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Farrer & Co | International schools series - Part 3: The key issues and lessons learnt from our recent experience

We have been advising UK schools on their overseas initiatives for approaching 10 years now and, in that time, have built up not only a wealth of experience of these deals - and just how varied they can be depending on the parties involved and the territories in question - but can also bear witness to some definite trends and emerging themes. We continue picking some of these up but with reference to our experience of the deals being put together on the ground and identifying some of the key issues and lessons for any UK school looking to commit to an overseas project.

Timing: The amount of time the Governors need to consider the prospect of (a) venturing overseas at all and (b) of any potential partner should not be underestimated. It sometimes can prove a significant part of the overall journey, which can typically take anywhere up to 3 years from in-principle decision to go overseas through to a local school opening. And it definitely seems helpful for the senior management team to have got an in-principle decision to set up overseas from its Governors, perhaps without a specific proposal in mind. With that commitment secure, then the specific proposals can be looked at individually, and more meritoriously evaluated. Taking specific proposals to a governing board that hasn't yet made up its mind whether to go overseas or not can make for a confusing decision-making process. There are definite advantages to being in the market for an overseas opportunity with a clear mandate. And if that mandate is, say, to consider certain territories and not others, then so much the better. Again, it is about clarity and certainty of objectives so that limited time and resources can be put to the most effective and targeted use.

A Healthy Dose of Realism: UK schools should be under no illusion as to how long the process might take, but also the amount of time, effort and resource that needs to be maintained just to get the project off the ground, let alone see a new school through its opening phase and up to the much-hoped-for capacity. It goes without saying that this should never be underestimated; and the benefits of any economies of scale, in terms of seeking to establish a network of schools from the off, especially in quite disparate locations, as opposed to just one, may actually prove minimal. These economies tend only to come over time once the number of schools has gradually and steadily increased and with a reasonable degree of territorial proximity, each then proving to be 'cheaper' to establish than the last. Trying to be too ambitious from the start may result in nothing other than over-stretching and over-commitment, tending then to end in under-delivery. In addition, schools must be realistic about when the returns are going to be made. It is very tempting to look at the new school's capacity and the percentage of fee-income it is set to be paid (normally somewhere between 3% and 6% of gross income) and say this is how much we will earn. That doesn't take into account that it will typically be somewhere between 5 and 7 years before these figures can be returned, mainly because of the time it takes to get a new school up to capacity (assuming it can get there at all) and because this simple calculation also omits to factor in the cost of the UK school's own investment, which is not insignificant and will need to be recouped. Schools need to be thinking about committing for the long-term in order to make a proper commercial success of establishing a school overseas.

Tax and Local Regulation: We mentioned previously the importance of thorough and targeted due diligence on the potential partner but how that is only part of the picture. Due diligence is also needed on the proposed structures, local market and business plans. And, within this exercise, one area specifically which UK school’s must properly assess when considering an overseas venture is the impact of local tax and regulation. It is crucial to ensure that the proposed activity: (a) is lawful in the relevant territory - take, for example, the continued evolution of regulation in China we commented on previously; and (b) does not expose the UK school and/or any staff deployed in-country to unexpected tax liabilities. Both points are regardless of what the governing law of the relevant contract(s) establishing the project is. While these risks can be mitigated, to a degree, under the contract(s) put in place, we always recommend that UK schools obtain proper local advice around the local regulatory and tax position.

• Governance: This is proving a really tricky area, for a couple of reasons. The first is that, whilst it is essential to establish an effective governing body for the overseas school, it is a real challenge to do this. Finding people with the time, inclination and the right mix of skills, experience and altruism is no mean feat overseas, especially where there are large numbers of transient ex-pat communities. The second challenge is establishing a board or senior management team that has a way of managing the potential (arguably inevitable) conflicts of interest with the overriding contractual relationship between the overseas partner and the UK school. It is quite typical for UK school representatives to sit on the Board and/or senior management team and, as a result, become directly engaged in the 'local' decision making about the operation of the overseas school. That is fine in principle, but it is important to establishing clear terms of reference for any board or senior management team, coupled with active management of conflicts of interest, in order not to compromise the UK schools’ contractual rights and remedies.

 Models: This is where we are definitely seeing some change of late. Whether through overly-cautious governing bodies keen only to dip their toe into an overseas project first, or because through market demand, or more likely a combination, we are seeing a shifting model of collaboration with existing local schools looking for tie-ups with UK schools to provide not so much the UK school's brand but particular specialisms and resources. This is particularly being encouraged in those regions experiencing a bit of a slow-down - Abu Dhabi, for example. Local schools want the UK school to 'sponsor' a particular department or area of the curriculum and provide specific resource, support and expertise to it. In our view (although you may say that is to be expected coming from lawyers who are known, as a collective, to be notoriously risk-averse and cautious) there is a lot to be commended by this simpler, less risky approach. It may not reap transformational amounts of new income to the school, but it ought undoubtedly to more than wash its face, and the side-benefit will be that it can prove hugely insightful in terms of what is conceived by the school as being involved in taking the bigger step to set up a new school, and whether it has the time, money, resources and, frankly, the inclination to make a real success of it. Despite the numbers doing it, setting up a new school overseas is as hard as ever, so the appeal of a much simpler proposition is not to be under-estimated, especially if it can be viewed as a testing ground for what the next step-up really involves.

Internal Structuring: And finally, it still surprises us that the UK charity law dimension is often overlooked, or its importance too easily subsumed. A UK charitable school must ensure its internal structuring, especially if the primary purpose of the exercise is to generate additional income, is done correctly and for the right reasons. This typically will involve the establishment of a trading subsidiary that then needs, in a tax-efficient way, to have a draw on the main school's brand, materials and staff resource in order for it to 'service' a contract with an overseas partner. It also needs to have a sufficiently independent board to manage the inevitable risk of conflict. Whilst this is all perfectly achievable and legitimate, none of it is necessarily all that straightforward and so expert tax and charity law advice really must be sought at the outset to ensure that the UK school's own house is in order before venturing overseas.

Our Approach

Whilst they will bear similar hallmarks, in our experience no two proposals for an overseas proposition are quite the same and there is no ‘one-size fits-all’ approach to establishing what are hoped to be long-standing and mutually beneficial relationships. The challenge therefore is to identify the proposal that best works for the UK school: this not only means what is best commercially and legally, but that also represents a structural, educational and cultural ‘best-fit’. Due to our deep understanding of independent schools generally; our charity law and related tax expertise; and our experience of overseas projects and collaborations, we appreciate the importance of delivering the balance between this combination of elements and will strive to guard it.

That, we think, sets us apart from others.

Investors looking for alterative structures could consider partnerships, trusts and/or corporate vehicles. The right strategy will depend on each individual’s  commercial and personal circumstances.

If you require further information about anything covered in this briefing note, please contact David Copping or Paul Jones, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2019

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