The Arthur Wishart Act (Franchise Disclosure), 2000 (Ontario) (the “Act”) requires franchisors to provide potential franchisees with a disclosure document containing all material facts, financial statements, copies of agreements to be signed, and other relevant information and documents regarding the franchisor, its principals, franchisees and system. With the potential consequences of rescission and damages against the franchisor, its agent, broker, those who sign the disclosure document, and associates (those who control or are controlled by the franchisor, and who are directly involved in the grant of the franchise), it is critical that every disclosure document be carefully reviewed to ensure that it is current, correct and complete. It is also important that information be set out accurately, clearly and concisely.
We often provide our franchisor clients with the following checklist for their review each and every time a disclosure document is prepared. This checklist is prepared on the assumption that a compliant “base” disclosure document in our experience is most likely to be subject to change. This checklist is not a substitute for legal advice and serves only as a guide for further discussion.
Before providing a disclosure document to a potential franchisee, franchisors should review the following information to customize their “base” disclosure documents for the franchisee:
- The business background of the franchisor:
- Have there been any changes to the franchisor’s legal or operating name, address, or business structure, such as a new corporate structure or a new parent company?
- Have any new lines of business been introduced?
- The business background of the directors, general partners and officers:
- Have there been any new appointments or resignations?
- Have any directors, general partners or officers changed their principal occupation or employer during the five years immediately preceding the date of the disclosure document?
- Are there any pending or have there been any charges or convictions of fraud, unfair or deceptive business practices, or violations of franchise or business law against any of the franchisor, franchisor’s associate or a director, general partner or officer in the ten years immediately before the date of the disclosure document?
- Are there any pending or have there been any administrative orders or penalties imposed against any of the franchisor, franchisor’s associate or a director, general partner or officer of the franchisor under a law of any jurisdiction regulating franchises or business?
- Are there any pending civil actions against the franchisor, the franchisor’s associate or a director, general partner or officer of the franchisor or have there been such civil actions in which any such persons have been found liable for misrepresentation, unfair or deceptive business practices or violating franchise or business law?
- Have any bankruptcy or insolvency proceedings taken place during the six years immediately before the date of the disclosure document against the franchisor, the franchisor’s associate, a corporation of which a current director, officer or general partner of the franchisor was a principal, or a director, an officer or a general partner of the franchisor in their personal capacity?
- Have financial statements for the most recently completed fiscal year that have been audited or prepared on a review engagement standard (unless the date of the disclosure document is within 180 days of the end of the most recently completed fiscal year and if the financial statements have not yet been prepared, in which case, the previous year’s financial statements may be used) not been included?
- Have copies of all agreements that the franchisee is required to sign, as well as any offer to lease not been included?
- Is the list of the franchisee’s estimated costs to establish the franchise not accurate and complete, together with all assumptions underlying the estimate?
- If annual operating costs estimates are provided, have complete and accurate assumptions underlying the estimates, together with the location where such information is available for inspection not been included?
- If earnings projections are provided, have complete and accurate assumptions underlying the projections, together with the location where such information is available for inspection not been included?
- Are the percentage of advertising funds:
- were spent and retained in the two fiscal years before the date of the disclosure document;
- are projected to be spent and retained for the current fiscal year?; and
- inaccurate or outdated?
- Have there been any changes in status of the franchisor’s trade-mark, such as changes to the status of trade-mark registrations, additions or cancellations of trade-marks?
- Will an exclusive territory be granted to this potential franchisee? If so, are there conditions required to be met to maintain such territory?
- Is the list of franchises that have been terminated, cancelled, not renewed or reacquired by the franchisor or otherwise left the system within the last fiscal year immediately preceding the date of the disclosure document not accurate and complete?
- Is the list of franchise closures within the three fiscal years immediately before the date of the disclosure document and the reasons for the closure not accurate and complete;
- Is the list of the locations of all franchises, including the business address, telephone number and name of the franchisee (or, if there are less than 20 franchises in the applicable province, a list of at least 20 franchises geographically closest to such province), not accurate and complete?;
- Is the Certificate of Disclosure not dated and signed by the sole director or officer or, if there is more than one director or officer, by at least two persons who are directors or officers?
If any of the above questions were answered in the affirmative, or any material change occurs after disclosure, the franchisor must provide the franchisee with a statement of material change as soon as practicable after the change has occurred and, in any case, before either signing any agreement with the franchisee or accepting payment from the franchisee. Statements of material change are intended to update changes that occur during the 14-day disclosure period.
Franchisors need to pay close attention to the information in each disclosure document to ensure that there are no such deficiencies or else franchisors risk facing the rescission penalties imposed by the Act. Using this checklist as a roadmap for maintaining and preparing disclosure documents, but we recommend that franchisors diarize an annual or bi-annual review of their disclosure document, franchise documents and operations manual. Doing so, ensures that these “living documents” continue to evolve with your system and with the developments in the law.
For more information on franchising, please contact Derwin Wong at (416) 368-0600 or by email at email@example.com.
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