There has been much comment and speculation in the media regarding the proposal considered by Council on 26th March to sell Denbighshire Leisure Limited to a management buyout funded by a private investor.
The Council has been made aware of a document produced by APSE Solutions and commissioned by Unison. This document was prepared without the Council’s involvement or consent. The document is therefore based on the instructions given by Unison and specifically states that it should not be relied upon by any other party. The document contains a disclaimer to the effect that it does not constitute legal advice, does not draw conclusions and does not make recommendations.
The document raises many questions which could have been answered had APSE Solutions or Unison involved the Council in the production of the document. The Council committed to closer working with unions as proposal progressed and arrangements had been put in place prior to the Council being informed that it would not proceed.
To be clear, in considering this proposal the Council sought independent, professional advice from external advisers. This advice covered a number of legal and other regulatory issues including
- the Council’s power to enter the transaction,
- the procurement and contract issues to be considered,
- employment and human resource matters including pension provision and the Code of Practice on Employment Matters,
- taxation,
- subsidy control and,
- property issues.
The Council also received independent advice as to the valuation of the company and other alternative options that may be available for the future of the company.
The Council has been asked about the costs of this proposal to date. The Council has spent £62k to date on independent advice (as set out earlier in the note).
Although the proposal that generated this advice will not now proceed, much of that advice will be relevant to alternative models for the company and is not therefore an abortive cost. It should also be noted that this advice was sought in anticipation of a significant capital receipt of £1.5 million to be received by the Council for the sale of the shares and the revised contractual relationship would not only have prevented existing costs from increasing, but would result in the fee paid by the Council for the provision of leisure services reducing in each year of its operation over a ten year period by 10%. This 10% reduction in year 2 would be £152k increasing cumulatively to a reduction of £930k by year 10.
Background
In 2019 the Council decided to create Denbighshire Leisure Limited as a company limited by guarantee for the purpose of maintaining the high standard of leisure provision across the breadth of the County without the Council having to commit ever increasing resources to do this.
The decision to create DLL was controversial with some at the time, and concerns were expressed about the creation of a company to deliver leisure services under a contract rather than maintain an in-house service.
The decision has however been proved successful. Since it was granted a contract by the Council in 2020 for the provision of leisure services, DLL has received no uplift in the management fee payable to it under that contract despite the inflationary pressures that have existed in the economy during that period. It has achieved this through growth in its commercial activities. The Board and management of DLL have however informed the Council that it is reaching the ceiling of the growth that can be achieved in its current structure.
All local authorities are facing unprecedented financial challenges due to the funding that they receive not keeping pace with inflation in both the costs of, and demand for, statutory services. In this context the Council is once again facing the question of how it maintains high quality leisure services without having to commit additional scarce resources required for other services.
This involves building on the success of DLL over the past five years and finding a way to continue its growth.
The proposal that was approved in principle by Council on 26th March, subject to the Council being satisfied from a legal and regulatory perspective, sought to enable continued commercial growth in order to protect those services.
The proposal was that the Council would transfer the business of DLL to a new company limited by shares. The Council would then sell that company to a management buy-out. The funding for that transaction would be provided by a private equity investor who would acquire a minority stake in the company. The majority ownership of the company would ultimately be vested in the management and staff of the company.
The conclusion reached, in light of all of the advice received, was that the proposal was one that could properly be put to elected members for a political decision as to whether to proceed with it or not.
Subsequent to the Council decision the investor informed DLL that it was withdrawing from the proposed transaction.
Consultation with members
In advance of putting this matter to a formal meeting of Council, there were two informal workshops for councillors, a number of political group meetings for members to question aspects of the proposal, and a pre-decision report to Performance Scrutiny, as a result of which the committee made recommendations as to the additional information to be presented to members at Council
On 26th March Council met to consider the proposal, and, after a lengthy debate, members voted by a majority to approve the proposal in principle subject to the relevant legal and regulatory matters being resolved to the Council’s satisfaction, and a further report being presented to Council for members to consider the final contractual documentation to be entered into.
Between the pre-meetings and full council meeting, substantial information supported by professional advice was provided to members to allow them to make a decision.
The Council has been criticised for the decision to consider the proposal in private session. The proposal that was to be considered was a commercial arrangement involving the Council, DLL and an investor. The investor and DLL operate in a commercial world, and it was considered that in order to protect the commercial interests of all parties that the proposal should be considered in private. This was confirmed by a vote by elected members in accordance with the law.
Next Steps
The current position remains as it was prior to the receipt of this proposal. DLL has successfully traded over the past five years and maintained high-quality leisure services across the breadth of the County while protecting the Council from additional costs increases.
The Council remains committed to helping DLL to find a way to continue this success and will continue to work with the company, elected members and trade unions to find an appropriate way to ensure that the next chapter of DLL’s journey will be as successful as the last five years.