University Boards Need Strategic Planning Committees

As smaller colleges and universities face a growing financial strain from plummeting enrollment caused by a demographic shift, particularly in the Northeast, they may find themselves in a position to merge with another higher learning institution.

Members of university administrations typically have no experience in planning and executing mergers. But a well-qualified and engaged strategic planning committee can increase the chance that an appropriate merger will be completed by a university and mitigate the closure risk.

University boards can amend their bylaws to create such a committee of independent members with experience and expertise in mergers and acquisitions that meet regularly to monitor the university’s planning and preparedness to implement this change.

For boards whose members have no prior experience with any type of merger or acquisition, these committees may be empowered to engage outside experts and make decisions as issues arise in implementing the merger.

Developments in the education regulatory landscape make this planning and the establishment of relationships and processes imperative. As part of its administration of federal student aid programs, the Department of Education has reviewed university mergers or other changes in control for decades. It distinguishes between legal entities, such as corporations, and institutions of higher education.

Institutions of higher education, rather than corporations, participate in federal financial aid programs, possess a unique identifier, and are parties to program participation agreements with the Department of Education describing federal student aid administration.

A change in control of a university terminates its program participation agreement with the Department of Education. As such, the department can review changes in control of institutions and determine how, when, and on what terms it offers new program participation agreements to universities.

Until September 2022, the Department of Education reviewed and approved mergers of universities in a single step. The merging institution became a branch campus or additional location of the acquiring university and participated in federal student aid programs under the acquiring university’s program participation agreement.

Between 2020 and 2022, in some cases, the Department of Education took several months to complete the consolidation of the two identifier numbers and program participation agreements into a single one of the acquiring university.

But new guidance issued on Sept. 15, 2022, articulated a new standard for completing university mergers in which the merging university becomes a branch campus or additional location of the acquiring university.

It now requires university mergers be completed in two discrete changes in control—known as the two-step process—with the merging university continuing as an independent institution with its own program participation agreement and its own identifier number between the first and second changes in control.

Different changes in control structures are possible to comply with the two-step process and should be selected based on the universities’ specific facts and circumstances.

Also, the Department of Education began requiring, as of July 2023, that universities provide written notice to current and prospective students at least 90 days before completing any change in control, which must include a signed legally binding agreement that details the change in control transaction. This extra step may extend the time frame to complete university mergers.

Institutional accreditors have conformed their policies to the two-step process in different ways. The Higher Learning Commission created a new accreditation status—Accredited Change In Control—for merging institutions that have completed the first step. In contrast, the Middle States Commission of Higher Education continued accreditation of the merging institution for a discrete period (generally between eight and 12 months) after the first step.

One consequence of these regulatory changes is that it will take between 12 and 18 months for universities to complete a merger. Without a well-prepared and engaged strategic planning committee that can initiate, govern, and oversee the merger process, financially challenged universities will struggle to consummate mergers with less time to identify a compatible financially viable counterparty; complete due diligence; prepare, negotiate, and sign agreements; and obtain required regulatory approvals, among other reasons.

Qualified university counterparties understand the significant effort and expense to complete a merger and will be wary of starting this process with a university that isn’t administratively prepared and financially capable of completing a merger.

In the absence of an experienced and engaged strategic planning committee, a university’s change in control options likely will be limited and a closure and teach-out may result. Board members likely will be concerned about their personal liability as universities approach insolvency, and therefore, become more receptive to closure.

As mergers increasingly occur—such as those of St. Augustine College and Lewis University, Northeastern University and Mills College, and Saint Joseph’s University and University of the Sciences—an engaged strategic planning committee takes on more importance.

The regulatory approval process for the markedly less desirable closure and teach-out alternative is between four and seven months.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Neil Lefkowitz is partner at Loeb & Loeb partner focused on corporate transactions in higher education.

AJ Prager is senior vice president and Michael Dymond is assistant vice president at Hilltop Securities.

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