The next wave of activity in the sector may be upon us, with the merger of public universities being advocated as a means of overcoming some of these challenges. It is argued that, by merging, some of our public universities could achieve a scale and presence better able to exploit opportunities, including by attracting more top domestic and international students, being able to access additional public and private funding for research and being better able to exploit commercial opportunities (including through commercialisation of research). They could also leverage economies of scale and efficiencies that arise from the pooling and sharing of resources from their individual operations.

Any merger of Australian public universities will be a significant (and complex) undertaking, from a political, commercial and legal perspective. This article discusses some of the key legal issues to be considered in any university merger.

1. Universities as competitors

Many of our public universities are competitors in relation to, amongst other things, the provision of education services. This means that any discussions between them in relation to a merger (as well as any ultimate merger) needs to be done with a view to the anti-competitive conduct prohibitions in the Competition and Consumer Act 2010 (Cth) (CCA).

Universities need to ensure that they do not reach any arrangement or understanding which amounts to price fixing, market sharing or output restrictions, or otherwise substantially lessens competition in the relevant market, in contravention of the CCA. For example, sharing of information about the fees which each university charges its students (or cost inputs that make up these fees) could amount to price fixing. It is also possible that a merger would, depending on how it is structured and implemented, substantially lessen competition in the relevant market for higher education services.

These issues are often managed through the development of a competition and confidentiality protocol to guide exploratory discussions, followed by a review of possible transaction structures for CCA compliance before they proceed. There are various ways that a merger may be able to be structured and implemented in a way which facilitates CCA compliance (including use of the merger authorisation process). Application of the Crown immunity principles may also assist States to achieve their policy objectives and allow transactions to proceed which might otherwise contravene the CCA.

2. Complex regulatory landscape

Reforms to the higher education sector over the past decade make any proposed merger of universities in Australia a more complex task. In particular, introduction of the Tertiary Education Quality and Standards Agency 2011 (Cth) (TEQSA Act) removed the power of the States to establish a new university automatically capable of awarding higher education qualifications, amendments to the Higher Education Support Act 2003 (Cth) made Commonwealth funding conditional on compliance with the new regulatory regime and amendments to the Education Services for Overseas Students Act 2000 (Cth) (ESOS Act) gave the Commonwealth the ability to regulate and cap the number of international students enrolled by universities.

These higher education specific regulatory considerations will impact the framework within which any merger discussions progress and decision making on how any merged entity is established or continued in existence. The current Commonwealth regulatory regime means that any new body corporate established by a State would need to apply for registration on the national register, and satisfy TEQSA that it complies with the relevant Threshold Standards and related requirements needed to permit the merged entity to meet its objectives concerning the enrolment of international students.

A proactive and strategic approach to engagement with the relevant Commonwealth regulators is required, to ensure that any merger can proceed in a way that optimises the future operation of any merged entity.

3. Management of employee concerns

The employment and industrial issues that will arise in any university merger will depend on the structure that is ultimately adopted. However, any merger is likely to be a 'transfer of business' under the Fair Work Act 2009 (Cth) and require a transfer of business order from the Fair Work Commission to limit the operation of multiple enterprise agreements and avoid having employees sitting side by side on different terms and conditions. These orders will be a vehicle for unions to seek 'the best of both worlds' employment conditions, and the views of both the unions and affected employees will be relevant to whether the Fair Work Commission grants the orders.

A range of other employment and industrial issues may arise as a result of the transfer including potential redundancies, potential (unlawful) industrial action and dispute notifications, immigration issues to ensure staff remain able to lawfully work following the merger, retaining key employees, mitigating any termination claims, membership of superannuation funds (particularly where the entity which engages employees post the merger cannot make contributions to a particular defined benefits fund), transfer of leave accruals, transfer of personnel files etc.

A comprehensive employment and industrial strategy would need to be developed to cover these matters. Consultation should be a key element of the strategy, to reduce the likelihood of the unions notifying a dispute to the Fair Work Commission or making a claim in the Federal Court alleging breach of relevant enterprise agreement (both of which are common union tactics in circumstances of change).

4. Transfer of real property

Public universities have a range of interests in real property (including fee simple, leasehold and interests in Crown land). Depending on how any merger is structured and implemented, real property assets may be able to be transferred by way of legislative instrument, with the merged entity effectively acting as successor-in-title. Regardless, a due diligence exercise will be required to identify, value and document these assets for the purpose of transferring them as part of any merger.

Third party consent may also be required in some instances; including, for example, in connection with the assignment of any leasehold interests. The terms on which land was transferred to a university may impact on how it can be dealt with. In addition to specific terms that attach to particular land, there are often general restrictions against universities transferring land under their enabling legislation or other State based legislation.

Universities should also consider proactively engaging with the Valuer General in relation to the valuation and transfer of land to ensure that any merger is not held up by differences of view about the value of the land. Any transfers will also need to take into account potential tax consequences, in particular stamp duty and CGT.

To the extent that consolidation of some functions occurs, there may be excess premises. Thought should be given to how to deal with that – whether through terminating leases early, retaining premises and leasing them to third parties, or disposing of properties – to ensure that the potential efficiency benefits of the merger are realised.

5. Transfer of other assets

Universities also have a large number of other assets that may need to be transferred as part of a merger. These include plant and equipment; intellectual property in course materials and research outputs; IT systems and data; financial investments in the form of endowment and other funds; funding agreements, collaborative research agreements, strategic partnerships, unincorporated joint ventures and other contracts; participation in other entities (which may include shares in subsidiaries and memberships of not-for profit organisations); and ongoing, multi-year gifts, endowments and pledges.

Depending on how any merger is structured and implemented, some assets may be able to be transferred by way of legislative instrument. Each public university is a body corporate established by statute so any merger could be effected by way of establishment of a new body corporate that acquires the assets of the existing body corporate or by way of a transfer of assets from one to the other, with one effectively acting as successor-in-title to the other.

Regardless, a large due diligence exercise would be required to identify, value, document and make decisions about the need to transfer these assets as part of any merger. Detailed analysis would be required to determine the extent to which a transfer by statutory instrument will be legally effective, particularly for interests with an inter-state or international situs, such as assets in joint ventures located overseas.

Where assets cannot be legally transferred without third party consent (such as contracts which would in the normal course require counterparty consent), a process should be established to seek, obtain and record such consents so that the statutory process is not relied upon as the sole legal means of transfer. Due diligence should also be designed to identify assets where 'poison pills' may exist, such as contracts that have adverse triggers upon a change of control.

6. Legislative amendment process

Each public university is established by a separate State based Act. Any merger will likely require the repeal/amendment of the establishing legislation for both universities and may also involve the establishment of a new body corporate pursuant to new legislation (as discussed above).

In order to ensure that the merged entity is established with the best possible regulatory framework, there would be value in undertaking a review of similar legislation in Australia and overseas, and also, undertaking a review of both universities to understand which aspects of the existing legislation works well, and which areas could be improved.

The process of implementing the merger may also be simplified if a project-specific Act is passed. In addition to simplifying the process of vesting assets between the existing universities and the new university (as discussed above), it could also remove other procedural steps under State based legislation that might otherwise apply.

7. Student transition

Regardless of the form that any merger takes, careful consideration will need to be given to the arrangements for transition of students, to ensure that this is done in compliance with the higher education regulatory framework and in a manner that protects the interests of students and each university's reputation.

In particular, each university will need to give students an option of completing their course at their existing institution or transferring to a course offered by the merged entity. Transitional teaching arrangements may need to be put in place between the universities to ensure that students who elect not to transfer can be taught out without interruption. For those students who do transfer, the universities will need to ensure that any transfer of their personal information is done in compliance with applicable privacy laws.

A comprehensive student transition strategy would need to be developed to cover these matters. Consultation should be a key element of the strategy, to reduce the likelihood of students raising concerns about the merger (particularly in relation to continuity of their studies and any associated scholarships or other funding).

8. Trusts and bequests

Many universities have a number of trusts, bequests, donations and fund raising arrangements that would need to be reviewed as part of any merger. These compliance issues are often complex, and there are a number of risks (financial, legal, regulatory and reputational) which will arise from any non-compliance. A merger could have unintended adverse consequences for those trusts and bequests. As well as the universities and officers involved incurring liabilities for breaches of trust, the trusts could fail resulting in loss to the universities.

Depending on how any merger is structured and implemented, it may be possible to deal with some of these issues by way of a court order approving a trust variation scheme, to deal with any trusts affected by a merger. However, a due diligence exercise will still be required to identify any issues arising under the current trusts and bequests, for the purpose of seeking such a court order or other remedy. There may also be a need to consult with third parties such as donors and trustees, and obtain approval to vary the terms of trusts.

9. Research funding

Universities would need to work closely with the Commonwealth and State governments, along with any other significant providers of funding, to ensure that funding is not reduced or cancelled as a result of any merger (particularly where both universities receive funding from the same source for research in the same field).

The research businesses of universities are structured in various ways (some universities conduct research commercialisation through a division of the university proper whereas others conduct it through a separate entity). Depending on the arrangements in place for each of the universities involved in any merger, different considerations will apply in relation to any transfer of research related assets. Where the research business is housed in a separate legal entity, it may be possible to transfer the shares in that entity to the new merged entity.

Regardless, a due diligence would be required to identify relevant contracts, licences, funding conditions and both registered and unregistered intellectual property assets, and to ensure that any transfer (of either the assets themselves or the shares in the separate entity) does not have adverse consequences (such as contracts that have adverse triggers upon an assignment or change of control).

10. IT system integration

Universities have sophisticated systems of information and communications technology systems, underpinned by infrastructure assets, licensing, leasing and/or outsourcing arrangements. These assets and contracts would need to be identified and transferred to the merged entity.

Substantial work would be involved in the migration of data (including personal information) to the merged entity and the consolidation of systems held by the respective universities across the faculty, staff and student networks. It is likely that transitional arrangements would need to be put in place to allow for this work to be done over an extended period of time.

Given the unique and complex regulatory and legal environment in which Australian public universities operate, any merger would be a significant undertaking, requiring the involvement of a wide range of stakeholders (including Commonwealth and State governments, regulators, unions, staff, students and the broader community).

Upfront consideration of key legal issues, structuring any merger in a way which minimises the impact of these issues and engagement with the relevant stakeholders would be critical to ensure that the potential benefits of any merger are realised in an effective and efficient way.