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Cracking the Merger Code

17 December 2015 • Jo Loake

As the sector moves on after a challenging and game-changing year, the need for housing providers to make efficiencies and look for the best way to secure their long-term futures is in sharp relief like never before.

Given that context, it’s no surprise that many in the sector believe more and more mergers will be considered, and last month’s timely publication of the NHF’s voluntary Merger Code aims to encourage good practice and aid transparency in RP Boards’ initial considerations.

Our Head of Governance and RegulatoryJo Savage, quickly got to grips with the new document and below she gives some initial reaction and ‘running commentary’ to the new ten point code.

  1. The code says:The role of the board is to act in the best interests of the organisation and its beneficiaries. There should be no presumption that a merged entity is in the best interests of the organisation but the board will give the proposal serious consideration.

Jo says: “Consider ‘best interests’ in terms of the bigger picture of your organisation; not just now, but for the next 30, or even 100 years. What is in the best interests of each individual organisation may not be quite the same as what is in the best interests of the merged organisation. It is not all about money; you must consider many things including geography, people, overall strategy of the individual and merged organisations and cultural fit, and consider any ‘showstoppers’ – most often IT, pensions and loans. Any difficult decisions should be made as soon as possible, and this includes being prepared to walk away if it is not the right fit. Boards will also need to check loan covenants as to mergers.”

  1. The code says:Boards should review an organisation’s purpose and value statement regularly to consider if the intent is clear and specific enough to allow the board to determine how to continue to fulfil its objects.

Jo says: “This is essentially going back to basics in terms of what your organisation was set up to achieve and whether a merger fits in with those objects. Look at constitutions and think about how a merger meets the needs of those people your organisation is set up to benefit.”

  1. The code says:Where merger or partnership opportunities emerge the whole board should be informed promptly. The parties should agree a process and timeline for the consensual development of first-stage proposals in order that the respective boards may properly evaluate the opportunity and make an informed and timely decision.

Jo says: “Your board must be involved as soon as possible. It is crucial that it is fully informed and able to have constructive debate as to a proposed merger. And your Board should be in a position to challenge proposals where necessary and work with the executive team to ensure that any difficult issues are dealt with as early as possible. The process of a merger is time consuming and expensive, and it is important that it is well structured and discussions are kept on track and relevant.”

  1. The code says:Decisions around mergers, group structures and partnership proposals must be presented to, and decided upon, by the board. In considering any proposal, a board should have access to sufficient written information to reach an informed in principle decision to explore or reject merger, group structure or partnership. Information provided at the first stage should include written proposals with enough material to allow the board to consider the over-arching suggested intent of a combined business or partnership and the strategic and practical implications for their respective organisations.

Jo says: “Providing your Board with sufficient information is key to enabling it to make a well considered decision about merging. Sufficient is not simply volume but also quality of information. Your Board must be able to see the reasoning for a proposal, from culture to finance, from people to geography and everything in between. A merger proposal should not be a foregone conclusion when presented to your Board; your Board must be empowered to be able to decide whether it wants to proceed or reject any such proposal.”

  1. The code says:Boards should ensure they have, or have access to, specific skills and experience necessary to objectively evaluate the merits or otherwise of mergers or partnership proposals.

Jo says: “Your Board must have access to the skills it needs to be able to constructively consider a merger proposal (and be fully informed of the advice they are able to access), be this among themselves or accessing skills from external sources. These skills are required in order to review the details of what a merger would mean for the organisation, what the merged organisation would look like, and how it would operate. The same is true when considering any form of partnership.”

  1. The code says:No board member or members of the executive should behave in a way which could frustrate due consideration of the first-stage proposal by the whole board. This includes failure to present or discuss proposals with the board, dismissal of an offer without due consideration, or withholding information that is integral to a decision. Discussions about a proposed merger need to be transparent and open and all information must be shared with the board and discussed in an effective and constructive way.

Jo says: “Board members and executives may well have differing opinions on the benefits of merging, and all constructive arguments should be heard, based on all available information having being duly considered. In my experience meetings relating to potential mergers must be chaired effectively; held in a professional manner, giving opportunities for all to be heard in an orderly fashion.”

  1. The code says:A board’s decision on a first-stage proposal should be documented and communicated.

Jo says: “All decisions from the very outset must be documented and communicated to all relevant stakeholders. There needs to be an audit trail of the decision making process and it must be able to be shown.”

  1. The code says:Once a first stage proposal has been agreed by the board, a process and timetable for the next step should be agreed in writing by both parties.

Jo says: “And the communication must continue too, with documentation being shared whenever actions have been completed or anything changes. It is important to note that the HCA is likely to want to be kept informed of the timetable and outcomes.”

  1. The code says:Following approval of the first-stage proposal and intent to proceed, an outline business case should be prepared which will include disclosure of financial and non-financial undertakings and target efficiencies undertakings to be realised as part of the merger proposal.

Jo says: “Professional advice should be sought as to the business case and the actual benefits of the merger in terms of targets and efficiencies. Your Board will need to be updated on the business case and asked to approve it. Due diligence will be required as part of the merger and expert advice should be sought to scope the process and appraise/co-ordinate any matters arising from it.”

  1. The code says:Boards which adopt the voluntary code will declare this each year in their financial statements. Boards will seek to keep a record of any activity under the code including any proposals reviewed or submitted, along with the outcome of these.

Jo says: “Signing up to the code will require publication in the financial statements and a record of activity undertaken pursuant to it.”

Thinking of merging?

Inside Housing research suggests 1 in 3 housing CEOs are considering a merger to cope with the 1% rent cut. However early on you are in thinking about the possibilities, Croftons can support you. In fact, it nearly always saves money getting legal advice as early as possible in the process.

Our Governance and Regulatory team can help with:

  • Exploratory/ongoing discussions with Boards/executive teams
  • Advice on Board duties
  • Reviewing loan covenants, objects
  • Drafting Heads of Terms and Merger Agreements
  • Due diligence
  • Creating new organisations, whatever the structure of the merger
  • Liaising with funders’ lawyers
  • Providing board papers

For legal advice or further information, please contact Jo Savage.


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