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Government Response – Pt 3 changing corporate form

June 14, 2012

Monday’s announcement from the Department of Business, Innovation and Skills skirted around last year’s proposals to ‘simplify the process for changing corporate status’. The White Paper paragraphs relating to this idea were vaguely formulated coupled with open-ended questions such as Question 21 from the Technical Consultation: ‘Would you welcome legislative change to make the process of changing legal status easier?’

The government’s formal response reported a lack of enthusiasm for the idea:

“The majority of universities that responded were against the proposal. Many felt that the current legislative processes were adequate, manageable and didn’t present any problems. Some universities gave a qualified response in which their main concerns were that they were unclear about the problem the proposal was intended to address, and concern about the future of charitable assets acquired over time with public funds and private donations.”

As I argued at the time, these sections were deliberately vague as they touched upon a major issue: a ‘legal form of their choosing’ (White Paper §4.35) could involve potentially for-profit forms such as ‘company limited by share’ and therefore suggested making it easier for universities to shed their charitable status so as to ‘better access private finance’.

The government has been shy about making this idea explicit but the recent sale of College of Law to Montagu Private Equity illustrates what is a stake: a charity with a royal charter was effectively purchased and transformed into a profit distributing entity.  College of Law shares its legal status, charitable chartered corporation, with all ‘pre-92’ universities, with the exception of the Universities of Oxford and Cambridge.

College of Law is a private enterprise – it does not receive public funding. Its sale is still surrounded in vagaries and indicates why proposals to simplify such proceedings would be needed were public universities to begin to go down this route.

A report commissioned by Universities UK commissioned a report in 2009 from the legal firm, Eversheds illustrates how the buyout of a university could be achieved under existing legislation.

It is heartening therefore that to read that amongst those attending the consultation ‘roadshow’ events:

“There was little interest in the legal status issue with those that did comment saying that this didn’t create barriers to what they wanted to do.”

If the majority of universities were against the proposals, it should be revealing to see which of the minority of respondents were in favour (who indicated that ‘the process of changing legal status easier could facilitate public-private partnerships and enhance institutions’ ability to compete internationally.’)

‘Public-private partnerships’ here may indicate spin-offs where joint ventures with private investment are used to run profitable operations such as business schools. The university and the backers would then split any returns between them.

Special cases in this regard are the forty-five or so universities, formerly polytechnics, which have the legal status of ‘higher education corporations’.  As statutory corporations they are bound by ultra vires: they can only do what they have been explicitly given powers to do by statute.

At present, unlike those holding royal charters or enjoying the status of ‘companies limited by guarantee’, they cannot issue financial instruments such as bonds.  This may represent a significant disadvantage in the new funding terrain – limiting their ability to access investment given the contraction on traditional bank lending.

Another quirk of HECs is that they are quasi-public institutions, not purely private: the relevant Secretary of State has the power to dissolve them. Here, assets can only be transferred to a new company limited by guarantee and must be used exclusively for charitable purposes. I believe the government was keen to legislate so as to overcome both those impediments.

Whilst it summarises the 200 plus responses to last year’s consultations, at this point in the document there is no indication of what the government proposes to proceed. (Intriguingly, I hear that BPP university college, previously the only for-profit with degree awarding powers, has recently amended its constitution to become a ‘non profit distributing’ organisation. More on this at a later date.)

Whilst legislation around changing corporate form may be off the agenda, the consultation identified a different concern: ‘the complexities and inflexibility of their existing governing structures rather than the process for changing corporate status itself’.

There is little detail here and we should await the full publication of all responses but one thing this might point to is an overhaul of the relation of university management teams to their Board of Governors and other trustees.  Any further developments here probably depend on the outcome of the recent statutory review into the 2006 Charities Act.

To conclude, one of the most far-reaching components of the conservative vision for English higher education has been stymied for the time being. Making it easier for higher education institutions to adopt any legal form would have required primary legislation.  It is on hold for the moment, but the outcomes of the review into charities and the acceleration of joint ventures both generate significant changes in and of themselves.

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