At the end of last year, the Department for Education (DfE) updated their non-statutory guidance on the “material change” regime for independent schools. As readers will know, certain changes at a school or college are considered “material changes” which must receive prior approval from the DfE before they can be made. One such change is “a change in proprietor”.
The basic regulatory position (which is outlined briefly below) remains substantively unchanged and in some cases can be relatively straightforward to apply. However, the increasingly diverse governance structures that many independent schools have in place (or are considering) and the growth in “merger” activity in the sector, has resulted in some uncertainty and complexity about when a “change in proprietor” has taken place for the purposes of the regime. This “material change” will be the focus of this note, which draws out the key points from the guidance and flags some practical tips for schools to consider.
As ever, changes being made at a school which engage this regime also have a good prospect of engaging the immigration and student sponsor regime, and we touch briefly on this also.
Basic regulatory position
There are seven changes which constitute “material changes” requiring DfE approval before the change can be effected. This approval process gives the DfE an opportunity to assess whether the school will still be able to meet its regulatory requirements if the proposed change takes place. If it is happy with the change, the DfE will proceed to update the public register of schools which records the key information about schools and colleges in England, including independent schools and colleges.
The Secretary of State has the power to remove a school from the register (such that it is not authorised to operate) if a material change is made at a school without having first received approval from the DfE.
The seven material changes are:
- A change of proprietor,
- A change of address,
- A change to the age-range of pupils,
- A change to the maximum number of pupils (ie the registered capacity of the school),
- A change to whether the setting is for male or female pupils or both,
- Starting or ceasing to provide boarding, and
- Starting or ceasing to admit pupils with special educational needs.
As noted above, we will focus on the first: a change of proprietor. In our experience, tied to the uptick in merger-type activity by and between schools in recent years, this is something about which there has been some confusion and mixed practice in the independent sector, particularly (but by no means exclusively) amongst groups of schools (both charitable and for-profit groups) and the structures that these can sometimes involve. This may be due to the lack of clarity in the regulatory wording about who (or which entity) is in fact the school’s “proprietor” and how the regulatory definition applies in cases where a school’s ownership and/or governance structure is complex or unusual.
It is potentially as a result of this confusion, and increasing queries from schools on this topic, that the DfE issued its update to the non-statutory guidance on material changes along with some specific guidance on changing proprietors and the change of proprietor application form.
What does the guidance say?
The key pieces of guidance are:
- Independent schools: applying for approval to make a material change
- Independent schools: change of proprietor guidance
- Independent schools: change of proprietor application form
Who is a proprietor?
The guidance confirms that a proprietor is: “the individual or the body of persons, corporate or incorporate, that has ownership control over the school and to which school management are accountable. Where the proprietor is a company or charity, the term proprietor … refers to the individual member of the proprietor body, that has direct oversight (eg the chair of the proprietor body or lead director).”
If an individual owns the school, they will be the proprietor.
If an entity of some form owns the school, for example a registered company (that is often also a charity) or a Royal Charter body, the name of the entity will be registered as the proprietor.
Difficulties can arise in commercial structures where there are layers of ownership such that one entity may “operate” the school but that this entity in turn is then owned by one (or possibly a chain of) entities above it to which it is accountable. In these situations, the school should ask which entity in practice has the controls that an owner would expect to have over the school, e.g. to make decisions about the school’s financial and strategic planning and structure, to sell the school or to make acquisitions on behalf of the school.
There is also a second part of the test to consider: which entity is the school management accountable to? It may be that the entity with “ownership control” and the entity to which the school management are accountable are not the same. In such cases, given the underlying purpose of the registration process is for the public to understand who is responsible for the school and for the DfE to feel comfortable that the entity responsible is suitable, there is some logic in considering which entity is closest to the school and, in laymen’s terms, would more likely be considered its “owner”. It may be relevant, for example, to consider which entity contracts with the parents, employs staff and commissions services on behalf of the school.
Having said that, in our experience it seems no arrangement is quite the same as the next and it would be sensible for schools, particularly those in a group, to take advice on the application of the definition in their particular circumstances. They may also wish to consult with the DfE to get their view, either directly or via an intermediary.
Change in personnel?
No “material change” application needs to be made to the DfE in respect of the “members” of the proprietor body and a “material change” will not be triggered if there is a change in personnel within the proprietor entity, including a change of “chair”. The DfE will, however, want to know the name of any new chair (or equivalent) so they can ensure the proper regulatory checks can be carried out against them (which is a requirement separate to the “material change” regime). The chair will then be responsible for ensuring the appropriate regulatory checks (as set out in the Education (Independent School Standards) Regulations 2014 (ISS) Part 4 – Paragraph 20 (6)) are carried out against the members and that these are reviewed and recorded. In practice, it is important to ensure the chair is primed to provide their information to the DfE when the application for a material change is being submitted.
You may, under the school’s safer recruitment and safeguarding policy and practice, wish to carry out checks against other individuals involved in the running and management of the school (even if they do not fall within the DfE category of individuals to be checked under the ISS).
When must the application be made?
The new guidance flags that approval for material change applications can take up to six months and complex requests may take longer, so applicants are encouraged to factor this timeframe into their planning. That said, our experience is that applications at present are being processed by DofE in less than six months and frequently proceed more quickly.
Where a change of proprietor arises in the context of a merger or acquisition, the obtaining of DfE approval is ordinarily a condition to completion of the transaction, though not always. This will depend on the structure of the deal. For instance, is the company which operates and has control of the school staying the same? If so, for example if the acquisition takes place by a change of membership (for a charitable school) or a transfer of the shareholding (for a for-profit school) with the “school-owning entity” otherwise remaining the same, then there may be no change of proprietor at all. If, however, the assets and undertaking of the school are being transferred to a new entity that will most likely constitute a change of proprietor. Advice is recommended on a transaction-by-transaction basis and we routinely provide this advice alongside our support to schools on transactions.
Where DfE approval is a condition to completion of the merger or acquisition, the uncertainty over the wait for approval can be a factor in negotiations and operational planning. For example, how much say should a buyer / merger partner have for that interim period and who will bear the economic risks of the school during that time? At what point is the change announced to staff and parents: before or after DfE approval? Usually the announcement to staff and parents is made before DfE approval and following exchange of contracts.
Who should make the application?
The application to change the proprietor must be made by the proposed proprietor (and not the existing proprietor). The application should be made using the new application form, having regard to the new guidance linked above (which principally relates to how to fill out the form correctly). However, the first contact with the DofE should be made by the existing proprietor to inform DofE that an application for a change to the registered proprietor should be expected.
What does the DfE assess?
When considering the change of proprietor, the DfE will assess whether the new proprietorial arrangements will meet Part 8 of the ISS, which relate to the expectations around leadership and management. It is unlikely that requests to change the proprietor will trigger a material change inspection (in which Ofsted or ISI will make enquiries and visit the school to satisfy themselves that the proposed change will not jeopardise the school’s ability to meet its regulatory requirements). There may be some circumstances where such an inspection is carried out, but this is likely to be where the proposed change is significant or there are some further material changes proposed or wider concerns.
The DfE will also carry out the checks against the chair (or equivalent) as set out in ISS Part 4 Paragraph 20 (5) (a) & (b). One of these checks is a right to work in the UK check. The chair of the proprietor body must have the right to work in the UK. We believe that members of the proprietor body do not need to, unless of course they would be performing work in the UK as part of their role (or otherwise).
Schools licensed by the Home Office to sponsor overseas students should be aware that they have separate reporting duties to the Home Office in relation to material changes of circumstances (which, when reported, may trigger a Home Office visit).
In addition to any applications to the DfE, changes of ownership (which includes mergers and acquisitions) are reportable to the Home Office within 20 working days of the date of change. As licences are not transferable, the new owner may need to reapply for a licence, which can be a time and document-intensive process, and whilst ongoing, can impact the school’s ability to sponsor overseas students. It is worth noting that the Home Office also considers a change of ownership to have taken place if the institution is part of a wider corporate group and there is a change anywhere in the chain of ownership (or membership in the case of charitable companies) and that change affects the institution’s day-to-day operations, governance, or any other sponsor licensing related matters. This means changes that may not constitute a “material change” for the purposes of DfE consent may still necessitate a report to the Home Office, and any restructures or changes should be considered through both distinct lenses.
If you are planning to make a change to your structure or to replace your current proprietor with a new individual or entity, whether as part of a wider merger-type transaction or otherwise, you should:
- Plan ahead, given it may take six to secure DofE approval. The change should not take effect without prior approval from the DfE.
- Prior to the application form being submitted, the existing proprietor should contact the DfE separately to let them know about the proposed change. This step is recommended in the guidance and would also be an opportunity to raise any queries about the identity of the proprietor and the process ahead of time (although raising queries could slow down the process).
- Once you have filed the application form (and if you have not had an acknowledgement or response) follow up within a reasonable time frame to get an update and ensure the process is moving forward.
- Use the DBS Update Service to expedite the criminal record checking process, if applicable.
- Consider whether the change triggers any reports to the Home Office and allow enough time for this.
- If you are unsure about anything, seek advice in good time.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2024