Legal

Beating the recession

As the credit crunch triggers a full-blown recession, there is real concern about the effects on the independent schools sector. Ben Brice reports on the options for struggling schools to survive the turmoil

It has been widely reported that independent schools are likely to face significant reductions in pupil numbers as their parents are no longer able to afford fees. The suggestion is that some schools are likely to face closure or seek a merger as the only viable way to stay in business. This threat is real, although it should only affect very few. For those that do find themselves in such a position, it is vital to keep a cool head when considering how the effects of the downturn should be managed.

Evidence of reduced numbers of pupils
New reports by both the Association of Teachers and Lecturers (ATL) and the Audit Commission appear to bear out the reduction in pupil numbers. According to ATL’s survey, undertaken in October 2008, one in five schools in the independent sector reports a decline in pupil numbers at their schools, 14 per cent report a reduction in the number of teachers and more than half expect cuts in their school’s spending over the next year. The Audit Commission’s December 2008 report on the impact of the downturn on local government spending states that 10 per cent of councils across the country, and more than 30 per cent of those in London, are already reporting an increase in demand for state school places for those previously educated independently.

Historical lag
It is perhaps surprising that reduced student numbers are being reported relatively swiftly after the commencement
of the current economic problems. Historically, there has been a time lag between the onset of a recession and
independent schools experiencing a diminution in the number of paying pupils. Last time, it was only as we began
to emerge from the recession in 1992 that independent school numbers were first reported to be declining and
they continued to do so for a further two years.

One can only hypothesise whether the current indications might reflect a statistical anomaly or a parent body more prepared to withdraw their children from independent education at the first signs of economic slowdown (especially given the usual requirement of a term’s notice prior to cancelling payment of fees). Could the reported 40 per cent average hike in independent school fees over the past five years have led to a more sensitive market? If the reduced numbers are a reaction to the downturn in the economy, can we presume that they will only decrease further and perhaps more markedly than before as the recession deepens and once the usual lag also begins?

Prepare for harder times
The true effects of the recession are only likely to be understood over the next year or two. It is prudent for
independent schools to prepare for the reduction in income that the migration of children to the state sector will bring. However, the much mooted steps of closure or merger should be considered only as a final resort. Schools’
governing boards must remember that there a number of alternative cost-saving measures to compensate for lost
income that should be considered first.

Collaborative working
An alternative to merging is for struggling schools to enter into collaborative working arrangements with others. This allows the schools to retain their independent legal identities, but to save costs by working together on aspects of their operational activities. For example, the shared use of facilities or outsourcing of functions including financial reporting, information systems or payroll services could result in significant savings.

Such arrangements can be structured in a variety of ways at the discretion of the parties. From a legal perspective, the vital considerations are that the proposed activities fall within each school’s purposes and that each
organisation’s trustee body is sufficiently empowered to authorise the venture. In other words, each school must
comply with the provisions of their governing documents. If there is any doubt over the compatibility of purposes or
administrative provisions, it may be necessary to discuss it with the Charity Commission.

Provided that the commission is satisfied that the schools’ governing boards, as charity trustees, are acting in the best interests of their schools and that they have properly assessed the risks and benefits of the arrangement, it may be able to assist the parties by amending their constitutions to enable the collaboration.

Mergers?
Nonetheless, a few institutions may find themselves unable to continue independently as going concerns. Their interests may be better served by seeking a merger with other schools, rather than taking the decision to close. A merger can be effected by two or more schools transferring their property and assets into an entirely new entity or by one organisation taking over the business of the other.

A merger is no small undertaking and should not be rushed into. Its cost in both fiscal and reputational terms should not be underestimated. Professional advice should be taken if a merger is proposed. As with collaborative working arrangements, there are legal and best practice considerations that must be taken into account before action can be taken. The same requirements of compatibility of purpose and of the trustees having the requisite powers to merge will again take precedence.

Due diligence
When considering the opportunity to merge, governing boards have a primary responsibility to act prudently and in the best interests of the school they represent. The risks and benefits of the merger must be clearly established
and considered. Each party should only go ahead with the merger if it is sure that to do so would make the best use
of their own charitable funds and property, and would better meet the needs of its beneficiaries.

A detailed costs-benefit analysis should be undertaken independently by each party prior to proceeding with a
merger and each should make commercial, financial and legal due diligence investigations into the other.

Major factors to consider as part of this process will include:
• the geographical locations of the merging schools;
• their respective demographic constitution and the demographic trends; and
• anticipated local authority planning developments of the areas in which each is based.

These will each have a bearing on the initial and future catchment of the merged entity, although their influence
may vary depending on whether it will be a boarding or day school.

The merging schools should assess what assets, liabilities and property will be transferred and whether any of the assets or property will be held as permanent endowment or on other special trusts that might prevent them being amalgamated with those of the recipient charity or sold.

The sale of property may raise extra finance to fund the continued operation of the merged school, but Charity Commission involvement will be required where any property is permanent endowment.

Another key and inevitable cost-saving during a merger is the redundancy of some staff. It is essential that the legal and contractual consultations and procedures are followed. An incorrectly handled redundancy can prove expensive in compensation paid to those made redundant and of adverse effects to reputation.

Stakeholder interests
Last but not least, trustees must not underestimate the effect that parent power might have on a merger or
collaborative working. Parents take a great deal of time and care in choosing the right independent school for
their children and may not take kindly to action that might prejudice their children’s attendance at their preferred school. It is increasingly common for affected parents to band together to take legal action to seek to prevent mergers or closures. This has both financial and reputational repercussions for the schools involved.

Trustees must carefully consider how they communicate with parents and manage their expectations of change.
The circumstances leading to a merger will vary from case to case. There is no one-case-fits-all solution and it will not necessarily be the appropriate course of action for all schools that find themselves struggling financially during the recession. Charity trustees must keep a firm grip on their school’s finances, plan ahead and keep calm; they should not panic, otherwise they risk finding themselves in a fire sale. The overriding factor for governing boards
when considering their options is whether the actions are in the best interests of the school’s beneficiaries and are validly in pursuit of their purposes.

Ben Brice is a solicitor at Bircham Dyson Bell LLP.

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