Mergers – Stronger together?
Law firm Harrison Clark Rickerbys’ senior associate James Morgan reveals the legal options available when a merger may be the best possibility for your school
This article is a brief introduction to mergers for independent schools that are contemplating o0strategic options during the current economic climate and includes the considerations that form part of this process.
WHY WOULD A SCHOOL CHOOSE TO MERGE?
Some of the key reasons a school may choose include:
• Competition from other schools – this may result in a drop in pupil numbers and fee income.
• Economies of scale – combining resources such as staff, facilities and equipment should reduce costs and improve conditions for stakeholders and beneficiaries.
• Lower pupil numbers – we are experiencing a cost of living crisis which has increased pressure on parental income and the ability to pay school fees.
• School fees – there’s a risk that VAT will become payable on school fees under a new government which will further increase the pressure on parental income.
• Higher maintenance costs – significant increases by utility companies have made running schools much harder.
• Parental demand for better facilities – whether for new facilities or modernising existing facilities.
• Wider curriculum – more subjects could be introduced as a result of the merger which is often attractive to stakeholders.
• Lack of capital reserves and/or assets – there may be no financial safety net or ability to generate additional funds for the school.
• Charitable status – a school’s charitable status will be continued, rather than being sold to a private school group, which is important to some stakeholders, although certain current charitable benefits may be affected in the near future.
WHAT ARE THE RISKS?
• Disruption to staff, pupils and parents.
• Reputation – the views associated with one school ‘taking over’ another and potential damage to a school’s brand.
• Incompatibility between the schools whether culturally or otherwise – the schools should complement each other on many levels so that the result is an improved merged entity.
• Staff reduction – staff redundancies are often inevitable and should be managed carefully by both schools and be limited as much as possible.
• Objections from parents and subsequent pupil removal – there may be objections therefore communications and announcements are important.
• Breach of confidentiality – leaks to stakeholders and third parties before exchanging contracts may significantly damage one or both schools’ reputation and prospects.
WHAT IS THE PROCESS?
The process of a charitable merger is quite different from an acquisition. When two schools merge, they combine their strengths and the outcome will often be that a new school is created.
Consideration is often required when merging schools that are operated by different types of charity.
The mechanism for a merger involving schools is generally one of the following:
• One school transfers its business as a going concern along with its assets and liabilities to another school.
• Two schools transfer their businesses as going concerns, assets and liabilities to a newly established charitable company.
• One school is appointed as a trustee or sole shareholder of another school.
WHAT WILL THE NEW STRUCTURE LOOK LIKE?
Typically, a merger will occur when two schools decide to merge their strengths. In the current climate, the size and availability of resources of a school
is crucial. In these situations, we will normally see the creation of a new school.
However, the concept of a ‘takeover’ is not unknown in the sector. Usually, one school is of a larger scale, and will take over a smaller school that’s no longer able to sustain itself (‘smaller’ not necessarily being in physical size but the difference in turnover). There are generally two types of takeover – active and passive.
An active takeover occurs when one school takes over another. Usually the result of this will be that the school taking over expands by absorbing the other.
A passive takeover is where a school isn’t able to sustain itself and another school takes over but, unlike a merger, a new school isn’t usually created.
It’s also possible for there to be a group expansion in that a school joins a group. Whether this takes place via merger or acquisition is dependent on structure.
Due diligence (legal, financial and academic) is an important part of any merger. In an acquisition where the phrase commonly used is ‘buyer beware’, in a merger, both schools are going to want and need to know as much about the other as possible because all of the assets and liabilities are often transferred. The extent of the due diligence often depends on the size of each school. For example, a smaller school would often undertake a lighter touch ‘reverse’ due diligence exercise on a larger school.
The larger school will require more extensive reassurance with regards to the liabilities and assets of the other school. However, the school being taken over will also want to know that it is transferring its assets to a secure undertaking.
THIRD PARTY CONSENTS
Schools will also need to consider any regulatory permissions that need to be obtained when merging two schools. For example, independent schools must make a request to the Department for Education (prior to their implementation) for any material changes such as a change of proprietor.
The Charity Commission may also need to provide its consent to the proposed merger and the governing document of one or both charities may require amending.
The land and buildings belonging to a school are often its mostsecure assets and are therefore particularly valuable and important in the context of a merger. Schools will need to consider that if there is a transfer of leasehold land involved, then further approval may be required as well as a potential extension or assignment of a lease. There will also need to be consideration of any outstanding planning consents and environmental factors (that is, if there are surveyors that need to be commissioned). Consideration of any land that is held on trust will need to be factored in in terms of whether the trusteeship can be changed and how the land can be transferred or held post-completion.
Notwithstanding any specific valuations which may be commissioned by either school in relation to the property being held, a charity law compliant report, which is usually obtained when disposing of property in an acquisition, in order to comply with charity law requirements, is not necessary in a merger.
When two schools merge, there are staffing implications that need to be considered in accordance with TUPE regulations and whether any measures are going to be taken, which can include minor measures such as changing the date salaries are paid, to major measures such as changing pension schemes.
Both of the schools involved will need to inform and consult with their employees. This is particularly important in that when the schools merge, it’s possible that not all staff will be needed and so it’s important that all regulationsare adhered to carefully. Both schools will also need to review the pension arrangements in place for staff as there are consultation requirements where changes are proposed. This is particularly topical in the context of the rising employer contributions to the Teachers’ Pension Scheme.
There are many other practical considerations such as changes to the name of the school, site reorganisation, faith elements, single sex/co-educational issues, boarding facilities, branding, logos, uniform, etc, which is something that schools will need to consider carefully.
The sector is lively at the moment and, if you are a school that is considering merging due to various ongoing financial pressures, then our advice would be to explore this as an option now rather than delay it further. The trustees of charities have ongoing duties and obligations to their charity and beneficiaries. It’s far better to discuss options with a potential merger partner while in a position of strength rather than one of vulnerability.
One final point is that potential merger partners are often local rivals and such historic rivalries should be put to one side and not cloud the judgement of either school, which should come to the table with an open mind as it will be more beneficial to their pupils to have a merged school rather than a potentially closed school.