Policy paper

Rail franchise change of control policy statement

Published 28 March 2008

This was published under the 2007 to 2010 Brown Labour government

© Crown copyright 2008

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What is a change of control?

A change of control relates to a change in the identity of any person who ‘controls’ the franchisee or franchise operator. ‘Control’ for this purpose is defined in the franchise agreement. The definition contained in a recent franchise agreement is included at the appendix to this note.

It is an event of default under the franchise agreement (for franchises on the new template it is paragraph 2.3 of schedule 10.3) for a change to occur during the franchise term in the identity of any one person, or any two or more persons acting by agreement, who may control the franchisee, without the consent of the Secretary of State. The prohibition is important because franchisees and franchise operators deliver front line public services. Rail franchises are vital to the government’s delivery of its broader policy objectives on the environment, the economy, social inclusion and accessibility. Ensuring the continued success of a franchise is therefore a matter of legitimate public interest. All franchisees are vetted by the Secretary of State to ensure that they are financially robust and have a track record of successful delivery. The Secretary of State will wish to have confidence that the new owners will continue to honour their obligations under the franchise agreement and, as the success of a franchise is ultimately dependent on delivery by its people, in the quality of the proposed management team.

What things are taken into account in considering whether to approve a change of control?

Except in the case of a change of control resulting from an intra-group restructuring, the Secretary of State will require a range of information from the prospective new owner. This will include the following:

  • copies of the acquiring company’s group accounts for the past two years and any published interim accounts for the current or immediately preceding financial year
  • details of the acquiring company’s corporate structure
  • copies of all constitutional documents of the acquiring company and its parents and any legislation under which it is incorporated

People

  • details of the proposed senior management team (including the board) which will be responsible for the franchise going forward, including details of their relevant experience and qualifications

Plans to honour franchise obligations

  • confirmation that the acquiring company has undertaken full due diligence in relation to the franchise and therefore understands the obligations it will be taking on in respect of that business
  • a statement from the acquiring company of its intentions in relation to the performance of the existing franchisee’s obligations under its franchise agreement and its plans for the long term future of the franchise
  • details of any future plans in relation to the acquiring company or in relation to the group which may affect the franchise or the way in which the acquiring company conducts its business

Will the Secretary of State require anything else?

Yes, the Secretary of State will generally require the payment of a facilitation fee in consideration of the Secretary of State’s consent, if granted, to all future changes of control of passenger rail franchises (where these do not result from intra-group restructurings). The fee will be levied on the person or persons in control of the franchisee or franchise operator before the change. The amount of the fee will generally be the greater of £1 million or 5% of the value of the change of control of the franchise to the vendor. The proceeds will be invested in the passenger rail network. This fee is over and above the administration costs of processing an application for consent to a change of control. The administration fee shall be calculated by reference to the amount of time spent by officials on the proposed change of control and the department’s scale rates for different grades of staff as shall apply from time to time.

On what basis is the Secretary of State requiring a facilitation fee?

The Secretary of State considers it appropriate to require payment of a facilitation fee because it is the reasonable expectation of the Secretary of State that a change of control represents a value to the vendor. The opportunity to realise that value is a product of the system of franchising established and maintained by Secretary of State at public expense, and the value of franchises is in many cases a product of substantial public subsidy. Therefore, the Secretary of State considers it appropriate that the public should also realise a benefit from a change of control. The Strategic Rail Authority, and prior to that the Office of Passenger Rail Franchising, used to require a passenger dividend - agreed infrastructure or service investments - in consideration for consent to a change of control. Passenger dividends were in substance and effect similar to the facilitation fee which the Secretary of State is now seeking as consideration for his/her consent to the change of control and for reinvestment in the railway network.

As mentioned above, the fee will generally be the greater of £1 million or 5% of the value of the change of control of the franchise to the seller. The Secretary of State considers that this basis of calculation strikes an appropriate balance between realising the full commercial value of the Secretary of State’s consent for the benefit of the public and avoiding undue interference in the market. There are likely to be very few, if any, cases where the value of the Secretary of State’s consent to the seller is less than £1 million or where the imposition of a facilitation fee of £1 million would constitute undue interference in the market.

Sellers will have the opportunity to make representations in relation to the facilitation fee when applying for the Secretary of State’s consent to a change of control.

In order to assess the value of the change of control to the vendor of the relevant entity which currently has control of the franchisee or franchise operator, and to enable a proper assessment of the level of the facilitation fee to be made, the vendor will be required to provide the Secretary of State with such information and assistance as he may reasonably require.

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