College mergers: be prepared for a long courtship

Joanna Forbes

A couple of weeks ago I attended an FE sector event at which a number of speakers, including representatives from key lenders to the sector, emphasised the length of time that is now required for two or more colleges to complete a merger process.  This is in part due to the fact that the big lenders are considerably more cautious about lending to the sector, and will therefore exercise considerable scrutiny over proposed merger partners and their ability to meet the colleges’ combined borrowing commitments before giving approval to a refinancing package (in contrast to the ‘simple novation’ of the loan agreement which had, until recently, been fairly common in such mergers).

 

The delay in obtaining lender approval to a proposed merger is another of the apparently unforeseen consequences of the proposed insolvency regime for colleges contained in the Technical and Further Education Bill, which has also been cited as a reason for the very significant increases in contribution rate for colleges imposed by some LGPS schemes, for example.

 

It is not just delays on the part of lenders that can hold up mergers, however.  We are often consulted by colleges who have got themselves into difficulties over the statutory and constitutional requirements which govern mergers.  The relevant provisions require certain steps to be carried out, in a certain order, and in some cases in specified time periods, and it is easy to get these wrong.  So, the corporation of the college which is proposing to dissolve must:

  • publish a formal consultation document setting out details of the proposal and the proposed date of dissolution;
  • allow at least one month for responses to the consultation;
  • take account of any responses to the consultation;
  • decide to dissolve and publish a draft of its proposed resolution at least one month before the proposed date of the resolution;
  • pass the resolution to dissolve; and
  • enter into a transfer agreement with the continuing college to transfer the college’s assets and liabilities before the date specified for the dissolution.

 

The corporation of the continuing college must also pass a resolution to receive the assets and liabilities of the dissolving college. 

 

It is common for colleges to underestimate the time periods involved in this process, or to find that key dates fall on bank holidays or other college closure dates.  A failure to comply with the statutory requirements can mean that certain steps need to be repeated, and that therefore the merger date is delayed.

 

Another very common problem arises from the fact that the majority of mergers are timed to take place on 1 August, during the summer holiday period.  In addition to the requirements for board approval of key documents, there are always a number of key documents (such as the transfer agreement, property transfer documents and share transfers) which require execution as a deed and therefore (usually) signature by two governors.  It is surprising how often this is forgotten, and then a week before the merger date the college finds that all of its governors are away on holiday and there is no one to sign the relevant documents. 

 

There is no magic to getting any of this right – all that is needed is good planning.  It is also sensible to make sure that the college’s instrument and articles allow for corporation meetings to take place ‘virtually’ and for decisions to be made using a written resolution procedure, if they don’t already, and that delegated authority is given to the chair to take decisions by way of chair’s action, if necessary, to deal with any unexpected issues which arise.

 

Joanna Forbes
Legal Director, Education Team
T: 0121 214 0310
E: Joanna.forbes@shma.co.uk
W: www.shma.co.uk

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