Q&A with Frank Zaid
Originally published in the Canadian Franchise Business Magazine on February 13, 2017.
Q: What changes have been made recently to Ontario’s franchise legislation and what further changes are expected in the future?
A: Ontario’s franchise legislation, the Arthur Wishart (Franchise Disclosure, 2000) Act, was recently amended to allow for the electronic delivery of franchisors’ disclosure documents to franchisees. In addition, a newly established business law advisory council has made recommendations that could further modernize the act in several ways.
Electronic delivery of disclosure documents
Since the act was passed in 2000, the only allowable methods for franchisors to deliver their disclosure documents to franchisees were (a) personal delivery or (b) registered mail. Both of these methods had significant flaws, such as limitations on the weight of a document that can be served via registered mail. The legislation also quickly became antiquated because it did not permit electronic delivery. So, effective July 1, 2016, the act was amended expressly to allow franchisors to deliver their disclosure documents electronically and by prepaid courier.
To the latter point, while many franchise lawyers took the view personal delivery could already be achieved through the use of a courier, provided the courier delivered the disclosure document directly to the prospective franchisee in person, the new amendment expressly allows courier delivery, provided the franchisor pays the cost of delivery. (Incidentally, the amendments also include a change relating to a franchisee’s delivery of a notice of rescission to its franchisor. Effective July 1, 2016, Ontario’s legislation permits the delivery of a notice of rescission by courier, in addition to the previously permissible methods of personal delivery, registered mail or fax.)
For a disclosure document to be delivered electronically within Ontario, the following conditions must be met:
- The document must be delivered in a form that enables the franchisee to view, store, retrieve, and print it.
- The document may not contain any links to other external content.
- The document must contain an index for each of the separate electronic files—if any—of which it consists, the index must set out each file’s name and, if such a filename is not sufficiently descriptive of the subject matter dealt with in the file, the index must contain a statement of the file’s matter.
- The franchisor must receive a written acknowledgment of the document’s receipt.
Given these conditions, some franchisors and legal counsel have expressed the view the changes do not go far enough, in that it is imperative for the franchisor to obtain a written confirmation of receipt from a prospective franchisee after delivery of the disclosure document by electronic means, even though it could probably be established the document was transmitted to and subsequently opened or downloaded by the franchisee.
At any rate, the amendments allowing electronic delivery have helped bring Ontario’s legislation into conformity with all other Canadian provinces that have franchise legislation, allowing greater consistency of franchise business practices across the country, with some very minor differences.
In New Brunswick, for example, electronic disclosure document delivery is the same as in Ontario, except there is no requirement to obtain acknowledgment of receipt. Prince Edward Island, meanwhile, has the most variations from Ontario’s legislation, in that it does not require an index and also requires the disclosure document to (a) be delivered as a single, integrated, document or file, (b) contain no extraneous content beyond what is required or permitted by law and (c) conform, as to its content and format, to the requirements of the law. The franchisor must also keep records of its electronic delivery of disclosure documents (although this is a recommended practice for all franchisors).
Manitoba’s legislation is substantially the same as Ontario’s, except for some minor wording differences. It states the prospective franchisee must be able to “retrieve and process” the disclosure document, rather than “view, store, retrieve and print” it.
Alberta’s franchise legislation does not contain any specific delivery requirements. As such, electronic delivery of disclosure documents is already a regular practice in that province.
Finally, British Columbia’s Franchises Act—which received royal assent in 2015 and is now pending publication of the final regulations—expressly provides a disclosure document may be delivered personally, by e-mail or by any other prescribed method.
Recommendations for modernization
Ontario’s ministry of government and consumer services established a new business law advisory council in March 2016 for the purpose of making recommendations for modernizing the province’s corporate and commercial statutes.
The council made its first recommendations the following fall, with a report posted by the ministry that also solicited input and feedback from the general public and business and legal stakeholders. Among other statutes, the report puts forward amendments for Ontario’s franchise legislation and general regulations made under it.
Definitions of terms
For one, the council recommends amending the act’s definition of the term ‘franchise’ to (a) clarify which types of intellectual property may form the basis of a franchise and how such intellectual property may be licensed to or owned by a franchisor and (b) ensure franchisors that have the right to exert significant control over—or provide significant assistance in—the franchisee’s methods of operation are not exempted from the act’s legal protections simply because they may fail to exercise that right.
The council also recommends narrowing the definition of ‘franchise agreement’ to clarify only the agreement by which the franchise is actually granted to the franchisee (which is usually, but not always, the franchise agreement) can trigger the franchisor’s disclosure obligations and potential rescission claims by the franchisee and not for example, a deposit, confidentiality agreement or other ancillary agreements that tend to be entered into with a prospective franchisee before signing the actual franchise granting agreement.
Non-application of the act
Agreements between a licensor and a single licensee for use of a specific trademark, trade name or other commercial symbol, where such licence is the only one of its general nature or type to be granted by the licensor, are currently exempt from the act. The council recommends amending this provision to specify the relevant geographic scope of such a licence grant includes all of Canada. (There has been confusion to date as to whether the territory could be all or part of Canada.)
In relation to disclosure obligations under the act, the council recommends deeming the generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS) of the U.S., the International Financial Reporting Standards (IFRS) and the International Auditing and Assurance Standards Board’s (IAASB’s) standards for auditing and review engagement, as adopted by other countries, acceptable as the basis for preparing, auditing or reviewing a franchisor’s financial statements that are required to be attached to the disclosure document.
This amendment is intended to reduce the regulatory burden for foreign franchisors that are considering entering Ontario, as they currently must determine whether or not their financial statements are prepared using accounting principles that are “at least equivalent to” Canada’s GAAP. Some foreign franchisors have felt it necessary to acquire—at considerable expense—a statement or opinion from their auditors confirming equivalency. The new change would eliminate any doubt.
Material change statement
Franchisors must disclose material changes, including any changes to their business, capital, control, operations and/or franchise system that could be reasonably expected to have a significant, negative impact on the value of their franchise. This type of disclosure is called a ‘material change statement.’
To ensure consistency in the information provided in a material change statement and certainty of compliance with the disclosure obligations under the act, the council recommends prescribing either (a) the content of the statement of material change or (b) the form itself to correspond to the prescribed content in the disclosure document certificate.
Exemptions from disclosure requirements
The council suggests amendments to four existing exemptions from Ontario’s franchise disclosure document requirements:
- Officer or director exemption—This applies when a franchise is granted to a former officer or director of the franchisor, for that person’s own account. The council supports recommendations from the Ontario Bar Association (OBA) that the relevant subsection of the act be amended to (a) clarify the exemption ceases to be available on the expiry of a 120-day period after the prospective franchisee ceases to hold such position as director or officer and (b) confirm the exemption also applies when the prospective franchisee is a corporation owned by a former director or officer.
- Fractional franchise exemption—This applies in the case of a ‘business within a business,’ whereby the franchise represents a relatively small part of the overall enterprise (i.e. anticipated to account for less than 20 per cent of total sales of the business). The period over which to calculate the anticipated percentage of sales is not specified. So, to ensure consistency in approach and certainty of compliance, the council recommends amending the relevant subsection of the act to explicitly state the period for calculating the anticipated percentage of sales is the first year of operation of the franchise.
- Small investment exemption—This applies when the total annual investment a franchisee has to make to acquire and operate a franchise is less than $5,000. To add certainty to the calculation, the council recommends replacing the concept of the ‘total annual investment’ with the ‘initial investment to acquire and set up the franchise’ that is anticipated by the parties at the time of the signing of the franchise agreement. This recommended language is consistent with other disclosure obligation language.
- Large investment exemption—At the other end of the spectrum, this applies when the prospective franchisee is investing $5 million or more to acquire and operate the franchise, also over a one-year period. Similar to the proposed amendments to add certainty to the small investment exemption calculation, the council recommends basing the calculation for the large investment exemption on the upfront investment amount, as calculated at the outset of the franchise relationship. And since the amendment would limit the prescribed amount to franchise acquisition and setup costs, as opposed to operational costs, the council further recommends reducing the threshold amount from $5 million to $3 million. This amendment would provide much relief and clarity in terms of understanding how the calculation should be made.