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

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

3. 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

4. Legal form and governance

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

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

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

8. 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

9. 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

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

11. 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

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

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

14. 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

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

16. Planning and implementing the transfer

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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?

24. 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

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

26. 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

27. 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

28. 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?

29. 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

30. 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

31. CONTACT Comron Rowe comron.rowe@templebright.com 0117 325 1252
Augustus Della-Porta
Louise McCartney
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.