Public & private

The past few years have seen a growing number of takeovers or mergers in the registered social landlord field, and the trend looks set to continue.

It is not surprising that an RSL in distress will look to a larger partner as part of a "rescue" strategy. After all, there can be clear advantages – the financial gains of sharing overheads are immediately apparent, but there can also be benefits to using the partner's relationships with funders, as well as in the sharing of expertise.

In any partnership of RSLs it is critical that the cultural fit is right, both at executive and board level, and this is probably even more the case in a distress situation where the correct cultural fit can ease negotiations and can often reassure those who may not be immediately involved. Group structures formed in strained circumstances require delicate handling from all involved, not only to avoid fears of "takeover" but also to ensure that existing commitments to third parties are not adversely affected.

From a legal perspective, the first point to note is that true mergers of RSLs are comparatively rare – most group structures that are formed leave intact the existing RSLs as corporate bodies – but a series of legal controls is also put in place to give the parent RSL the ability to "control" its partner.

A careful balance needs to be struck at this stage by the parties and their advisers to comply with, on the one hand, the regulatory requirement of a strong parent capable of exercising control, and on the other the need to recognise the cultural background of the partners. This is especially true where an RSL is formed through transfer such that the rights of nomination of tenant and local authority board members must be respected, or where there is a partnership between charitable and non-charitable organisations where vires (rules) concerns come to the fore.

Perhaps the most difficult negotiations will be the parent’s ‘step-in’ rights

Perhaps the most difficult negotiations at this stage will be the parent's "step-in" rights – in other words, the ability of the parent to appoint and/or remove members from a partner's board. Here consideration needs to be given to the circumstances giving rise to the ability to use such a power and at what stage any appointees may be withdrawn.

This debate will be all the more salient where a partner is in distress at the time of these negotiations and where there may already be statutory nominees on the partner's board as part of the regulatory supervision process.

The balance of power is equally delicate on the financial side, where the parent must be satisfied that its partner will operate within acceptable parameters, but at the same time allowing the partner a satisfactory degree of operational independence.