Stronger together

Heads and bursars know that there are unavoidable pressures that will always demand that the school must tightly control its costs. Sam Macdonald, Jonathan Eley and Kit Brown report on radical strategies

In certain sub-sectors, the pressure on costs is more keenly felt than ever before. As a consequence, many schools are considering the economic advantages of a merger or other form of collaboration. Joining forces and centralising certain functions undoubtedly have their economic advantages.

Which way?
The first consideration is what form a collaboration should take. A school could consider either a full-scale merger or a form of federal structure. Maximum efficiency will often be achieved by the former. On the other hand, federal structures have the potential to offer the best of both worlds: savings in costs, while retaining – at least to an extent – educational autonomy and independence.

While a merger brings two or more organisations together as one, federalised structures retain the separate identities of the participating bodies, while putting in place a mechanism for collaboration.

In charity law and constitutional terms, a merger or a federalisation is possible according to the compatibility of the objects and powers of the parties. Provided compatibility can be achieved (and for this the Charity Commission’s intervention may be necessary), the transaction becomes fairly straightforward.

In the case of a merger, it will involve a transfer of undertakings from one to another (for nominal consideration). In the case of a federalisation, it will involve a contractual matrix (sometimes described as “soft federalisation”) or the establishment of a new centralised and centralising body, into which certain parts of the participants’ undertakings are transferred and to which a degree of control may be handed over (a “hard federalisation”). However, these options need to be considered carefully in the context of employment and competition law constraints.

Employment issues
A merger of schools will inevitably impinge on employment arrangements: it is likely to entail a change of employer for some employees; there will almost certainly be a surplus of staff (and therefore the prospect of redundancies), and there may also be cultural as well as contractual differences between the two sets of employees.

The principal legal issues for employment matters will be the protection afforded to employees by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and the obligations and entitlements of redundancies. Put briefly, TUPE (which is likely to apply to most mergers) is intended to protect employees in a merger from changes to their terms and conditions and from dismissal (save, for example, where the redundancy is genuine). It also puts obligations on merging schools to inform and consult staff via appointed or elected representatives.

TUPE generates a number of knotty problems: one is the considerable obstacle it puts in the way of harmonising the terms and conditions of different sets of staff; another is the requirement it effectively imposes on merging schools to select fairly from both sets of staff when it comes to choosing redundancy candidates.

Where there are redundancies, there is an obligation to consult appointed/elected representatives of staff if more than 20 employees are being made redundant in less than 90 days (with financial penalties for failure to do so) and to notify the Department for Business, Enterprise and Regulatory Reform (DBERR). In addition, merging schools need to consider unfair dismissal law, notice requirements and statutory and contractual redundancy payments, among other obligations.

There is no substitute for careful and detailed forward planning: failure to do so will increase the risk of disaffected staff derailing the merger process. That planning process, which should be carried out against the background of legal obligations, will involve:
• assessing the likely staffing requirements of the merged school;
• anticipating the grounds for concern among staff;
• considering voluntary redundancy packages and the use of compromise agreements; and
• setting out a clear timetable and structure for consultation.

The employment implications of federalised structures will depend on the nature and organisation of the structure, but there is likely to be less upheaval than there would be in a merger because the majority of staff will continue as before. In the areas where economies of scale are sought (such as the creation of shared/centralised administrative or finance functions), some care needs to be taken: as in a merger, TUPE may well apply (either because such functions are transferred to an umbrella organisation or because schools agree to contract out those functions), in which case staff who work in those functions will have an expectation that their employment will transfer before redundancies are made on a fair basis.

Competition law issues
A merger between schools will be subject only to compliance with merger control law. (Breaches of the so-called “Chapter I prohibition” – discussed below – can only take place where there is an ongoing agreement between independent entities.) The advantage of this, from a competition law perspective, is that the threshold for interference by the competition authorities is higher: only mergers resulting in a “substantial lessening of competition” in a market or markets are prohibited. Care would have to be taken, but in general it is only where a merger would result in the entity’s gaining strong market power that there would be grounds for concern.

To constitute a “merger” (as the law puts it), the parties must “cease to be distinct”. Enterprises are treated as ceasing to be distinct if they are brought under common ownership or control.

A full merger between schools is clearly a “merger”. As for federalised structures, that may depend on the precise structure adopted. Three examples illustrate the point.

Take the foundation of a core company having as its members the various schools forming the federation, with the schools controlling the core company, nominating representatives to its management board and paying an annual subscription fee, but remaining independent and retaining the ability to withdraw their membership at any time.
Such a federalised model would be unlikely to constitute a merger. Each school would be in control of its own policy. No control over the school would be exercised by another entity. The participant schools would not be considered under common ownership or control.

Similarly, schools coming together simply by means of a contractual arrangement (or a matrix of such arrangements) will retain full independence within competition law.

On the other hand, schools that hand over their own “membership” to a central “parent” body (in effect, a group structure in corporate terms) are likely to be treated as a single economic unit for purposes of competition law.

What are the limits?
So, when considering the means by which they might achieve economies of scale, schools need to be aware of the prohibition, contained in section 2 of the Competition Act 1998, on agreements and concerted practices between “undertakings” having as their object or effect the restriction of competition. This prohibition is known as “the Chapter I prohibition”. In the first two examples noted above, the federal structure will maintain the separate existence of the “undertakings”.

The application of the Chapter I prohibition is often complex. Broadly speaking, it prevents, among other
things, schools which could be said to be competing with each other from sharing commercially sensitive information (such as pricing strategy and significant heads of costs). The idea behind this is that uncertainty in the marketplace is crucial to the competitive process.

Sharing important, sensitive information serves to reduce – often substantially – that uncertainty and facilitates co-ordination among competitors.

Ultimately, whether an exchange of information has anti-competitive effects needs to be determined on a case-by-case basis. However, information on staff costs, which themselves constitute a significant proportion of a school’s overheads, would ordinarily fall into this category.

Agreements – particularly among competing schools – pursuant to which such information is exchanged, should generally be avoided, unless there is good evidence to suggest that (a) they will lead to economic efficiencies and (b) consumers (here, parents) will receive a fair share of such efficiencies.

Crucially, the form of the federal structure will determine whether the participants remain independent economic units or whether they are treated as one, and so needs to be considered carefully in the context of the competition law risks.

Sam Macdonald is a partner, Jonathan Eley is a solicitor and Kit Brown is a barrister at Farrer & Co LLP.

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