FRANCHISE DISCLOSURE

The Nuts and Bolts

Introduction

• 5 provinces with franchise disclosure legislation – British Columbia is next

• Significant remedies for franchisees• More court cases everyday• Sometimes even minor administrative errors

create disastrous consequence

Disclaimer• This webinar is intended to outline the basics of compliance

with the disclosure requirements of these statutes, to draw attention to the most common pitfalls and to outline best practices to keep errors and omissions to a minimum.

• This webinar is not intended to be legal advice for the attendees or to replace the need to use other material in the preparation of franchise disclosure documents or for competent legal advice from a lawyer experienced in franchise law.

Triggering Events for Disclosure

• Payment of money• Signing of agreements• Exception, with conditions, for deposit

agreements

One Document

• Everything must be delivered as one document at one time

• Exception in Manitoba– Date of delivery is date the last document is

delivered• Very little else about the form of the FDD • Emphasis is on content

Delivery Methods

• Personally or registered mail• Only Manitoba, PEI and New Brunswick

permit electronic delivery with specific requirements

When Delivered?

• An FDD must be delivered not less than 14 days before the prospective franchisee signs an agreement or pays any money relating to the franchise.

• Challenge: It is best to make the 14 days clear days, i.e. do not count the day the FDD was delivered and do not take money or have documents signed on the 14th day following delivery.

Who Should Receive an FDD?

• If individual franchisee(s), then each one• If franchisee is a corporation, then the corp.• All guarantors

Certificate

• Originally signed and dated certificate must be included in and FDD

• One signature if only one director or officer• Two signatures if more than one director or

officer

Receipt

• Not required by any of the statutes• Absolutely critical in any legal proceeding

Record Keeping

• A complete copy of the signed FDD and all signed receipts should be retained for proper record keeping and any future challenge or litigation.

Material Facts

• Defined very broadly in all of the statutes• In addition to specified information• Could be just about anything• Most important is if the fact would have reasonably

been expected to have a significant impact on the decision of a prospective franchisee to purchase the franchise, or the price the prospective franchisee would be willing to pay

All Agreements Must be Attached to FDD

• This means every agreement• Should include agreements the franchisee is

required to sign with third parties

Other Attachments and Information for the FDD

• The table of contents for the system operating manual should be attached to the FDD, (which is mandatory in Manitoba and New Brunswick). In Manitoba only, if no manuals are to be provided, there must be a statement to that effect.

• Concern where the franchise agreement incorporates the manual into the agreement

Earnings Claims and Operating Costs Projections

• Optional in all statutes• If providing them then need:– assumptions, accuracy, place where information

substantiating claims and projections can be inspected

• Can be a challenge to avoid being misleading

Financial Statements of the Franchisor

• Exemption for larger more mature franchise systems

• Must be audited or review engagement• For last completed fiscal year plus 180 days• New corporation only needs opening balance

sheet• Avoid consolidated statements

Disclosure for Specific Circumstances

Renewals

• Exempt from disclosure in Alberta• Exempt in other provinces, provided there is

no material change since the signing of the original franchise agreement

• Best practice is to disclose in any event

Renewals Continued

• Areas for adaption of pro-forma FDD:– costs to renew instead of costs to establish– attach copies of agreements dealing with renewal

only– revise references to provisions of franchise

agreement that have changed

Resales of Franchises by Franchisees

• Exemption, with conditions, in all provinces• Tricky condition is "by or through the

franchisor”• Best practice is to always disclose

Resales Continued

• Areas for adaption of pro-forma FDD:– description of the transaction and the franchisor’s

role– attach copies of agreements dealing with the

resale only and specifically, i.e. assignment or new franchise agreement

– costs to establish the franchise should be replaced with the costs necessary to effect the purchase of the franchise, i.e. refurbishing

Sale of a Corporate Unit

• Areas for adaption of pro-forma FDD:– terms of purchase instead of costs to establish– add copy of agreement of purchase & sale– add all relevant historical financial and operational

information concerning the business

Provinces Without Franchise Legislation

• A good practice, but optional• Include a cover letter stating:– disclosure not required and prospective franchisee

should be cautioned that the information included in the FDD may not relate to the province in which the franchise business will be operated or the franchise being acquired and that the FDD is being provided for information purposes only

• No certificate should be given

U.S. Franchisors

• U.S. franchisors are very familiar with franchise disclosure legislation, as they must comply with U.S. federal and many state regulations. While the Canadian provincial franchise statutes have many similarities to the U.S. statutes, there are some fundamental differences which must be taken into consideration when a U.S. franchisor enters the Canadian market.

Master Rights for All of Canada

• While no court has ruled on the question, it is widely assumed that most of the provincial statutes take jurisdiction when master or other franchise rights are granted for all of Canada. Best practice dictates that a U.S. franchisor provide a franchise disclosure document, which is compliant with all of the provincial franchise statues, to such a prospective franchisee.

Use of U.S. Disclosure Documents

• Use of wrap-around disclosure is permitted or not prohibited

• However, cost and time to conform very close to creating a Canadian FDD

• Concern about the “clear & concise” requirement

Costs

• Care needs to be taken to adjust anything that is different in Canada than in the U.S., i.e. construction costs, costs of supplies and inventory, operating costs, labour costs, leasing costs, food costs, etc.

Financial Statements

• U.S. financial statements may be used, but they need to be prepared in accordance with standards that are at least equivalent to the Canadian standards

• Popular in the U.S. to have consolidated financial statements, which could be a problem

Updates

• No annual update required in Canada• All information must be current as of the date

of the delivery of the FDD, unless specifically related to fiscal periods

Updates Continued

• Some items that often change:– directors and officers – costs of establishing the franchise– litigation, insolvency proceedings and

administrative proceedings– list of existing franchisees

Updates Continued

• As soon as new financial statements are prepared for the previous fiscal year, they must replace the existing financial statements used in the franchisor's standard form FDD. Such new financial statements must be prepared no later than 180 days following the end of the last fiscal year

Updates Continued

• The following items relate to fiscal years:– advertising contributions and expenditures– former franchisees – 1 year and 3 year categories

Material Changes

• Definition is similar to “material facts”, except that only negative facts are relevant

• Need to disclose if arise after disclosure and before signing or payment of money

• Only the provinces of New Brunswick, Manitoba and Prince Edward Island prescribe any form and technical requirement for a notice of change, other than the notice merely has to be in writing

The Unknown

• What to do when key information or documentation is simply not available at the time of disclosure, i.e. no location or lease?