In light of the international successes of many leading British independent schools and universities, many UK education institutions are considering overseas expansion. The question is, where to start and what issues your institution needs to consider throughout the process?
Can you expand internationally?
The first thing to consider is whether the UK institution’s existing constitution allows for overseas expansion. For instance, it may be that the UK institution’s objects state that it will provide, or be involved in the provision or support of a school or schools within a certain geographic area. These objects may therefore need to be amended (or even removed) before the expansion process begins.
How do you expand internationally?
Once it is established that the UK institution is permitted to expand overseas – or steps have been taken to amend its constitution - the structure of the venture needs to be decided. It is prudent to set up a separate legal entity, in order for the UK institution to manage the risk and liabilities attaching to the proposed venture.
The chosen structure could involve the establishment of a new subsidiary company, to participate in the international value.
In respect of any new company established, the UK institution will need to decide whether the new entity will be charitable and, if so, whether it will be a charity limited by guarantee or a Charitable Incorporated Organisation (CIO).
The differences between the two structures include the level of regulation, decision making powers, accounting obligations and borrowing opportunities. Careful consideration will need to be given to how the new company will operate initially and further down the line.
If the plan is to open a number of companies overseas, a holding company may be appropriate, both for tax structuring purposes and to separate any perceived risk from overseas activities.
Funding and external capital
The UK institution will need to consider how it will fund its internal expansion. Invariably this will require external capital either from UK based investors (for example as part of a major roll out of the school or university internationally), or discrete funding on a project by project basis from investors in the jurisdiction you are targeting, to fund the acquisition of land and the construction of the premises. Funding may also be required to cover operational expenditure of the new school in the early years. As well as opportunities, external funding brings with it challenges, as the UK institution will need to adapt to the requirements imposed on it by investors who will seek a certain level of control to protect their investment. An investor will expect a certain return on its investment and it is common to see UK institutions who are not for profit in the UK, entering into projects overseas which are for profit.
Access to land
Availability of land will be key to the success of a project. Locally based investors may have access to land, the local education regulator may be able to assist with locating land, and land owners or developers may be keen to have a school as part of their development. The cost of land, plot size, location (and the catchment area it is located in), transport access and infrastructure will all affect the viability of the new campus.
Each jurisdiction will have its own laws and regulations governing the conduct of commercial activities, the ability for foreign institutions to operate or establish companies, and the establishment and operation of schools and universities. The UK institution will need to be mindful of those, ensure that it complies with any requirements placed on it, and may be expected to take responsibility for the academic plan and other content of any application to license the local education institution. The jurisdiction of choice, for example the Middle East, may have a very different legal system to the UK and the laws and regulations, compliance requirements, and liabilities may be very different to that of the UK.
Protecting your brand
As part of any arrangement with investors, it is common for the UK institution to license its intellectual property rights, including the name and logo, curriculum or courses, teaching materials and uniform. Some of these assets can be protected through IP rights, such as trademarks, copyright and registered design rights. Given that the use of the name and logo of the UK institution will be core to any deal, it is key to ensure that adequate trademark protection is secured in advance of signing any agreements As part of this protection strategy, it is important to consider whether local language variations, such as Arabic or Mandarin versions of the mark, need to be protected.
Common structures for overseas projects
The decision as to how you will structure your international expansion will depend on a number of factors, such as whether external funding is required, the regulations of investors, the UK institution's knowledge of the jurisdiction and the local law of the jurisdiction (for example whether there are foreign ownership restrictions). For example, in China and the Middle East, where external funding is obtained from local investors, it is common to see the investor take ownership of the operating company as well as the land and premises. In this scenario the UK institution will enter into a licensing and operating agreement with the investor and be paid a management fee, without any capital expenditure on its part. There are, however, a number of alternative structures that can be considered, depending on the requirements of the investor, such as the UK institution owning the operating company and the investor owning the land and premises, or the UK institution and the investor entering into a joint venture. Each structure has advantages and disadvantages and it is important that legal advice from the local jurisdiction is sought.
The process involved in expanding overseas can be unexpectedly time-consuming. Local laws, regulations and conditions in the chosen jurisdiction will bring new hurdles, as will contractors and consultants, who will usually operate differently. It will certainly be a challenge to set up overseas in a matter of months or years what it has taken possibly many decades to establish in the UK. The UK institution should therefore consider delegating authority to an individual or a committee who will be tasked with managing the expansion and who will report back to the board of directors.
Protection for the UK institution
The UK institution will need to ensure that it retains control over decision making processes throughout the project, for both legal and reputational reasons. From a legal perspective, the UK institution’s name, brand and logos will be registered in the relevant jurisdiction and intellectual property will need to be licensed to the new company. From a reputational perspective, consideration will need to be had as to how to unravel the project if it is ultimately unsuccessful, enabling the institution to revoke the use of its intellectual property in the relevant territory. Further, the UK institution will want to maintain control over the standards of the project, ensuring any key decisions are only made with the approval of the UK institution.
When setting up the new company, the UK institution needs to consider how any money generated from the new company will be efficiently returned to the UK institution. The structure of the UK institution (whether a charity limited by guarantee or a CIO) will affect how any revenue is taxed, as will the chosen location of any holding company.
It is important to spend adequate time and resources on the planning and development stage of the expansion. The above considerations are only a general overview of some of the considerations to begin thinking about if a UK educational institution is planning overseas expansion, with advice required from the relevant jurisdiction of expansion being vital.