On September 1, 2020 long awaited amendments to the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) and its General Regulation (O. Reg. 581/00) (the “Regulation”) initially introduced in 2017 came into force. These amendments will provide franchisors some flexibility with certain disclosure obligations, and introduce some welcome clarity to other provisions of the Act and the Regulation. The following article highlights what are excepted to be some of the more useful amendments for franchisors.
Confidentiality Agreements
Before the amendments came into force, a franchisor was obligated to provide a prospective franchisee with a disclosure document not less than 14 days before the prospective franchisee signed the franchise agreement “or any other agreement relating to the franchise”. It was widely understood that “any other agreement relating to the franchise” applied to prohibit a franchisor from asking a prospective franchisee to sign a confidentiality agreement before providing the prospective franchisee with a disclosure document. Now, as a result of the amendments, a franchisor is permitted, with certain exceptions, to have an agreement signed by a prospective franchisee before providing the prospective franchisee with a disclosure document if such agreement only contains terms that:
- require any information or material that may be provided to a prospective franchisee to be kept confidential,
- prohibit the use of any information or material that may be provided to a prospective franchisee, or
- designate a location, site or territory for a prospective franchisee.
However, such agreement cannot prohibit the disclosure of information to a franchisee organization, other franchisees of the same franchise system or a franchisee’s professional advisors. Further, such agreement cannot contain terms that require the information to be kept confidential or prohibit the use of information, if the information:
- is or comes into the public domain other than as a result of contravention of the agreement,
- is disclosed to any person other than as a result of contravention of the agreement, or
- is disclosed with consent of all parties to the agreement.
These amendments will prove useful to franchisors seeking to protect from broad disclosure or use by a prospective franchisee of unique or personnel information relating to the franchisor, its system and its franchisees.
Deposits
Before the amendments came into force, a franchisor was, also, obligated to provide a prospective franchisee with a disclosure document not less than 14 days before the payment by the prospective franchisee to the franchisor or its associate of “any consideration”. Thus, a monetary deposit was not permitted prior to or during the 14 day period. Due to the amendments, monetary deposits are now permitted prior to or during the 14 day period, provided that:
- such deposit does not exceed 20% of the franchise fee, to a maximum of $100,000,
- it is refundable without any deductions, and
- is given under agreement no way binds the prospective franchisee to enter into a franchise agreement.
The ability to obtain a monetary deposit prior to the signing of a franchise agreement may prove useful in weeding out some prospective franchisee candidates that may be not be as serious or committed to investing in the system before disclosure is provided to them, leaving more time for the franchisor’s personnel to focus their time and energy on other candidates.
Statement of Material Change
Pursuant to the amendments, certain contents of a statement of material change are now prescribed in the Regulation. Specifically, a statement of material change must include a certificate, certifying that it:
- contains no untrue information, representations or statements, whether of material change or otherwise, and
- includes every material change.
The certificate must be signed and dated by the franchisor or in the case of a franchisor that is incorporated with only one director and officer, by that person (or by at least two persons who are directors or officers in the case of a franchisor that has more than one director or officer). While providing a signed certificate with a statement of material change may have been a common practice within many franchise systems, these amendments are nonetheless welcome by franchisors (and their advisors) in that they increase consistency and certainty with wording and usage of a certificate in connection with statements of material change.
Disclosure of Financial Statements
Prior to the amendments, a disclosure document was required to include certain financial statement disclosure relating to the franchisor. Specifically, the Regulation required inclusion of audited or review engagement financial statements for the most recently completed fiscal year of the franchisor prepared in accordance with generally accepted auditing or accounting principles, as applicable, that are at least equivalent to those set out in the Canadian Institute of Chartered Accountants Handbook.
As a result of the amendments to the Regulation, in addition to financial statements prepared in accordance to Canadian auditing or accounting standards, audited or review engagement financial statements prepared in accordance with certain American or international auditing or accounting standards, as applicable, are now permitted. This will be welcome news to foreign franchise systems wishing to expand into Canada such as those franchise systems originating in the USA, who will now be able to include financial statements in their disclosure documents prepared under accounting standards that are not necessarily equivalent to our Canadian standards, without incurring any additional expense (or the worry) inherent in having to “Canadianize” their financial statements to comply with our Canadian standards.
Other amendments to the Act and Regulation not covered in this article include amendments that clarify certain disclosure exemptions and update various phrases and terms.
Overall, the recent amendments should provide some utility to franchisors because they allow for further flexibility with certain disclosure obligations under the Act. Moreover, all participants should welcome these amendments in that they serve to clarify certain provisions of the Act and the Regulation.