October 26, 2020
We previously reported on Bill 154, the Cutting Unnecessary Red Tape Act, 2017, which introduced new proposed amendments to the Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure) (the “Wishart Act”), in our blog post here. On September 1, 2020 those amendments to the Wishart Act came into force.
The amendments have added clarity to certain provisions of the Wishart Act. Below is a summary of those recent amendments. The more significant amendments to the Wishart Act are as follows.
Confidentiality Agreements and Location Reservation Agreements
A franchisor and prospective franchisee may now enter into certain limited agreements prior to the delivery of a disclosure document. More specifically, the amendments to the Wishart Act now permit the parties to enter into pre-disclosure agreements provided those agreements:
(a) require any information or material that may be provided to a prospective franchisee to be kept confidential;
(b) prohibit the use of any information or material that may be provided to a prospective franchisee; or
(c) designate a location, site or territory for a prospective franchisee.
The first two categories of agreements that are now permitted prior to disclosure describe what are commonly known as “confidentiality agreements”; the last category describes what might more commonly be called a “location reservation agreement”. Not all confidentiality agreements are permitted under the new amendments; if the confidentiality agreement either
(a) requires information to be kept confidential or prohibit the use of information, if the information,
(i) is or comes into the public domain other than as a result of a contravention of the agreement,
(ii) is disclosed to any person other than as a result of a contravention of the agreement, or
(iii) is disclosed with the consent of all the parties to the agreement; or
(b) prohibits the disclosure of information to an organization of franchisees, other franchisees of the same franchise system or a franchisee’s professional advisors,
then the franchisor must still provide disclosure document 14 days before entering into it.
Payment of Deposits
The Wishart Act has also been amended to permit the receipt of the payment of a deposit before the delivery of a disclosure document, if the deposit:
(a) does not exceed the prescribed amount (currently limited to 20 per cent of the franchise fee, to a maximum of $100,000);
(b) is refundable without any deductions, and
(c) is given under an agreement that in no way binds the prospective franchisee to enter into a franchise agreement.
Statement of Material Change
The Wishart Act amendments also clarify the permitted use of a statement of material change. A statement of material change must now include a certificate of disclosure certifying that the statement of material change (i) contains no untrue information, representations, or statements, whether of a material change or otherwise, and (ii) includes every material change. That certificate of disclosure must be signed and dated by the franchisor (if not incorporated) or by one or more officers and/or directors (if incorporated), as applicable.
The exemptions to franchisors’ disclosure obligations have also been clarified by the recent amendments to the Wishart Act. The franchisor continues to be exempt from its disclosure obligations in circumstances where the franchisor is granting a franchise to an officer or director of the franchisor or the franchisor’s associate; the amendments clarify that (i) the officer or director must have held that position for at least six months and is currently such an officer and director, or (ii) was an officer or director of the franchisor or of the franchisor’s associate for at least 6 months, and not more than 4 four months have passed since the person was such an officer or director.
Another amendment concerns so-called “fractional franchises”, in which the franchisor grants a franchise to sell goods or services within a business in which the franchisee has an interest. Please see our previous blog post for further details on fractional franchises. The amendment clarifies that the exemption is available if the sales arising from those goods or services during the first year of operation of the franchise, as anticipated by the parties or that should be anticipated by the parties at the time the franchise agreement is entered into, do not exceed 20% of the total sales of the business during that year.
The recent amendments also clarify the circumstances under which franchisors are exempt from disclosing in relation to “small” franchises and from disclosing to sophisticated purchasers. As to the former, the amendments clarify that the franchisor is exempt from disclosing when the franchisee’s total initial investment is (currently) no more than $15,000. As to the latter, the amendments clarify that the franchisor is exempt from disclosing when the franchisee’s total initial investment is (currently) $3,000,000.
The Wishart Act has also been amended to clarify the form of the financial statements that a franchisor is required to disclose. The amendments now allow non-Canadian franchisors, when expanding to Ontario, to include a non-Canadian financial statement in their disclosure document, provided that the financial statements meet Canadian, U.S., or international accounting standards.
If you have any questions regarding any of the above-noted amendments to the Wishart Act and how they may affect your franchise, we invite you to contact us.