The government has recently announced its plans to introduce VAT on independent school fees from January 2025, as well as removing their eligibility for business charitable rates relief from April 2025. As a result, we’ve seen an increase in independent schools re-considering their long-term vision.
Independent schools may decide to merge for many reasons, including financial benefits, risk diversification, collaboration, and/or shared educational vision.
When looking to merge here are some key considerations that should be taken into account to ensure the process runs smoothly:
- Legal structure (merger or sale)
The most common merger structure for charitable independent schools is an asset transfer without a sale price. This is where the assets and liabilities of Charity A are transferred across to Charity B. There are other forms of merger, such as a change of control merger (where Charity A becomes a wholly owned subsidiary of Charity B) which can also be considered.
One other option is to sell the school to another organisation for an agreed price. This option tends to be the preference for non-charitable independent schools, or where a charitable school is sold to a non-charity.
2. How to choose a school to merge with
In our experience, the most successful mergers happen where the schools have carefully considered their reasons for wanting to merge and approach partners that have aligned educational visions and cultures.
Other key factors to consider are:
- is the school single sex/co-ed?;
- does the school have any religious affiliations and if so, are these aligned?;
- to what extent does the school support learners with special educational needs?;
- the proximity of the schools (are they within the same area?); and
- whether they have any current connections (is one a feeder school to the other as an example) or do they otherwise already collaborate with each other?
3. The importance of confidentiality
Once a potential merger partner has been identified, both schools will need to make sure their dealings are confidential. At this point, the parties should enter into a non-disclosure agreement. From a practical perspective, it is important that both schools decide who needs to be privy to the potential merger discussions. Normally this would include at least the head, the bursar and the trustees (as well as the schools’ professional advisors). This helps to ensure that merger news is not leaked to staff and parents which can result in misinformation.
4. Full due diligence
Due diligence is a vital step in the merger process. It is a process undertaken in order to find out as much about the other party as possible in order to assess whether there are potentially any hidden liabilities, whether any matters require further investigation and (ultimately) whether or not it would be in that school’s best interests to proceed with the merger. For mergers, we would usually expect the due diligence to be two-way. Due diligence will be particularly important for the continuing legal entity on an asset transfer given it will be taking on the other school’s assets and liabilities, usually with very limited recourse if anything goes wrong post-merger.
There are different types of due diligence that need to be carried out, including legal, financial and commercial. Legal due diligence involves looking into aspects of a school’s operations such as employment and pensions; property owned or otherwise used by the school; health & safety; whether there ae any ongoing disputes/litigation; intellectual property; key contracts (including parent contracts); and school compliance (including, crucially, safeguarding). There will be other charity law issues to consider for charitable independent schools, such as whether there are any restricted funds or restrictions on the use of any school land and buildings.
It will also be prudent to look at both entities’ governing documents early in the merger process to check that they have the power to merge and have compatible charitable objects.
5. Communications and PR
A good communications strategy is key to ensure the merger announcement can land well with staff and parents and they feel positive about the benefits of merger. In terms of timing, there is a fine balance to be struck between the confidentiality needed, especially at the early stages of merger discussions before legal agreements have been signed, versus the desire to be as open as possible with parents/staff. The right time to announce will depend on a number of factors such as if there is to be restructuring of staff (which will require staff consultation), but schools will wish to avoid disrupting busy assessment periods or announce a merger right before a school holiday. Schools should assume that once the staff know that this news will travel to the parents!
Once announcements are made and any completion conditions are satisfied (such as obtaining Department for Education consents), completion of the merger can then take place.
For further information or advice, please contact Jean Tsang, Partner and Head of Education, or Hannah Bignell, Solicitor.