Become an academy, merge or stay as you are?
An Area Review Toolkit
Collaborations and mergers in further education (FE) have been relatively commonplace since 1993.
Following the adoption of the Education Act 2011, sixth form colleges (“SFCs”) have greater freedoms over their governance arrangements. The Education Act 2011 made a number of important changes to the Further and Higher Education Act 1992 (as amended) (“FHE Act”), providing all further education corporations (“FECs”) with greater flexibility in relation to their governance. The new legislation included the power to make amendments to their Instrument and Articles of Government (subject to certain mandatory statutory requirements) without the need for Secretary of State (“SoS”) approval, and provided them with the ability to dissolve and transfer all of their assets (and liabilities) to another body, subject to compliance with the statutory requirements and processes.
It is fair to say that the increasingly challenging funding pressures and the recent announcement that SFCs can academise, coupled with the Area Review, is changing the dynamics and shape of the SFC sector. There is now a wider variety of collaborative options available to SFCs, providing SFCs with real opportunities to merge, collaborate or academise and so secure their long term viability and future.
There are a number of options open to the SFCs in both the FE and Academy sector, which can be summarised in the diagram below.
MOVING INTO THE ACADEMY SECTOR
SFCs will need to decide whether becoming a 16 to 19 Academy is the right choice for them and, if so, whether they join an established Multi Academy Trust (“MAT”), or set up a new Multi Academy Trust, or set up a new Single Academy Trust (“SAT”) with other schools and/or SFCs or sponsor a MAT.
What are Academy Trusts?
An Academy Trust:
- is a charitable company which is established to operate Academies as independent state schools, publicly and centrally funded;
- signs Funding Agreements with the SoS (for the operation of any number of Academies) which set out how the Academies are funded, the conditions of funding and the circumstances under which the SoS can terminate the agreements;
- has “Members” akin to the shareholders of a normal company (albeit there is no entitlement to a dividend) how do not get involved in the day-to-day running of the Academy Trust but do hold some important rights such as appointing the majority of the Trustees and approving changes to the Articles of Association;
- has “Trustees” who are responsible for the strategic direction and management of the Academy Trust as a whole;
- is accountable to the SoS through the Department for Education (“DfE”) and the Education Funding Agency (“EFA”);
- must abide by company law and charity law.
A SAT, commonly referred to in the sector as the ‘standalone model’ is a charitable company set up to operate one Academy. The key governance features of a SAT are as follows:
A SAT has Members (as above). Members can comprise both individuals and organisations.
The DfE’s policy has changed over the years and, although the Articles of Association require a SAT to have a minimum of 3 Members, the DfE strongly prefers 5 Members and for the majority of the Members to be independent of the Board of Trustees. The Articles of Association also do not permit employees acting as Members.
Board of Trustees
The Board of Trustees is responsible for the day-to-day management of the SAT. It must act within the broad powers set out in its Articles of Association.
In terms of size, the general recommendation is that a Board should have between 7 and 11 trustees to enable effective and productive decision-making. DfE has been insisting on a skills-based Board of this number.
The SAT may set up other committees and delegate prescribed responsibilities and functions to them. The Academies Financial Handbook 2016 mandates an Academy Trust to establish a committee to ‘provide assurance over the suitability of and compliance with its financial systems and operational controls.’ Academy Trusts with an annual income above £50m must discharge this responsibility by establishing a separate Audit Committee while smaller Academy Trusts may include this within the terms of reference of another committee such as the Finance Committee.
In addition to the mandatory committees above, a SAT may set up other committees of the Board of Trustees as they see fit to oversee the work of the SAT. Common examples include finance and standards.
A SAT must have an accounting officer who would be accountable to Parliament in the event of any issues or irregularities with regard to the operation of the SAT. This person typically acts as the Principal of the Academy operated by the SAT. Careful consideration will need to be given to the identity and extent of the role of the accounting officer.
A MAT is an Academy trust with a Master Funding Agreement and a series of Supplemental Funding Agreements enabling it to operate more than one Academy.
The governance structure of a MAT largely follows that of a SAT in that it will have Members and a Board of Trustees. The key difference is that the MAT structure has an additional tier of governance, in the form of Local Governing Bodies, commonly referred to as ‘LGBs’.
Local Governing Bodies
An LGB is essentially a committee of the Board of Trustees. The role of an LGB within a MAT is a valuable one in providing local governance, as well as offering assistance to the Board of Trustees in the fulfilment of their duties. Broadly, the role is to provide focused governance for an Academy at a local level, monitoring the Academy's key performance indicators and acting as a critical friend to the Principal of that Academy, providing challenge where appropriate. The LGB also plays a part in representing the views of an Academy's stakeholders.
The Board of Trustees set the terms of reference and scheme of delegation for the LGBs, which are usually subject to annual review. The Board of Trustees decides the extent of delegation of powers to the LGB of its Academies. In some cases, the stronger Academies receive a greater level of delegation of powers although some MATs set up their LGBs to be purely advisory.
It is important that the functions of the LGB are clearly defined and set out in clear Terms of Reference and Schemes of Delegation to ensure that the local governors, the senior leadership team (“SLT”) and the Board of Trustees have a clear understanding of their respective roles. In all cases, the Principal of each Academy within the MAT is accountable to the Board of Trustees.
It is possible to have an LGB covering more than one Academy and such “cluster” bodies are being used increasingly, particularly in areas where there are difficulties in recruiting governors with the requisite skills.
In addition to LGBs, ‘Forum Hubs’ are becoming an increasingly common and useful medium for large MATs and can be set up by the Board of Trustees to address particular needs of a MAT at any given time. They can be functional and structured around Principals and Chairs or theme-based (e.g. governance, Key Stage 1 or Phonics etc.). They are accountable to the Board of Trustees and it is advisable that they should operate under an approved Terms of Reference.
The Academy Options
There are a number of options open to SFCs in the Academy sector. Options range from sponsoring a MAT, through to conversion as an Academy under the SAT or MAT models. The various models, and some of the key considerations are set out below.
Sponsoring a MAT
One option open to SFCs is to become a sponsor of a MAT. In the early days of the academies programme under the Labour Government, many SFCs and universities became involved in the Academy sector in this way but by sponsoring SATs.
The benefit of the sponsorship model is that an SFC can remain as it is, an independent corporation, in a world that it knows, with its financial liability limited, as a ‘Member’ of the MAT, to the nominal sum of £10.
The main drawback of this model is that the SFC would not be able to access the main lucrative benefit of Academy status, namely the ability to recover its VAT.
Additionally, from a financial perspective, while there is scope to share services between the parties under this structure, under the terms of the Academies Financial Handbook, any service flow in excess of a nominal amount from the SFC to the MAT must be provided ‘At Cost’.
There is no requirement for an SFC to make a financial contribution to the MAT that it sponsors.
Under this model, we would expect the SFC to have an active role in the operation of the MAT by appointing the majority of the trustees. Being able to shape the governance is an important feature of the relationship between the parties, as the SFC’s name and reputation will be closely tied to the name and operations of the MAT and so it will want to ensure that the Board of Trustees, who will be entrusted with the day-to-day management of the MAT have got the correct skills and a shared vision and ethos to drive forward the MAT’s operations.
Benefits of sponsoring a MAT
- The SFC’s liability is limited to £10 as a Member of the MAT.
- There is no requirement for the SFC to make a financial contribution as a sponsor of the MAT.
- The SFC can shape the governance of the MAT that it establishes.
- This provides an opportunity for SFC to convert into MAT at later stage, giving the SFC time to understand the regulatory and operational world of the Academy sector.
Drawbacks of sponsoring a MAT
- The SFC would not be able to achieve the VAT savings which would come with converting to Academy status.
- Services between the SFC and the MAT must be provided “At Cost”.
- Conflicts of interest between the SFC and MAT need to be carefully managed.
- Reputation at risk (if the MAT was to fail under its sponsorship).
- The SFC needs to be mindful of shadow directorship issues. A “shadow director”, according to law, is a person in accordance with whose directions or instructions the directors of a UK limited company are accustomed to act. In short, a shadow director is anyone who is directly calling the shots at a company or an area within the company, however, a person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity.
Legal Process and Key Steps
- The SFC needs to make a decision to sponsor an Academy. The SFC will need to carefully consider which school or schools it wishes to sponsor (for the reasons outlined above).
- The SFC will need to apply to the DfE to become an Academy sponsor, and meet the sponsorship requirements. The SFC could become the sponsor of an existing Academy or of a converting maintained school.
- If the SFC sponsors an existing Academy, the governance of the Academy Trust will need to be revised so that the SFC has the appropriate level of control.
- If the SFC sponsors a converting maintained school, then the SFC will need to set up a MAT to operate the school (as an Academy) and will need to put in place appropriate governance arrangements to ensure that it has control over the appointment of trustees of the MAT.
Establishment of a new SAT
An SFC can apply to convert to Academy status under the SAT model, commonly referred to in the sector as the ‘standalone Academy’ model. It is important to note, however, that only SFCs with good or outstanding ratings from Ofsted and for finance will be able to convert under the SAT model, and that the government’s preference is for a MAT.
If a SFC were to opt for the standalone model, it would need to show to DfE that it will consider plans to work collaboratively with other schools in the future, as the DfE’s desire is for all schools and SFCs to work collaboratively.
- VAT savings.
- The converting SFC would be the driver, setting and shaping its own governance arrangements.
- There is one legal entity running one school and, therefore, the financial and reputational risks are minimised.
- The model is easier than a MAT to manage.
- There is less opportunity for economies of scale.
- There are fewer opportunities for staff progression and development.
- The SAT will be unable to achieve the same financial savings as a MAT.
Legal process - Key Steps
- If an SFC decides to become an Academy, the SFC will need to get its own house in order to ensure the smooth transition of the SFC into the SAT.
- The SFC will need to complete the formal application process referred to below and also consider applying for funding to cover the costs of its restructuring (see below).
- The SFC will need to carry out a stakeholder consultation exercise as prescribed by legislation to enable the SFC to dissolve and transfer its assets, undertaking and liabilities to the SAT.
- The SFC will need to undertake a TUPE consultation exercise.
- The SFC will need to determine the governance arrangements for the SAT and incorporate the SAT at Companies House, and following that enter into a funding agreement with the SoS.
- The SFC will need to enter into a Transfer Agreement with the SAT to formally transfer its operations.
- The SFC will dissolve under statute.
Establishment of a new MAT
Another option is to set up a MAT with other converting schools and/or Academies.
The MAT model is the government’s preferred governance model and the DfE has made announcements that it would like all schools to be in a MAT by 2022. It is important to note, however, that only SFCs with good or outstanding ratings from Ofsted and for finance will be able to form their own MAT.
Advantages of a new MAT
- There will be economies of scale with one company running a number of Academies.
- There will be one employer of staff, allowing for a flexible staffing structure.
- There will be less duplication of roles.
- The model enables different levels of authority to be delegated according to the performance of each Academy.
- The SFC can become an Academy and create its own governance structure, rather than joining an established MAT with its own operations and systems.
- The model allows the converting SFC time to grow at its own speed and to carefully select the schools that it wishes to partner with and the manner in which these schools will join the MAT.
- The ability to pool funds (subject to meeting certain regulatory requirements), giving flexibility over purchasing and finance.
- Groups of schools can find it easier to find and fund teachers and specialists in areas such as data analysis, finance, health and safety and provide richer curricular and extra-curricular activities.
Disadvantages of ‘New MAT’ Model
- The pooling of funds can often be a thorny issue as the DfE may expect the MAT to move money from one Academy to support another Academy in the MAT. The financial and reputational health of one Academy could therefore affect the financial health of another Academy within the MAT. This can be mitigated by the MAT carrying out a due diligence exercise on the schools coming into the MAT. It is important to note that, when a MAT takes on a school, the general position is that the historic liability of the school will remain with the local authority whereas, if the MAT takes on an existing Academy, there is no local authority to underwrite liability and the risk profile of the transaction is higher.
- There is a potential loss of autonomy for the Academies within the MAT as the Academies have no separate legal status which they can use to enforce their rights against the MAT.
Legal Process - Key Steps
- If an SFC decides to become an Academy, the SFC will need to ensure its own house is in order to ensure the smooth transition of the SFC into the MAT. Further thought will need to be given to the types of schools that it wishes to work with, and, in due course, a due diligence exercise will need to be undertaken on those schools coming into the MAT.
- The SFC will need to complete the formal application process referred to below and apply for funding to cover the costs of its restructuring (see below).
- The SFC will need to carry out a stakeholder consultation exercise as prescribed by legislation to enable the SFC to dissolve and transfer its assets, undertaking and liabilities to the MAT.
- The SFC will need to undertake a TUPE consultation exercise.
- The SFC will need to determine the central and local governance arrangements for the MAT and the established MAT will enter into a master and supplemental funding agreement with the SoS which will govern the funding arrangements.
- The SFC will enter into a Transfer Agreement with the MAT to formally transfer its operations.
- The SFC will dissolve under statute.
Joining an established MAT
A SFC can become an Academy with an established MAT. There are numerous different types of MATs in existence and an SFC seeking to go down this route should look within its geographical area to determine what options are out there and which MAT has a vision and ethos most closely aligned with its own. It will be important for the SFC to undertake a financial and legal due diligence exercise on the MAT it is seeking to join as the financial health and future plans of the MAT will have an impact on the SFC.
It will also be important to determine what knowledge the MAT has of the 16-19 school funding environment. If it is lacking expertise in this area, then the SFC will have a greater right to ask for SFC representation on the MAT Board of Trustees to fill this knowledge gap.
Benefits of an established MAT
- The MAT is already operational and functioning. There is less work in terms of set up and the SFC can see how the MAT operates before joining.
- Being part of a MAT may give the SFC access to better resources and support as an Academy.
- The converting SFC can access and benefit from the MAT economies of scale.
- Having a single employer of all staff allows for flexible staffing structures.
Drawbacks of an established MAT
- As the MAT grows, it may become increasingly difficult to ensure consistent systems and procedures are applied across the MAT. The Board of Trustees, who have ultimate responsibility for governance matters, may feel that it is difficult to take on this responsibility for an SFC that they have had no day-to-day involvement with.
- The expectations of individual Academies need to be managed. Some schools may have joined the MAT voluntarily; others may have been forced because of poor educational results or weak governance structures.
- Individual Academies may feel that their own independence is threatened and there is always a risk that, should one of the Academies in the MAT fail, this will affect the reputation of all the Academies in the MAT.
- The MAT will already be set up and the converting SFC will have less opportunity to shape the governance arrangements.
- Once a decision is made to join an established MAT, there is no going back. The decision is final.
Legal Process, Key Steps and Questions
- The SFC should undertake a due diligence exercise on the MAT that it is seeking to join. The key point behind due diligence is to give the SFC the chance to review the financial and operational health of the MAT that it is considering joining. As part of this due diligence, it is important to look at the MAT’s future plans, including its plans for growth. It is likely that the MAT will also want to undertake a due diligence exercise on the SFC as it will inherit not just the assets of the SFC but also any liabilities.
- The SFC should initiate a conversation with the MAT about the proposed governance model and where the converting SFC will be placed within that governance structure. The questions to ask are as follows:
- Should the converting SFC have representation on the Board of Trustees (the SFC will have a stronger case if the MAT is smaller in size, and if the current trustees do not have a background and understanding of 16-19 provision)?
- What do the prepared Terms of Reference and Scheme of Delegation for SFC’s LGB look like? What level of decision making will be devolved to SFC’s LGB?
- What is the ethos and vision of the MAT?
- What are the future plans for the MAT?
- If a decision is made to join the MAT, the SFC will need to get its own house in order to ensure the smooth transition of the SFC into the MAT.
- The SFC will need to complete the formal application process referred to above and apply for funding to cover the costs of its restructuring.
- The SFC will need to carry out a stakeholder consultation exercise as prescribed by legislation to enable the SFC to dissolve and transfer its assets, undertaking and liabilities to the MAT.
- The SFC will need to undertake a TUPE consultation exercise.
- The SFC will need to enter into a Transfer Agreement with the MAT to formally transfer its operations.
- The established MAT will enter into a supplemental funding agreement with the SoS which will set out the bespoke funding arrangements for the converting SFC.
The application to convert to Academy status must be made once the recommendations from the Area Review are made but an interested SFC can still consider its options earlier and undertake the preliminary work referred to in this document. SFCs are advised to allow 4-6 months from formal approval to conversion.
The Academy Application Process
SFCs that are interested in converting to Academy status should express an interest by contacting the EFA/SFA Joint Area Review Unit at firstname.lastname@example.org.
Which SFCs are eligible to convert?
- FE corporations must have at least 80% of pupils aged 16-19 years old.
- Other FE corporations must have 80% of pupils aged 16-19 years old, with the majority of pupils following academic study programmes.
The Application Form
- The SFC registers its interest with JARDU: EFA/SFA Joint Area Review Delivery Unit (JARDU) email@example.com and the SFC is assigned a lead contact from the EFA to help with the application.
- Partnership arrangements with schools must be evidenced (SAT route only).
- The following information on assets and liabilities must be included to show that the new academy will be financially solvent:
- financial and physical assets to be transferred to the SAT or MAT;
- assets used but not owned by the SFC;
- current liabilities held by the SFC which would transfer to the SAT or MAT;
- contracts/agreements between the SFC and third parties which are to be transferred to the SAT or MAT or terminated upon conversion;
- the LGPS deficit which would transfer to the SAT or MAT.
- The full costs relating to implementation of the application (including project management, legal/financial advice, IT systems, branding and communications) must be established.
- The SFC must decide whether to apply for financial support from the post-16 restructuring facility.
- An application for financial support under the restructuring scheme requires the SFC to provide additional information as part of its application.
- In support of the application, the college should include:
- strong evidence showing a need for funding and that the SFC would be unable to fund the conversion from its own resources;
- details of when the funding will be required and the sources of funding sought along with any proposed repayment terms;
- a clear implementation plan showing how the new Academy will be managed and its quality maintained or improved (if it is not already “Good”).
Alongside the merger, federation and Academy conversion options described above, it is also worth mentioning the wider framework for collaborations between SFCs and schools as this completes the picture for SFCs in relation to the area review implementation process.
Before the Education and Adoption Act 2016 (the “2016 Act”) came into force, the legal framework for sixth form SFCs to formally collaborate with other schools was largely confined to section 63 of the Education and Inspections Act 2006 (the “2006 Act”) which entitles a local authority to require the governing body of a school maintained by the local authority (a “maintained school”) to:
- make specified arrangements with a further education body (being a further education corporation or sixth form corporation); or
- enter into a contract or other arrangement with a specified person for the provision of specified advisory services
- with a view to improving the performance of the school.
However, section 4 of the 2016 Act extended the same power to the oS by amending the 2006 Act. This fits with the expanded role of the Regional Schools Commissioners (“RSCs”) who, on behalf of the DfE, broker intervention in schools while also directing sponsored Academy conversions and re-brokering Academy transfers between MATs. Given the focus of the RSCs on school intervention, it is therefore the extended power of the Secretary of State, delivered by the RSCs, which provides the main focus for wider collaboration between SFCs and schools.
The further detail on specified arrangements with a further education body is set out in section 166 of the 2006 Act and the Collaboration Arrangements (Maintained Schools and Further Education Bodies (England) Regulations 2007 (the “Regulations”) which permit certain functions of any number of SFCs and maintained schools to be exercised by a joint committee with a view to improving the performance of one or more maintained schools.
The alternate option of an SFC entering into a contract or other arrangement with a maintained school, again in order to improve the performance of that school, is self-explanatory.
As above, the key focus of any joint committee or contract/arrangement between an SFC and a maintained school must, in this context, be on improving the performance of that school. As such, while it will be possible for the joint committee or contract/arrangement to deliver ‘back office’ services such as finance and payroll, the joint committee or contract/arrangement would need to deliver effective school improvement support to improve performance.
Key Steps and Processes
Given that the RSCs are tasked with brokering school improvement support, it therefore follows that the RSCs would be responsible for instructing a maintained school to form a joint committee or contract/arrangement with an SFC. However, the key here is that the RSCs will be unable to compel an SFC to form the joint committee or contract/arrangement.
Advantages and Disadvantages
Moreover, the RSCs are focussed on brokering school improvement support from MATs. It is therefore unlikely that an SFC would be asked by the RSC to form a joint committee or contract/arrangement with a maintained school. While this route is available to SFCs, the reality is that SFCs will need to be more focussed on merger, federation and Academy conversion as the key options going forwards. That said, where an SFC converts to Academy status under an existing or new MAT, that MAT will undoubtedly be asked by the RSC to provide intervention support to a maintained school either independently of, or as a precursor, to the sponsored Academy conversion of that school.
STAYING WITH THE FE SECTOR
One option open to SFCs is to Standalone and to remain within the FE sector.
Collaboration in the FE sector is diverse, with options ranging from federations (soft and hard) and shared services to full merger (via the’ Model A’ and ‘Model B’ routes described below). Any form of collaborative venture inevitably requires structural appraisal, leadership, management, stakeholder engagement, due diligence, sensitivity and time.
SFC collaboration has predominantly existed through joint procurement initiatives and sector liaison groups or forums. The general consensus is that these collaborative ventures have not had a material impact on SFC finances or strategy.
We set out below an overview of the various options open to SFCs in the FE sector.
Formal mergers in the FE sector are referred to as follows.
‘Model A’ (double dissolution - where both corporations dissolve and form a new SFC with a new name). ‘Model A’ requires the consent of the SoS (for the creation of the new entity), following a formal stakeholder consultation.
'Model B’ (single dissolution - where one corporation (normally, but not inevitably, the smaller weaker one) dissolves and passes its assets/liabilities to the other). The ‘Merged Entity’ typically consists of members drawn from both original SFC boards (with a strong bias to the more dominant party).
‘Model A’ or ‘Model B’- The Deciding Factor
Most mergers in the FE sector involve a ‘Model B’ process for the following reasons.
- Continuity of name/brand for one of the SFCs.
- Less legal work and costs, as one SFC remains in situ.
- Continuity of employment/contracts for SFC remaining in situ.
- More predictable timetable.
However, there are sometimes good reasons for choosing a ‘Model A’ Merger, namely:
- avoiding any suggestion of a takeover by one SFC of the other;
- a ‘fresh start’; and
- establishing the new SFC before the existing SFCs are dissolved.
Benefits of a Merger
- Student choice and progression.
- Better results, brand image and financial strength if carefully planned, timed and implemented.
- Limit duplicated efforts by eliminating market competition between two previously competitive organisations.
- Potential economies of scale
- bulk buying (a bigger organisation can get a discount for buying in bulk)
- organisational (one head office rather than two can be more efficient)
Drawbacks of a Merger
- The lack of central financial support for debt clearance and staff restructuring.
- Agreeing the governance of the ‘Merged College’ can be difficult.
- The difficulty of integrating staff and systems following the merger and loss of jobs.
- Less choice for students.
- Diseconomies of scale.
- In the short term, particularly, the ‘experience dis-economies of scale from the increased size. After a merger, the new bigger ‘Merged College’ may lack the same degree of control and struggle to motivate workers. If workers feel they are just part of a bigger entity, they may be less motivated to try hard and feel devalued.
- Mergers can lead to financial fall-out due to the disruption of work-flow and higher than anticipated costs and also create a less productive workforce if employees resent the merger and fail to see “eye-to-eye”.
The timetable will be dictated by circumstances but, typically, college mergers take around six to nine months between the formal public announcement of a merger plan and the actual merger date. The case for fast action, and a shortened timetable is generally strongest where it is necessary to maintain confidence, for example where one of the SFCs is in a financially weak position or where there is a leadership vacuum. The case for a slower, longer timetable is that it allows the SFCs more time for implementation and planning.
Key Steps and Legal Process
An overview of the key legal steps and process can be found at Appendix 1.
A hard federation can best be illustrated as follows:
The timetable for forming a hard federation will be dictated by the circumstances, for example, where an SFC loses its Principal. However, the process is quicker than a full merger as each of the collaborating SFCs will retain its own legal identity.
- Each SFC maintains its own governing body but a joint committee can be established that has delegated powers to make certain decisions on behalf of the ‘federation’.
- Certain decisions cannot be delegated and must reside with the governing bodies of the respective SFCs.
- An Executive Principal, or Chief Executive, presiding over both SFCs and shared senior leadership team (“SLT”) can be implemented.
- Protocols can be agreed for what can (and cannot) be decided by the joint committee and when it is required that a recommendation has to be approved by the respective SFC.
- There will be a Collaboration Agreement setting out terms and conditions of shared management and other services.
- The Instrument and Articles of Government of each SFC can be updated to reflect the governance changes (if necessary).
- SFC meetings are streamlined to increase efficiency and decision-making (there can be jointly convened meetings of the SFCs by agreement).
Benefits of Hard Federation
- A hard federation can allow SFCs to work together efficiently and sustainably to raise standards, improve services and increase opportunities for students and staff.
- Allows SFCs to share resources, staff, expertise and facilities.
- The SFCs remain separate legal entities and are bound together by the terms of the Collaboration Agreement.
- There is a ‘way out’ if the collaboration is not fruitful, unlike a full merger.
- Federations have the potential to offer a range of leadership opportunities at all levels, both in the provision of formal continuing professional development and in opening up leadership opportunities that may not otherwise exist.
- Can encourage the development of greater ideas and efficiency.
- Allows for increased mobility of staff and resources.
Drawbacks of a Hard Federation
- This can be an expensive endeavour and so a cost-benefit analysis is required.
- There can be concerns about the duplication of roles and redundancies.
- There is requirement for close project management.
- Commitment levels and timescales can be difficult to manage.
- Ensuring that all parents and staff are informed and included in decision-making can be more difficult with multiple sites and communication, generally, may be less easy.
- Travel between sites for some staff and the creation of a larger SFC requires careful management to guard against the development of a less personal atmosphere.
Key Steps and Legal Process
An overview of the key legal steps and process can be found at Appendix 2.
A soft federation can best be illustrated as follows:
An informal collaboration or ‘soft federation’ is where two or more SFCs wish to work together without any formal governance changes and without creating legally binding obligations. In these circumstances it is generally advisable to put in place a Memorandum of Understanding (“MoU”) setting out the principles and basis on which the SFCs intend to work together.
Benefits of Soft Federation
- It is easy to set up and easy to get out of.
- It is often not legally binding and so there may be agreement on common goals through an MoU or joint protocol.
- Provides opportunity for sharing knowledge and ideas.
- Potential economies of scale can be achieved through joint working.
- Can encourage the development of innovative ideas and practice.
Drawbacks of Soft Federation
- No fixed objectives or responsibilities.
- A lack of formal structure and leadership can result in low achievement.
- Demands a high level of focus and drive and so can be difficult in an unstructured environment.
- The participating SFCs may be competitors so this can affect how certain issues are addressed and how information is shared.
- No formal ties can result in parties leaving the collaboration.
Merger - Legal Process and Key Steps
Preliminaries, Project Managers and Legal Team
- It is advisable to appoint a single project manager who will work impartially for both SFCs.
- It is recommended that a legal team is appointed by each SFC to draft the necessary legal documentation to effect the merger and to deal with due diligence queries which arise.
- A merger timetable and project planner should be drawn up.
- A risk register with RAG rating is advisable.
Governing Body Resolutions and Joint Working Group
- The SFC governing bodies should establish a joint working group to lead the merger process.
- Terms of reference of the joint working group should be agreed and documented.
- The SFC governing bodies will need to reach agreement on key issues in parallel.
- The SFC governing bodies will need to approve the merger consultation document.
Stakeholder Consultation and Formal Statutory Consultation
- Mergers involving SFCs are covered by dissolution regulations where the early engagement of stakeholders is important as it helps prevent the merger process being disrupted by late objections.
- Stakeholder engagement is likely to produce longer-term success.
- SFCs embarking on a merger should carry out due diligence on each other (the governing bodies have duties and responsibilities to ensure the SFC is well-run, delivers its charitable outcomes and avoids activities that might put its funds, assets or reputation at undue risk).
- It is critical that due diligence, particularly financial due diligence, is commenced as early on as possible in the process as the due diligence will be the deciding factor as to whether the merger is viable (both financially and in terms of shared ethos and vision).
- It is recommended that the parties sign up to a non-disclosure agreement (NDA) which helps prevent sensitive commercial and strategic information being mis-used and placed in the public domain.
Third Party Agreements
- The agreement of banks and other stakeholders (e.g. landowners) plus legal processes relating to LGPS pension funds need to be completed.
- If either SFC has a long-term loan, the bank will need to be involved in the merger process.
- Each bank has its own carefully guarded terms and conditions which will include loan covenants. Essentially, subject to the terms of the loan agreement, banks generally reserve the right to treat a merged SFC as a new organisation and to require a new loan application with new terms. Working out whether a merger will lead to higher or lower loan costs should be an early priority.
- Conversations regarding restructuring, job changes, redundancies and removal of vacancies will need to be considered.
- Once the merger has taken place, there will inevitably be pressures to harmonise policies and terms and conditions.
- Information about current organisation structures, staffing levels, contracts and HR policies will need to be shared.
- New staffing structures for the merged college will need to be designed.
- Staff and recognised trade unions will need to be consulted.
- Pension arrangements will need to be finalised.
- Ensuring “business as usual” for the two SFCs up until the date of the planned merger will be key.
Governance of a Merged College
- The leadership of the ‘Merged College’ will need to be settled.
- The composition of the governing body of the ‘Merged College’ will need to be agreed.
- Where a merger involves geographically separate SFCs consideration should be given as to the creation of local advisory boards reporting to the full governing body.
- An early decision will be needed on how to involve the principals and senior staff in each SFC which, in turn, depends on what decision is made on senior appointments.
Transfer Assets and Land
- Both the “Model A” and “Model B” mergers involve the transfer of the assets and liabilities of one or both SFCs (depending on the chosen model). Although there is a statutory transfer of assets and liabilities, it is important that the transfer is formally documented.
- The land interests will need to be transferred and third party consents may be required.
- Mergers often involve a change of name and brand which has cost implications and raises intellectual property issues.
- The consent of the Secretary of State is required to change the name of the SFC.
- Merger planning needs to cover external and internal communications with agreed, co-ordinated and consistent messages from both SFCs.
VAT advice should be taken in relation to the transfer of operations and land.
Hard Federation - Legal Process and Key Steps
- Due Diligence (financial, land, contracts and HR) is essential - see section on due diligence above.
- Each SFC reviews its Instrument and Articles of Government to determine whether amendments are required to accommodate the new governance arrangements referred to above.
- A ‘Collaboration Agreement’ is drafted setting out the terms and conditions on which the SFCs agree to share resources including the composition and scheme of delegation for the joint committee.
- The SFCs operate under an Executive Principal (and shared SLT) and must also comply with the legally binding ‘Collaboration Agreement’.
- Secondment agreements and service agreements between the SFCs will need to consider the VAT and tax implications of supplies.