The Legal Framework for Governance

31 January 2015

INTRODUCTIONS Tom Morrison

LEGAL STRUCTURES AND EDUCATION PROVIDERS

Gerry Morrison & Tom Morrison

Legal Structures for Further Education Providers

• Statutory Further Education Corporations • Education Act 2011 • Companies • Charitable Status • Subsidiaries - wholly owned subsidiaries - joint venture

companies • Relationship between Further Education Corporations

and Subsidiaries • Academy Trusts

Statutory Further Education Corporations

• Majority of Further Education Colleges • Set up by order of the Secretary of State under the FHEA • Powers vested by Act of Parliament • Independent Corporate Bodies • Own legal personality distinct from governors/members • Instruments and Articles of Government • Purposes set out in Section 18 and 19 FHEA • Composition, procedures, internal powers • Private training providers = mainly companies • A few colleges are companies

Education Act 2011 • Prior to EA 2011 Further Education Corporations’

instruments and articles could only be amended by regulations made by SOS under FHEA

• Amending regulations issued periodically, uncommon for FE Corporations to request bespoke changes

• Less flexible, hard to change governance structures, internal procedures

• FE Corporations at a disadvantage to private training providers and colleges established as companies

Post-Education Act 2011 • FE Corporations’ freedom to amend instruments and articles • Instruments and articles must specify how FE Corporation

may amend them • SOS power to amend, replace or revoke • Change composition of governing body, procedures and

internal powers • Balance flexibility, efficiency with protecting the organisation’s

aims, assets and beneficiaries • Remove some of the previous disadvantages • Provided instruments and articles comply with Schedule 4 of

FHEA (minimum requirements for governance)

Post-Education Act 2011 • FE Corporations’ power to dissolve themselves • FE Corporations may transfer property, rights and

liabilities upon dissolution to specified education providers for educational purposes

• Consultation required • FE Corporations can use EA 2011 powers to convert

legal structure • Rationale for change?

Companies • Limited by shares • Limited by guarantee • Regulated and incorporated by Companies House • Companies Act 2006 • Memorandum and Articles • Power to amend articles and dissolve • Two-tier system of governance - directors and members • Statutory directors’ duties

Powers • Power for FE Corporations to convert legal structures to

companies • Can be a wholly-owned subsidiary of Further Education

Corporation or joint venture companies • Academy Trusts

Charitable Status • FE Corporations are exempt charities • Principal Regulator SOS for Department for Business

Innovation and Skills • FE Corporations cannot amend instruments and articles

to cease being charities • Governors’ legal duties and responsibilities as charity

trustees • The Charity Commission, The Essential Trustee: What

you need to know • Aims for public benefit

Advantages Charitable Status • Tax breaks • FE Corporations exempt from corporation tax, income

and capital gains taxes arising out of the provision of education and stamp duties

• Fundraising • PR benefits • Asset-lock

Disadvantages Charitable Status • Perceived red tape (charity law) • Complex rules trading activities • FE Corporations cannot carry out large scale non-

charitable trading or non-primary purpose trading • Routed through subsidiary • Ultra vires, breach charity law, tax penalties • Rules on payment of governors as charity trustees • Partnership/joint ventures with non-charities additional

red tape

SUBSIDIARIES, JOINT VENTURES AND COLLABORATION IN THE EDUCATION SECTOR

Tom Morrison & Gerry Morrison

Subsidiaries • Wholly-Owned Subsidiaries

– colleges can establish separate legal entities to run different activities across their group

– ring-fences risks/liabilities – commonly create wholly-owned subsidiary companies – tax efficient gifting of surplus to parent college – diversification of activities – development of new brands – acquire private training providers

Relationship between Further Education Providers and Subsidiaries

• Non-charitable subsidiary - arm’s length commercial relationship between subsidiary and parent charity

• Subsidiary = separate legal entity with its own legal personality

• Directors of subsidiaries not all the same as college governors

• Conflicts of interest • Charity law regulates funding of subsidiaries by FE

Corporations • Reporting/Monitoring

When might a subsidiary be appropriate and what are the

alternatives?

Legal models for collaboration • Wide ranging • No single definition • Interchangeable use of terms • Joint venture = JV • Legal entity (Specific Purpose Vehicle = SPV) • Partnership • Contractual joint venture • Collaboration or subcontracting?

Joint Venture Companies • Partnerships/joint ventures between FE Corporations

and non-charities/other organisations/colleges • Ring-fences risk/liabilities • Apprenticeship training agencies • Owned by the College and one or more third parties • Membership Agreement

Rationale • Key to any successful collaboration • Short term requirement? • Longer term benefits? • Driven by specific project requirements? • Political drivers? • Cost saving? • Creating capacity? • Better together? • Rationale should dictate choice of legal model

Distinct projects • Large scale projects • Bringing together multiple partners • Geographic reach • Capability • Capital projects - more likely to be SPV • Revenue projects - more likely to be contractual JV

Longer term requirements • Collaborative working for the long term • Explored other options - e.g. merger? • Typically transfer of functions into a SPV • Outsourcing • Procurement • Governance of the SPV • Longer term contractual alternatives

Academy Trusts • Companies limited by guarantee • Exempt charities • Sponsored by Colleges • Set up multi-academy trusts • Independent, separate legal entities, own legal

personality • Funded directly by Department for Education via a

funding agreement • Relationship with the college as sponsor • Conflicts of interest

Group discussion and questions

Tom Morrison Gerry Morrison

Partner tom.morrison@rollits.com

01482 337310

01904 625790

Partner gerry.morrison@rollits.com

01482 323239

01904 688539