Governance, Becoming Independent and Leaving the Local Authority Music Mark Conference 2017

Planning and implementing the transfer Key elements Planning and implementing the transfer Legal form / structure Governance 1

Acting for service within Council Acting for new entity Transfer of assets (and liabilities) (Enter into on-going funding relationship) Preparatory advice Establish legal entity Due Diligence Now Local authority New entity Local authority Music service Transfer Agreement New entity Funding Agreement 3

Legal form and governance

Legal form – factors to consider Appropriate structure Governance / ownership Managing risk - liabilities Administration and regulation 7

Legal form – factors to consider Financial Sources of income Tax advantages Income through trading? 7

Legal form – factors to consider Positioning Branding and perception Safeguarding social mission 7

Legal form - structures Company limited by guarantee (with charitable status) Charitable Incorporated Organisation (CIO) Community Interest Company limited by guarantee Three best options: 9 Variety of structures available 3 best options: Company limited by guarantee (with charitable status) Charitable Incorporated Organisation (CIO) recent legal form solely for charities single regulator – Charity Commission Community Interest Company limited by guarantee

Legal form - Community Interest Companies Must fulfil a community purpose Lock on assets Special features to safeguard the social mission Directors can be paid for role as directors Easy to establish Social enterprise “brand” Can receive statutory funding and make grants Advantages So no charitable tax reliefs Often a deal breaker BUT cannot be charities More flexible not-for-profit legal form… 10

Legal form - charitable status Established for the public benefit; and Has purposes which are exclusively charitable in law. A charity is: Advancement of education Advancement of arts, culture, heritage or science Activities must fall within charity’s purposes: Must register with and be regulated by the Charity Commission Charity Commission tax reliefs gift aid on donations Advantages unpaid trustees restrictions on certain trading activities Disadvantages 12 Other objects possible: Advancement of health Recreation

Legal form - non-charitable trading Parent Charity Subsidiary Company limited by shares Wholly owned by the charity Gift aids any surplus to the charity each year Examples of trade Corporate events Venue hire Musical instrument hire (commercial) 13

Governance - CLG/ CIO features Governing document Limited liability Two tier structure Wide membership or ‘foundation’ model? Members Trustees Strategic responsibility Ownership 15

Governance – who are your stakeholders? Staff Council Parents Young People Music Hub Local schools Local community organisations Volunteers Governance – who are your stakeholders? 17

Governance – practical issues Who do you want on the board? Skills, experience, stakeholders Council involvement – on Board? CEO on board? Recruiting a board Managing a board of trustees 22

Governance – CEO and trustees Parallel universe + Know your role Doing each other’s jobs Highly effective

Planning and implementing the transfer

Asset transfer In return for Council transferring the assets and liabilities associated with the music service to Newco…. ….Newco gives the Council an indemnity to meet any liabilities which are related to the transferring assets, after the transfer date. 24

Process: Planning PLANNING Identify the extent of the assets and liabilities which are to transfer (due diligence exercise) Obtain advice on state aid / procurement / VAT Staff engagement (union engagement) Any third party consents required obtained 26

Process: Implementation Preparation of transfer agreement basis on which assets and liabilities will transfer negotiation of extent of indemnity Preparation of contract for services (e.g. with schools) or grant agreement Preparation of lease(s), admission agreement, other agreements with Council eg back office services, revolving credit facility agreement) 28 NB state aid/ procurement

What usually transfers? Premises Staff Contracts Physical assets Intellectual Property Data Cash at the bank Debts Liabilities Funding Seed funding 23 Premises (transfer freehold or leases/licences) Staff Contracts (e.g. school/parent contracts) Equipment and physical assets Intellectual Property Data Cash at the bank Debts Liabilities (including pensions liabilities) Funding (eg. Arts Council grants) Seed funding

Employee Liability Information/ Due Diligence TUPE - Council to provide prescribed list of basic information about those transferring to Newco Much more extensive due diligence exercise needed, and much earlier Important to start early and be thorough Understand who will transfer and what obligations are owed to or by them Newco must tell Council about any proposed changes it envisages making post-transfer Employee representatives must be provided with information (and consulted?) about the transfer 33

Regulation 4(1) Regulation 2(1) Includes: Who will transfer? “any person employed by the transferor and assigned to the organised grouping…that is subject to the relevant transfer” Regulation 4(1) “employee” defined as “any individual who works for another person whether under a contract of service or apprenticeship or otherwise but does not include anyone who provides services under a contract for services” Regulation 2(1) Employees Apprentices Workers? Includes: 35 Regulation 4(1) – “any person employed by the transferor and assigned to the organised grouping…that is subject to the relevant transfer” Regulation 2(1) – “employee” defined as “any individual who works for another person whether under a contract of service or apprenticeship or otherwise but does not include anyone who provides services under a contract for services” Includes: Employees Apprentices Workers?

Pensions (1) - Background Requires local authority to protect public sector pension benefits contractually ‘Fair Deal’ policy LGPS (as admitted body) TPS (as function provider) Admission to relevant public sector scheme Key risks and appropriate risk sharing 38

Pensions (2) – Key documents Transfer agreement / contract actuarial report admission agreement (and SLA?) bond or guarantee LGPS collaboration agreement? TPS 41

Pensions (3) – LGPS – key considerations Risk sharing at beginning, during and at end of participation Most significant risk likely to be cost of exit from LGPS Other key risks include fluctuating contribution rates and costs of unreduced pensions on redundancy or ill-health Bond or guarantee (actuarial risk of default) 44

Pensions (4) – TPS – key considerations Unfunded, so less of a concern Ongoing agreement with Council collaboration agreement? Unreduced redundancy pension (discretion) Bond or guarantee (3 months contributions) 50

Negotiating warranties and indemnities Protections against risks/liabilities for Newco Commercial decision for Council, obvious potential impact on viability of Newco Identify deal breakers early on, for example: What liability will the Council take on for transferring employees? What are the pensions liabilities? Are there issues with the property will Newco inhabit? What about the assets? Will the Council give due diligence warranties? Importance of independent legal advice 52 Consider early on - Risks/liabilities – employment related, financial etc Property – maintenance and repair? Liabitilies relating to employees - redundancy costs? Other legal claims? For how long?

Common obstacles Governance issues/board issues Due diligence – lack of co-operation or information Employees (problem staff, low morale) Admission to relevant pension schemes Pensions and pension liabilities Other unwanted liabilities Premises – late information, difficult negotiations State aid/procurement Legal team at Council will not engage/negotiate Political obstacles (officers or councillors not fully on board) 55

Timeline of spinning out – legal aspects Transfer of assets (and liabilities) Agreements relating to any on-going relationship Preparatory advice Finalise legal entity Now Due Diligence Advising on legal and governance structures (including objects, governing body, membership, representation of stakeholder groups, comparing the various structures), state aid, procurement and tax implications, structure of any funding arrangement, preliminary property, employment and pensions advice. Agreeing legal and governance structure, including composition of the board and involvement of stakeholders in the governance structure, recruitment of board, establishment of legal structure and registration as a charity or CIC. The board must be satisfied to a reasonable extent that the Council does in fact own the assets, that the disclosed liabilities do not exceed the assets and that it is therefore in the best interests of the charity to enter into the transfer. Due diligence exercise to include contracts, liabilities, property, staff, pensions, data protection, safeguarding, intellectual property, disputes and other assets/liabilities. Principles in relation to pensions, property and employees to be agreed. Parties to comply with obligations under TUPE (for example identifying any measures, consultation with staff, provision of employee liability information). Preparation and negotiation of : Transfer agreement effecting the transfer of assets and liabilities of the services as a going concern from the Council to the charity to include an indemnity from the Council in respect of pre-transfer liabilities, warranties against the due diligence responses, property, pensions and employment warranties and mechanism for novation or assignment of all third party contracts relating to services. Agreements relating to premises such as leases and licences. Pensions admission agreement. If relevant, preparation and negotiation of the funding agreement under which the Council funds the charity to support it in its activities. In addition or alternatively, preparation of loan agreement whereby the Council provides the charity with a revolving credit facility to assist with cashflow until the charity has built up sufficient reserves. Preparation and negotiation of a back office service agreement for certain services provided by the Council to the charity (for example HR, payroll, IT). 3

CONTACT Comron Rowe comron.rowe@templebright.com 0117 325 1252 07889 403801 Augustus Della-Porta a.della-porta@bwbllp.com 020 7551 7607 Louise McCartney l.mccartney@bwbllp.com 020 7551 7624 These slides are for general information purposes only. They are not intended and should not be used as a substitute for specific legal advice. Specific legal advice should be taken before acting on any of the topics covered.