LGR - risks and opportunities in respect of corporate assets

In this article Andrew Spicer, Partner, considers the risks and opportunities arising in respect of corporate assets in the context of Local Government Reorganisation (LGR).

Each of the forewords to the English Devolution White Paper make clear its intentions to streamline governance structures, avoid duplication and enable growth. This is not news to local authorities who regularly seek innovative ways to reduce costs, deliver better services and generate surpluses to be used elsewhere within their respective boundaries. 

Building on the ideas touched on in Philip McCourt and Kirtpal Kaur Aujla’s paper Thinking Ahead: contractual and commercial tasks for local government reorganisation, this article considers how local government reorganisation creates opportunities in respect of corporate assets and the steps that authorities should be taking now in order to make the most of those opportunities. 

LGR may result in county areas being split or district, borough and city areas being merged, each of which provides opportunity and risk. An urgent job for authorities is to collate information on the companies and corporate assets they have an interest in to ascertain their value and any underlying liabilities through questioning the management of the company and reviewing records (contracts, licences, leases etc). Where an authority is engaged in joint ventures it will need to review its agreements and consider how best to approach partners.  Authorities should therefore incorporate an analysis of corporate assets (involving the existing management team of such entities) as part of the information gathering and due diligence of the wider LGR process. This due diligence forms part of the corporate legal work we carry out, and we have processes and systems which can assist with this. The use of powerful data management tools (we use HighQ for example) will be required and can be flexed around the needs of each authority.

Transfers are primarily governed by the Local Government (Structural Changes) (Transfer of Functions, Property, Rights and Liabilities) Regulations 2008 (as amended) which leaves successor councils to agree between themselves what will happen to their respective property (including corporate assets). In particular Regulation 11 (dealing with a situation where there is more than one successor council) excludes shares in a wholly owned company, meaning that the predecessor councils are not under a duty to ensure that the shares only transfer to one of the successor councils. They are therefore free to determine how the shares are split, or whether the entire shareholding transfers to one successor. This will be achieved by way of agreement under section 16 of the Local Government and Public Involvement in Health Act 2007, and by way of Regulation 12 the shares vest and transfer to the agreed successor council on the reorganisation date. 

As assets will not be bought and sold, no consideration will be paid and consequently no protection will be offered through warranties or indemnities and there will be no completion accounts to enable a post transfer re-payment. It will therefore be imperative that each party understands what assets are transferring prior to vesting so that they can either seek to have issues resolved beforehand or plan for their management post vesting. We anticipate that this will be an important part of the role of shadow authorities which the government intends are formed to manage the transition under LGR. 

At which point we can turn to the opportunities presented by LGR. In the event of a predecessor authority splitting, a decision will be required as to which of the successor authorities should retain the corporate assets, which will include whether:

• to share ownership
• to sell the company
• to leave ownership with one successor body with the other a non-owning customer
• one authority should buy out the other or provide some sort of indemnity for no longer sharing ownership (where for example there is a loss making company which provides necessary services) 

In the case where one successor authority is left in ownership there could be a clearer vision, stronger support for the company, a chance to refresh the business plan and change the directors. Similarly where ownership is split it could be that the successor authorities have access to different pots from which to invest in the company, or where one successor authority becomes the customer of the company owned by the other the relationship will change which could have positives for one or both successor authorities.

The more obvious opportunities arise where predecessor authorities “merge” into a successor authority, creating an enlarged pool of resources and assets. These opportunities can be categorised as rationalisation, expansion and reorganisation. Clearly what is possible and appropriate will depend on a wide number of factors and we have set out some high level possibilities below by way of illustration.

Where the same services are delivered by companies owned by predecessor authorities, which are then transferred to and vest in a successor authority,  they can either keep delivering the services through different companies or merge them to take advantage of greater scale to pay less for the services they receive and/ or receiving better services whilst using less person hours to manage the services. They can also consider rationalising the buildings and other assets they use to deliver the services, allowing the sale or repurposing or redevelopment of properties and the retirement of worn assets.   

Any such merger would result in a re-organisation of the merged entities which may involve returning equity to the owner, changing the board and potentially its governance and moving assets and staff into one of the organisations before potentially winding up one or the other, or using it for other purposes within the corporate structure. In more complex structures there may also be hiving up or down of assets within a group structure to make efficient use of the enlarged asset base. Such re-organisation could allow for the separation of services back to the owner in one vehicle and of profit making services in the other to take advantage of the different treatment for each under public procurement rules.

Similarly a company which was previously owned by a predecessor authority and delivered services to it and/ or to its residents which has transferred to a larger successor authority will have the opportunity to expand its service provision to the enlarged successor authority and potentially benefit from greater investment and aspirations. Where there is more than one company providing similar services which merge there is an opportunity, rather than rationalising, to expand the scope and scale of the services with the potential benefits that such growth can bring to the enlarged successor authority in terms of revenue and employment opportunities.

Our central and local government team have a wealth of experience in advising on the matters raised in this article and on the full array of issues that authorities are likely to encounter on their LGR journey. Further details about the support we provide and our team of experts can be found our dedicated Devolution and Local Government Reorganisation page.