The Disclosure Obligations of a Franchisor (Ontario)
QUESTION CORNER – NUMBER 8
Question from a franchisor (Ontario): We are offering a franchise to the public (Franchise A) and ready through a separate company (same principals) to offer a different franchise (new one Franchise B). Do you have to disclose anything pertaining to Franchise A on the Disclosure Document for Franchise B?
Answer: Yes, there will be information to disclose on Franchise A in the Disclosure Document for Franchise B. However, while the question is interesting, given the generality of its nature (and specifically, the use of the word “different”), my answer will contain both disclosures that must be made and general advice to assist a franchisor (with the corporate structure described above) in determining how much additional information on Franchise A must be disclosed in the Disclosure Document for Franchise B.
The use of the word “different” as pertains to your franchise offerings raises questions like, “While being “different”, is Franchise B in the same line of business as Franchise A?”, “Is there an overlap in the product/service offerings of the two (2) franchises?”, “Will Franchisor A and Franchisor B be doing business together?” and “Does introducing a new different franchise constitute a “material change” for existing franchisees of Franchise A and/or a “material fact?” to be disclosed to prospective Franchise B franchisees. One could argue that introducing a new franchise implies additional risks for the existing franchise network and therefore, given that the principals in both companies are the same, the introduction of a new franchise must be disclosed to franchisees of Franchise A.
First, I will look at what must be disclosed on Franchise A in the Disclosure Document for Franchise B.
A franchisor must disclose the business background of the directors and officers of the franchisor, including a brief description of the prior relevant business experience of each person and the principal occupation and the employers of each person during the 5 years immediately preceding the date of the Disclosure Document. By having to provide this information, information on Franchise A will need to be disclosed.
Sections 2.3 through 2.6 of the Regulations (to the Arthur Wishart Act) describe disclosures pertaining to convictions of fraud, unfair or deceptive business practices, administrative orders or penalties, judgements in a civil action of misrepresentation, unfair or deceptive business practices and bankruptcy or insolvency proceedings, voluntary or otherwise. These disclosures have to be made by franchisor’s associate (the principals), officers and directors. In the event they pertain to Franchise A, they must also be disclosed in the Disclosure Document for Franchise B, if one or more of these situations has occurred.
Is there more information on Franchise A that must be disclosed in the Disclosure Document for Franchise B? This brings us back to the questions I raised at the beginning of my answer, that is, the specific facts of the case at hand. How will the principals operate the two (2) franchises? Can and/or will they pool their resources together (financing, advertising, training, etc.)? It therefore becomes important to study the specific operations of each franchise to determine if a new different franchise constitutes a “material fact” for prospective franchisees of Franchise B and/or a “material change” for existing franchisees of Franchise A.
By studying the specific facts and their potential repercussions on existing franchisees with your franchise attorney, additional information on Franchise A may need to be disclosed in the Disclosure Document for Franchise B and/or a Statement of Material Change may need to be sent to franchisees of Franchise A.
IMPORTANT NOTE: As already mentioned in previous Question Corners, I do not provide legal opinions in answers to questions in Question Corner, but rather provide my thoughts, comments and practical advice on issues that arise in the normal course of the activities of a franchisor. Therefore, I strongly advise that you consult an attorney in your province for a legal opinion on the answers to questions asked in Question Corner. Also, please note that the answer in this Question Corner applies only to franchisors in the province of Ontario.
The next Question Corner will be sent the week of January 7, 2008.
I take this occasion to wish you and your families a very Merry Christmas and a Happy New Year (and especially, alot of retail sales during the Christmas season).
Cordially,
Claude J. Pellan, Attorney and Consultant
Franchise and Business Law
www.claudepellan.com
