Thorough legal due diligence allows a potential purchaser to assess the risks of a transaction by investigating the obligations and liabilities of the target company. Obtaining objective and reliable information on the transaction will help inform the decision on whether to proceed fully, or to ring-fence, exclude or limit the risks, and negotiate on warranties or the purchase price.
For investors seeking to acquire education business, for example schools, it’s absolutely essential that safeguarding and immigration due diligence is front and centre of the exercise, alongside other areas of inquiry like employment, intellectual property, property and tax.
The UK has the most developed safeguarding regulatory framework in the world, covering children and adults at risk. If the target business has any contact with these groups, a due diligence exercise which establishes whether the business has been operating lawfully within the jurisdiction and is currently complying with the statutory framework and government guidance is essential. As high-profile cases of historic abuse, for example at Southbank International School, demonstrate allegations of poor safeguarding practice can be costly to a business, both reputationally and financially.
The basics of safeguarding due diligence involve an assessment of whether the organisation has an appropriate suite of polices in place. The organisation should have a written safeguarding policy that applies to all staff including volunteers and is updated annually. The organisation should also have a staff Code of Conduct for working with children, an E-Safety policy that outlines the organisation’s online safety procedures for children and young people and a Safer Recruitment policy.
A sample of the organisation’s recruitment files should also be checked to ensure that the procedures in the Safer Recruitment policy are being followed. Organisations working with children should have a single central record for staff that details the mandatory checks that must be carried out on staff working with children. Staff working with children are likely to be engaging in “regulated activity”, therefore an enhanced DBS certificate which includes barred list information will be required for most appointments. In addition, any member of staff who is appointed to carry out teaching work will require an additional check to ensure they are not prohibited from teaching. Written references from an individual’s previous employer should also be obtained and kept on file.
All safeguarding concerns, discussions and decisions made, and the reasons for those decisions, should be recorded in writing. Therefore, the organisation’s safeguarding records should be inspected. Any unlawful use of settlement agreements to exit staff against whom allegations of abuse have been made should be ascertained.
It is important to assess whether the organisation has been and is complying with its various duties to report to external authorities. Where a child is suffering, or is likely to suffer from harm, a referral to children’s social care (and if appropriate the police) must be made immediately. Child protection allegations made against staff and volunteers who work with children and young people should be reported to the local authority designated officer (LADO) within one working day of the allegation. If the organisation is a charity (most UK independent schools are registered charities), then, depending on the severity of the safeguarding concern / incident, a serious incident report (SIR) should be submitted to the Charity Commission. Charities should report an actual or alleged incident promptly, which means as soon as is reasonably possible after the incident happens, or immediately after the charity becomes aware of it.
Finally, “regulated activity” providers (schools, colleges etc) have a legal duty to refer to the DBS anyone who has harmed, or poses a risk of harm, to a child or vulnerable adult where the harm test is satisfied in respect of that individual, the individual has received a caution or conviction for a relevant offence, or if there is reason to believe that the individual has committed a relevant offence; and the individual has been removed from working (paid or unpaid) in regulated activity, or would have been removed had they not left. The duty to refer applies even when a report has been made to another body such as a local authority and is irrespective of whether another body has made a referral to the DBS in relation to the same person. Failure to refer to the DBS when the criteria are met is a criminal offence.
A further important, but often overlooked element of due diligence in transactions involving educational institutions, is compliance with UK immigration law. In order to sponsor overseas students, a school or university must hold a student sponsor licence issued by the Home Office. This licence comes with its own regulatory regime and is governed by a different (although at times overlapping to a degree) framework. If a sponsor fails to comply with that regulatory regime, it risks revocation of the licence. The commercial value of a student sponsor licence to an educational institution should not be underestimated: without one a school or university’s access to the lucrative overseas student market is cut off.
When purchasing an educational institution that holds a sponsor licence, one essential consideration is “is the licence holder managing the licence in a compliant manner?”. In particular, consideration should be given to whether a sponsor is complying with its record keeping duties (ie keeping the correct documents on the files of each of its sponsored students) and reporting duties (ie updating the Home Office with any relevant changes to sponsored students’ status, as well as relevant changes to the institution itself). In our experience, the simplest way to undertake this due diligence exercise is to work with the relevant institution to understand whether the systems they have in place, and the manner in their licence is operated meet their requirements as a sponsor. In our experience, this aspect often required some work, which includes us providing the institution in question with training on specific matters; a comprehensive list of questions regarding their sponsor licence; and general understanding of their immigration obligations, alongside a spot-check of files of sponsored students.
Another extremely important consideration for the purchaser, is the duty to report any change of ownership of a student sponsor licence holder to the Home Office within 20 working days, and the potential consequences of this. A change of ownership is defined by the Home Office as a transaction in which the institution is “sold as a going concern” or “a share sale that results in the majority of shares being transferred to a new owner”. If there is a change of ownership, as defined, then the sponsor licence is non-transferable. The new owners of the institution will need to apply for a new sponsor licence if they wish to continue sponsoring overseas students. If the institution has previously complied with its duties as a sponsor licence holder, this will make the process of applying for a new licence significantly more straightforward. The cost and time implications of this however, still need to be factored into the client’s thinking. Strategic consideration should also be given to whether a change of ownership, as defined, can be avoided through the structure of the transaction. This also feeds into any potential restructuring either pre or post transaction. It is important, in our experience, to consider and agree a blueprint for any such restructuring in a way which will not disrupt the smooth running of the licence.
Finally, and a further matter which often goes unnoticed, is the question of other licences an institution might hold, such as a Skilled Worker Licence. This issue is often excluded from the scope of due diligence instructions. However, in our view, it is best to address matters relating to this type of licence at the due diligence stage as well, in order to avoid unforeseen matters arising post transaction (which are often more costly and complex to resolve at this stage).
The acquisition of education businesses like schools necessitates a due diligence exercise that is conducted by lawyers with sufficient expertise to grapple with the safeguarding and immigration risks that arise in the education context. Ultimately, the more thorough the due diligence is, the more specific the ensuing contractual protection can be.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2021