In Part 1, we explored the reasons to expand internationally, how to structure the international business and protect intellectual property. We also shared some thoughts on partner selection, market assessment and deal structure.
Since publishing Part 1, Covid-19 has developed into a global pandemic. School closures, social distancing, remote learning and a reduction in international travel and student exchange for the foreseeable future are all placing a significant strain on businesses in the education sector.
Nevertheless, with every crisis comes opportunity. For the education sector, international expansion will be an important way of securing long-term financial viability, by creating new revenue streams and developing new Ed-tech innovations.
In this Part 2, we will therefore look at the key legal and regulatory issues, which need to be overcome before a deal can be signed.
1. The legal challenges of going global
Whatever structure is adopted, the international strategy must be designed to identify the regulatory and legal hurdles at any early stage.
Before the parties sign the licence agreement, they will inevitably exchange sensitive information. Schools should only disclose this information under the protection of a robust confidentiality agreement. However, the best way to protect confidential information is to keep disclosure to a minimum until the parties have entered into the licence agreement. The Manual is the "crown jewels" of any school, and this document should not be disclosed until the licence agreement has been signed.
In addition, it is the school which will incur legal costs leading up to the signing of the licence agreement , so at the stage of either signing the confidentiality agreement or agreeing heads of terms, the school should request a deposit, which will be deducted for any upfront fee under the agreement or, in the absence of an agreement, it is refunded less the school's costs.
International regulation of franchising
Most international partnerships of this nature will satisfy local definitions of franchising, whether or not the parties use the "F" word describe the relationship.
Franchising is regulated in a significant number of countries that have franchise specific laws, whilst others impose a complex and challenging regulatory environment through more general commercial laws.
These laws regulate the sales process, the content of the licence agreement and some require that the documentation be filed on a public register. These compliance issues can impact on commercial timelines for doing deals and opening sites should be identified at the planning stage.
Regulation of the Sales Process
Countries such as the USA, Canada, Australia and a number of Asian countries require set form pre-contractual disclosure. Key disclosure issues include the how and when the disclosure must be made, mandatory cooling off periods before the deal can be finalised and the scope of the content of the sales and disclosure documentation.
The consequences of a failure to comply with disclosure requirements vary. Non-compliance generally entitles the franchisee to walk away from the agreement without restrictions provided it acts within a reasonable period of entering into the agreement. The franchisee can also sue the franchisor for damages. Some jurisdictions also impose fines for failure to comply.
Regulation of Contractual terms
Franchise specific laws in certain countries impose mandatory contractual terms in the licence agreement. These often include a minimum term, a duty of good faith, restrictions on termination and restrictions on post termination non competition clauses and so on. These mandatory provisions may impact on the proposed business model and change the terms of the commercial deal on offer.
Some jurisdictions require the franchisor to register only relevant details whilst others require registration of all the documentation. In developing markets, this is to enable the government to monitor franchisors doing business in the market whilst in more developed economies it is to ensure transparency and maintain a certain level of quality.
In some countries, there are multiple registration requirements. For example, franchisors in China who sell franchises in just one province, must file the information at the local office of the MOFCOM of that province, whereas for cross-province franchising the papers have to be filed with MOFCOM itself.
The Impact of General Commercial Laws on Franchising
Franchising is also regulated by a variety of general laws such as the duty of good faith, anti-trust law, unfair competition law, agency law and consumer law, which must be taken into account.
Education specific regulation
Education is a highly regulated sector in the vast majority of foreign jurisdictions, as one would expect given the importance of educating the future workforce. It is therefore crucial that a school's principal international legal advisor has a network of local legal specialists which can identify the issues at an early stage to ensure that a deal can be structured appropriately. Common regulatory issues include:
- Restrictions on the percentage of the student intake, which can be from the national population.
- Requirements for national representation of the board of governors.
- Restrictions on foreign ownership.
- Controls over school fees.
- Initial and ongoing obligations to obtain and maintain licences.
Ed-Tech – the next frontier?
A number of independent schools have invested in developing online teaching resources as a way of increasing their international reach and profile. The current pandemic has underlined the importance of Ed-Tech as a means of supporting home-based learning through these difficulties times, and it presents a further opportunity to diversify revenue streams.
Coincidentally, on 10 June 2020 the UK Government published its response to a consultation on the Online Education Accreditation Scheme (OEAS). The OEAS should be operational by September 2020. A Quality Assurance Board will be appointed shortly and it will provide an inspection service for those providers wishing to become accredited under the OEAS. The standards against which providers will judged are based on the Education (Independent School Standards) Regulations 2014.
Whilst the OEAS is available for online-only providers, it demonstrates that this aspect of education is set to grow significantly in the coming years, and Ed-Tech should form part of the international strategy.
A thorough consideration of the legal and practical issues in Ed-Tech warrants a separate article, but key areas which will need to be developed carefully include data protection and cyber security, licensing terms of IT platforms (both from providers and to online students), ownership of the intellectual property in the learning content and a the commercial model which underpins it.
The local partner will be required to play its part in developing and rolling out the platform in the local market and it is important to think through how these rights and obligations will sit alongside and interact with the "core" right and obligation to open and operate a school.
There is no “one size fits all” solution to international expansion. Such ventures need to be carefully structured to reflect the needs of the school, the target market and the franchise partner. The most appropriate structure needs to be determined at the outset, as restructuring an international franchise is a complex, costly and time-consuming exercise.
Choosing to work with experience legal counsel who have walked down this path before and can manage the international compliance on your behalf can be the difference between success and failure. It is also crucial that the business has "bought into" licensing at the board/governors level.
Once the strategy and structure are in place, expanding internationally can be a relatively low risk/high reward venture, and one which over time will generate significant income and ultimately a paradigm shift in the way a school operates, evolving into a truly global education brand.
This article originally appeared in the Independent School Magazine
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