UK: Academy Trust Mergers – The Key Aspects Of The Process

With mergers back on the agenda, we look at what we mean by a merger and some key issues trust boards and leaders need to consider.

Mergers between academy trusts have become and are increasingly common for various reasons. Some take place as a result of intervention or re-brokerage by the Regional Director. Others are the result of an independent decision by trusts to join together for the ultimate benefit of their students. Many features of the merger process are common to both scenarios. However, in this article we focus on those key aspects which trust boards and leaders themselves will need to consider ( where the merger is an independent or voluntary decision), to help in ensuring it is a success.

Terminology

While 'merger' is commonly used to describe the process whereby two trusts come together, the term can be misleading. Mergers can be structured in different ways, for example where two separate entities transfer their assets and staff into a new third entity and the two original entities are then wound up.

However, in academy trust mergers it is more often the case that one trust transfers all of its assets and staff (comprising all of the academies which are part of that trust) to the other trust. It is therefore more accurate to describe the process as a series of academy transfers from one trust to the other. While the process may therefore be referred to as a merger, for ease and perhaps also to best describe the purpose and intent, it is nonetheless important to understand the practicalities, which will inform your understanding, as trust leaders, of the various steps involved in the process.

Rationale

Before embarking on any merger, it is essential that the trust board has understood and agreed its rationale for joining together with another trust. The reasons can be many and varied. While the Department for Education (DfE) remains ambitious for 'all schools to be in or joining a strong trust', as stated in its schools white paper Opportunity for all: strong schools with great teachers for your child (though no longer by 2030, as reported by Schools Week), any merger must be in the best interests of the trust.

A trust board and its leaders will therefore want to consider a range of factors including alignment of vision, values and ethos, sharing of knowledge and expertise, staffing and succession, school improvement support, school specifics and geography, the function of the central team, financial efficiencies, governance roles and structures and ultimately how the merger would benefit the pupils and students served by the trust.

Trusts should also consider what the future merged trust will look like and take into account the DfE's Trust Quality Descriptions, which (when finalised) will inform the Regional Director's decision regarding the merger, and other important applicable factors, such as what it means to be a thriving trust, as described in Sir Steve Lancashire's blog and in Forum Strategy's series of think-pieces on thriving trusts.

Review

The rationale for a merger should be informed by an honest assessment by a trust board of the strengths and weaknesses of their own trust. This should draw on their risk register. The trust may also benefit from a peer review by another trust not involved in the merger. The assessment can also be helpfully aided by an external review of governance which is recommended before any significant change, such as a merger. Wrigleys offers a governance review service which looks at trust effectiveness and compliance. If you would welcome further information, please get in touch.

Due diligence

Due diligence should also inform the rationale for merger with a trust, which can be more limited in scope at this early stage in the process. Once the decision has been taken to progress the transfer process, due diligence should be more detailed. In each case, the due diligence will be in respect of the other trust and, latterly, will need to be sufficiently detailed to provide a full picture of the trust, warts and all.

Risk management

The governance review and due diligence exercise should then feed into a risk matrix for the transfer and inform how any issues identified are to be managed. It will be important to ensure that key risks relating to the transfer are reported regularly to each of the trust boards.

Roles and structures

A trust board and its leaders will also want to give early thought to the composition of the members and trustees and the structure of the local governance and executive team at the future trust and whether these roles and structures need to be updated. In the case of the board, it will be important to ensure the trustees have the skills, expertise, experience and knowledge needed to ensure the success of the trust going forward. A skills audit will assist with this process. Since these governance issues can prove to be a major stumbling block to a successful merger, it will be important for trust boards and leaders to have these conversations early in the process and establish an agreed position from the outset.

Key terms

Written agreement between the two trusts recording the key terms on which it is intended the merger will take place, is an essential part of the process. It should set out the intended timeline and allocation of responsibilities and help avoid disagreement later in the process by addressing key issues such as: which trust will transfer its academies to the other; any change of name (of the trust or any individual academy); who will be the members, trustees, and local governors going forward; and whether any assets (or liabilities) will not transfer to the other trust.

A written agreement of this kind is usually referred to as heads of terms (HoTs) or a memorandum of understanding (MoU). Either way, it will be important to consider whether the agreement will be contractually binding. If it will, this will provide certainty regarding the key terms on which the merger is to take place and the ability to enforce those terms against the other trust. However, the trusts may not want to be tied into the key terms of the merger in this way, in which case it may be better for the agreement to be non-binding. Whichever approach is taken, it will be important to consider whether any terms of the agreement and the merger are to remain confidential. If they are, this will need to be addressed in the agreement with any confidentiality (or non-disclosure) obligations expressed as contractually binding where the agreement will otherwise be non-binding on the trusts.

Data sharing

Since the personal data of pupils and staff and possibly also parents and carers and third party contractors and suppliers will inevitably be shared between the trusts, it will also be important to consider the basis on which that personal data is to be shared and whether a data sharing agreement between the two trusts will be advisable. This is particularly important when processing special category (or sensitive) data including medical, sexual orientation and similar information and continuing compliance with each trust's (and any separate academy) Privacy Notices.

Steering group

The appointment of a steering group is also recommended to ensure effective oversight and management of the process. The constitution of the steering group should include relevant representatives from each trust. This should be recorded in the written agreement above, together with the terms of reference of the steering group. The board of each trust will need to agree a delegation of applicable functions to the steering group (potentially meeting any formal academy trust requirements to set up sub-committees). Representatives of each trust on the steering group must then report regularly to their trust board on decisions taken by the steering group.

Consultation

Each trust must consult on the proposed merger. The consultation must be fair and open and include all those who could be affected by the merger. This includes parents, other schools, the local authority and, where there are Church schools, the Diocese and site trustees. The consultation must run for a minimum of 4 weeks and the trust will need to show they have considered all responses received.

Specific staff consultation is also required, as outlined below.

Approvals

Since a merger will involve a significant change for each trust, they will each need to submit a full business case to their Regional Director as part of their application for approval of the proposed merger. The DfE guidance Making significant changes to an open academy sets out the process to be followed.

Where a trust operates one or more Church schools, it will also need the agreement of the Diocese and any site trustees to transfer the Church school(s) to the other trust. This agreement will be required in relation to the treatment of any buildings and hard-standings at any Church school(s) and may be used to place conditions on the merger. These issues are addressed below.

Articles of association

Where the articles of association of the future trust are based on an outdated DfE model document, the DfE will likely require those articles to be updated to the latest model as part of the merger.

Where there are CofE schools, the Diocese will require the DfE CofE majority or minority model document to be used depending on the mix of CofE and non-Church schools to be operated by the trust. The Diocese may also require a members agreement or church school oversight agreement to be entered into to further safeguard the distinctive ethos of any CofE schools.

Where the articles are to be updated, this may also require application to the Charity Commission for consent to regulated alterations (for example relating to the objects and trustee benefit provisions), which will need to factored into the process.

Funding agreements

As part of the merger, the Master Funding Agreement of the outgoing trust will need to be terminated. This will be achieved by a Deed of Termination and Release between the trust and the DfE.

The Supplemental Funding Agreements of the outgoing trust will then be novated or transferred to the future trust and updated to the latest DfE model document by a Deed of Novation and Variation between both trusts and the DfE.

Staff transfer

The merger will involve the transfer of an undertaking under the TUPE Regulations. This means that employees of the outgoing trust will transfer to the receiving trust. Trusts are likely to be familiar with the TUPE process through the academy conversion process and will know that TUPE transfers liability relating to the employment contracts of transferring staff to the receiving employer, protects the terms and conditions of transferring staff and preserves their continuity of employment. But there are some particular issues which can arise where the transfer of staff happens in the context of a merger.

The receiving trust will need to carry out careful due diligence to ascertain the existing terms and conditions of transferring staff. There may be a kaleidoscope of different contracts, policies and procedures in place where schools have joined from different local authorities or trusts over a period of time. In some cases, there can be considerable uncertainty about applicable contracts and policies where these were not shared in full by the local authority at the time of academy conversion and are now difficult to trace, or where post conversion contract variations have been made, and it may be difficult to know who is on which version.

It is not uncommon where a merger is planned for the receiving trust to begin to support the outgoing trust some time before the merger takes effect. Trusts should be aware of the risk that a TUPE transfer will happen automatically at the point where the receiving trust assumes control of the business of the outgoing trust, for example, where receiving trust staff or trustees are taking key business decisions on behalf of the outgoing trust. A transfer of employees which occurs prior to an official merger date will not have the contractual protections of the transfer agreement referred to below: specifically, any employment-related indemnities and warranties given by the receiving trust would not then align with the date of the TUPE transfer.

There will of course be a need to review the staffing structure of the receiving trust following the merger. There is likely to be duplication of roles between the central teams of the outgoing and receiving trust which may lead to a redundancy situation. This can mean senior leaders and managers who are working towards the merger are themselves at risk of redundancy or redeployment. Clearly this will require careful consideration and planning.

Trusts should be aware of the increased risks of claims where there are dismissals and changes of role in the context of a TUPE transfer. No decisions on the dismissal of incoming staff should be made by the receiving trust ahead of the transfer, as it is not at that stage the employer. It is important to remember that all staff who are carrying out the same or similar potentially redundant roles may potentially need to be pooled together in a redundancy selection exercise. That includes pooling transferred staff along with those of the receiving trust.

Transfer agreement

A merger usually involves the transfer of all assets and liabilities of the outgoing trust to the future trust, since the outgoing trust must be free of all assets and liabilities in order to apply for voluntary removal from the Companies House register once the merger has completed.

A transfer agreement between the trusts will therefore usually provide for the entire operation of the outgoing trust to transfer, without any warranties or indemnities given by them regarding the academies and any liabilities which may exist. Where existing contracts cannot be transferred without the consent of the other party to the contract or a deed of novation, this will need to be dealt with as part of the merger process.

Land transfers

The form of land transfer for each academy will depend on the terms on which the site is occupied which, in turn, will derive from the status of the academy pre-conversion. It is likely that:

• former community schools will occupy their site under the 125 year DfE model lease from the local authority, which will be assigned;
• the outgoing trust will hold the freehold title to the site of any former foundation schools (with or without a foundation) which will transfer;
• former voluntary controlled or voluntary aided schools will have a combination of the 125 year DfE model lease of their playing fields from the local authority and a Church Supplemental Agreement (CSA) with the Diocese, site trustees and DfE for its buildings and hard-standing, which will be replaced by a new CSA.

PFI

Where an academy operates premises procured under the Private Finance Initiative ("PFI"), the existing School Agreement (between the trust and the local authority) and the Principal Agreement (between the trust, the local authority and the DfE) will need to be transferred to the future trust, in each case by a Deed of Novation.

The outgoing trust as co-insured under the PFI insurances will also need to be replaced by the future trust, which may also require the original PFI contract to be updated by a separate Deed of Variation.

The documents will need to be approved by the PFI contractor and its lender(s) which will need to be factored into the merger process.

Final decision

Once the above processes are substantially complete and before the final agreements are entered into, the board of each trust will need to make the final decision whether to proceed with the merger and, if so, approve the final agreements and authorise these to be signed on behalf of the trust and completed.

Winding up

After the merger has completed and the final accounts of the outgoing trust have been prepared, audited and submitted to the Education and Skills Funding Agency, the old trust will be able to apply for voluntary removal from the Companies House register, subject to any time restrictions in the transfer agreement.

Summary

Trust mergers have become and continue to be a common feature of the sector, driven by intervention and re-brokering on the one hand but also by the independent decision of trusts on the other. Where a merger will be independent or voluntary, each trust will need to take a range of factors into account not just in the initial assessment of the proposed merger but also in the planning and implementation of the process. Specifically, trust leaders need to consider:

• the rationale for a merger, informed by an honest assessment of their trust's strengths and weaknesses and due diligence of the other trust,
• the key terms of the merger, informed by due diligence, and record these in a written agreement and
• the steps required to implement the merger for the future benefit of pupils and students.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.