Posted: 19/09/2024
There have been many articles and comments about mergers recently, but very few consider things from the perspective of the party that is being taken over, which is usually the smaller association. Whilst it is natural to want to focus on the lead association as it will be driving things forward post-merger, it is also worthwhile to consider things from the other association’s perspective, not least to help smooth the path of mergers in the future.
The starting step for the transferring association will be the same as the lead association’s: what are your reasons for undertaking the merger? The answers, however, may well be very different. For the lead association, growth is likely to be one of the major drivers as increased size and resources are generally considered to give increased protection against the vagaries of the environment in which housing associations operate, and a stronger, more resilient organisation is certainly something worth working towards.
For the transferring association, this may be the case too. Many mergers have come about because the transferring association felt increasingly exposed to risk in the commercial environment that housing associations now inhabit and decided that a merger was the best way of guarding against those risks.
For the transferring association, the questions it needs to ask will be the same as for the lead association:
The answers, however, are likely to be different. Given that the transferring association will not exist post-merger, these are important questions for it to consider, which should form the basis of the decision to proceed.
This is probably the most important question that needs to be asked.
The new Consumer Standards make the consideration of this issue a regulatory requirement and requires that any merger proposal properly focuses on the people whom it should benefit. In the past, business cases for mergers often talked about growth, increased resources and so on, but frequently said little about tenants and their wishes or concerns (apart from some comfortable words about improved services).
That will need to change now, and the best way of looking at this is to ask: ‘If tenants had a vote on this merger, would they support it? And if not: why not?’ The new Consumer Standards oblige associations to consult their tenants about any merger proposal at an early stage and to enable (not merely ‘allow’) them to be involved in the development of the proposal. How tenants are consulted and involved is likely to be a major focus of mergers going forward.
All of this feeds into another key question: how can it be ensured that a transferring association’s ethos and culture are maintained (or at least included) within the new merged body?
This is a vital question for the transferring association in a potential merger as it may be difficult for it to influence matters after it has taken place. This is because after the transferring association has been absorbed into the lead association, it will cease to exist as a separate entity and its board and senior management will have been absorbed into the lead association, or simply let go.
If the ethos and culture of the lead association are not in line with the transferring association and/or their tenants’ expectations, it needs to find this out before the merger, as it may be too late to do anything about it afterwards. It would therefore be sensible for the transferring association to carry out some due diligence in relation to the culture and ethos of the lead association.
Some transferring associations have sought to ameliorate this problem by asking the lead association to sign up to some form of agreement to create, for example, a formal sub-committee, working group or sounding board which would continue post-merger. The difficulty with this is that there is no one who can effectively hold the lead association to account post-merger, as the transferring association will no longer exist (technically, ex board members might be able to try and enforce the agreement, but in practice this is likely to prove extremely difficult and very expensive).
Nevertheless, it could still have some persuasive power as the lead association may not want to simply ignore/resile from a pre-merger agreement for fear of the impact on potential future mergers.
Linked to this is a need for the transferring association to consider very carefully what is to happen to its board. Usually, the board of the transferring association stands down, although one or more members may be asked to sit on the board of the merged organisation to provide continuity. The board of the transferring association needs to consider:
In some cases, the size of the transferring association is so small compared to the lead association that it would be unreasonable to seek this, and so alternative methods of ensuring the transferring association’s ethos is looked after post-merger are necessary. For example, the transferring association might consider setting up a specific committee or working group to undertake this role.
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply to employees, including senior management of the transferring association, meaning that they will automatically have the right to transfer to the lead association, and in many cases must be consulted with, especially if there are any proposed changes to their terms and conditions.
With senior management this can be a problem, in that there will be no suitable roles for them in the lead association, and it is likely that some or all of them will be made redundant. This all needs to be discussed, negotiated and agreed as soon as possible so that senior staff know where they are.
It will need to be decided what will happen to the shareholders/members of the transferring association after the merger has completed.
Current best practice, supported by both the Regulator of Social Housing (albeit not officially) and the National Housing Federation (NHF) via its code of governance, is for the shareholding membership of an association to be limited to its current board members. This would mean that the shareholders of the transferring association would not normally be invited to become shareholders of the lead association post-merger.
Usually, the shareholders of the transferring association are asked to retire on completion of the merger (which makes sense as there would no longer be an organisation for them to be ‘guardians of the constitution of’ – to use the phraseology of the NHF model rules).
Lastly the transferring association should consider the risks of a merger:
The risks if the merger negotiations fail are usually obvious: the issues prompting the merger will still remain and the transferring association may find itself a more attractive prospect for less friendly suitors who sense an easy target. There are also likely to be issues revealed from the post-mortem (which the association’s board should insist upon) that may make difficult reading for the senior officers involved (and even, possibly, some of the board members themselves).
But there are also issues if the merger succeeds; the most obvious ones being the risks that the culture and ethos are simply ‘swamped’ by the lead association, not necessarily deliberately, and/or just wither on the vine.
As can be seen from the above, pursuing a merger as a transferring association can often be a risky and difficult path to pursue, needing clear strategic thinking and a certain degree of selflessness from the board and senior management.
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