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Legal challenges in mergers

The emergence of larger housing groups like the proposed Thames Valley and Genesis tie up may dominate the headlines. But, across the sector, the environment for merger activity has changed dramatically in the last 12 months. A four year cut in social rents, government policy shift towards home ownership and the introduction of the NHF's merger code, designed to facilitate housing associations when responding to merger opportunities, has laid the groundwork for the prospect of greater merger activity.

There are common legal challenges that housing associations will face during a formal merger. Spending time navigating these often complex issues and the sometimes risky process of merging together different housing associations, will help to ensure that the new organisation or group is fit to face the sectoral challenges ahead.

Speak to your funder

One of the most common blockers on the smooth passage of a merger is the cost of obtaining funder consent under any existing facility arrangements. Similarly, the prohibitive cost of a full financial restructure if a full merger of two entities is to go ahead.  

Engage your funders early on. One of the key advantages of a merger is to streamline operating costs and garner other efficiencies. But, the cost of any financial restructure or consent from funders has to be accounted for.  At times these costs can be prohibitive so it is important that an assessment of these takes place early on in the process. 

…and the Regulator

Likewise, early engagement with the HCA is important to secure the relevant consents.  The new entity or group to emerge from the merger will be subject to the same regulatory requirements and the HCA will seek assurances that any reshaped executive or non-executive team is able to meet these requirements.  There is an increasing level of scrutiny coming to bear on recent mergers. Involving the HCA early on will be time well spent so that appropriate timeframes as regards consents can be factored into your project plan.

Don't forget the due diligence

All too often the scope and quality of legal due diligence undertaken in a merger process is found lacking as problems materialise post-merger. These problems could be avoided with greater investigation at the start.  Of course the extent of any due diligence is always limited by practical realities such as time and expense. But, this should not prevent both parties undertaking concise and focused due diligence to identify potential issues that may impact on delivering the business case for the merger.

What about the corporate structure?

When housing associations consider merger, the legal and constitutional basis on which the merger proceeds has to be considered.  It is possible for the housing associations to fuse two entities into one through a transfer of engagements or amalgamation.  Alternatively, existing housing associations can retain their existing identity but come together as subsidiaries under a new group parent.  The structure adopted has to support the long term interests of the entities and there are many factors that influence what emerges.

Possible trip wires – staff and pensions

Pensions throw up particular challenges and will influence the legal mechanism by which the housing associations merge.  If a new group parent is being set up and staff transferred into it, pay careful attention to the admission of the new group parent into the local government pension fund.  The terms of such admission may lead to a crystallisation of any underfunding deficit. 

Likewise, ongoing eligibility to participate in the local government pension fund will influence whether "joint" or sole contracts of employments are adopted across a group or whether a secondment model is adopted. 

People are of course the key to any successful merger.  The development of new staffing structures inevitably throws up potential overlaps, roles and functions that will be affected by the merger.  The promotion of job security through natural wastage, bans on recruitment and redeployment wherever possible will go some way to securing a committed workforce dedicated to achieving their business and service objectives. 

Better together

Mergers come in all shapes and sizes but a shared vision for the future, a robust business case and collaborative and supportive working will help pave the way for a successful outcome.  Overcoming the legal challenges along the way is a critical part of this success.

First published in 24 Housing on 6 May 2016.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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