Guide to international expansion in the education sector – part one explored the reasons why schools should expand internationally and how to structure an international business and protect intellectual property. The article also considered partner selection, market assessment and deal structure.
Since part one was published, 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 through the creation of new revenue streams and the development of new edtech innovations.
This article looks at the key legal and regulatory issues which must be overcome before a deal can be signed.
Legal challenges of going global
Whatever structure is adopted, a school's international strategy must be designed to identify the regulatory and legal hurdles at an early stage.
Pre-contractual protection
Before parties sign a licence agreement, they will inevitably exchange sensitive information. Schools should disclose this information only 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 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. As such, at the stage of either signing the confidentiality agreement or agreeing heads of terms, the school should request a deposit, which will be deducted from any upfront fee under the agreement or, in the absence of an agreement, be refunded less the school's costs.
International regulation of franchising
Most international partnerships of this nature will satisfy local definitions of franchising, regardless of whether the parties use this word to describe their relationship.
Franchising is regulated in a significant number of countries that have franchise-specific laws, while others impose a complex and challenging regulatory environment through more general commercial laws.
These laws regulate the sales process and the content of the licence agreement, and some require that the documentation be filed on a public register. These compliance issues can affect commercial timelines for doing deals and opening sites should be identified at the planning stage.
Regulation of sales process
Countries such as the United States, Canada, Australia and a number of Asian countries require set form pre-contractual disclosure. Key disclosure issues include:
- 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 that 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.
These mandatory provisions may affect the proposed business model and change the terms of the commercial deal on offer.
Registration requirements
Some jurisdictions require the franchisor to register only relevant details while others require registration of all of the documentation. In developing markets, this is to enable the government to monitor franchisors doing business in the market while 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 which sell franchises in just one province must file the information at the local Ministry of Commerce (MOFCOM) office of that province, whereas for cross-province franchising, the papers must be filed with MOFCOM itself.
Impact of general commercial laws on franchising
Franchising is also regulated by a variety of general laws which must be taken into account, such as:
- the duty of good faith;
- anti-trust law;
- unfair competition law;
- agency law; and
- consumer law.
Education-specific regulation
Education is a highly regulated sector in most foreign jurisdictions, which is expected given the importance of educating the future workforce. It is therefore crucial that a school's principal international legal adviser 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; and
- initial and ongoing obligations to obtain and maintain licences.
A number of independent schools have invested in developing online teaching resources as a way of increasing their international reach and profile. The COVID-19 pandemic has underlined the importance of edtech as a means of supporting home-based learning through these difficult times, and it presents a further opportunity to diversify revenue streams.
A thorough consideration of the legal and practical issues in edtech warrants a separate article, but key areas which must be developed carefully include data protection and cybersecurity, licensing terms of IT platforms (both from providers and to online students), ownership of the intellectual property in the learning content and the commercial model which underpins it.
Local partners will have to play their part in developing and rolling out a 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 must be carefully structured to reflect the needs of the school, the target market and the franchise partner. The most appropriate structure must be determined at the outset, as restructuring an international franchise is a complex, costly and time-consuming exercise.
Choosing to work with experienced legal counsel who can manage international compliance can be the difference between success and failure. It is also crucial that a business has bought into licensing at the board/governor level.
Once the strategy and structure are in place, expanding internationally can be a relatively low-risk/high-reward venture – one which, over time, will generate significant income and ultimately a paradigm shift in the way in which a school operates, allowing it to evolve into a truly global education brand.
An earlier version of this article was published in Independent School Magazine.
