In Canada, the five provinces (Alberta, Manitoba, New Brunswick, Ontario and PEI) with franchise legislation (and soon to be six with the addition of British Columbia) require that franchisors disclose specified financial statements from the previous fiscal year in their franchise disclosure document (FDD). Normally, failure to provide the correct financial statement in the FDD provides franchisees with the statutory right to rescind their franchise agreement within two years of entering the agreement. However, all of the Canadian franchise statutes have an exemption that allows large, well established franchisors to avoid disclosing financial statements in their FDD, if certain requirements are met. The requirements for the application of the exemption vary from province to province.
Recently, the Government of Alberta launched a consultation survey to solicit input from stakeholders in the franchise industry regarding Alberta's Franchises Act Exemption Regulation. The survey focused on two key issues: if large franchisors should continue to be exempt from having to disclose financial statements to prospective franchisees; and if so, if the existing monetary threshold triggering the exemption is appropriate.
The current exemption for disclosing financial statements in Alberta applies if both of the following requirements are met:
- (a) The franchisor has a minimum net
worth of $5 million, or;
(b) The franchisor is controlled by a corporation with a minimum net worth of $5 million and the franchisor has a minimum net worth of $1 million; and - The franchisor has a minimum of 25 franchisees in Canada conducting business continuously for a minimum 5 year period prior to the date of disclosure, and has conducted business that is the subject of the franchise continuously for 5 years or more.
The survey also solicited feedback on whether Alberta, as a precondition to the financial statement exemption, should require a franchisor to be free from any judgment, order or award made in Canada for fraud, unfair or deceptive practices, in the five years immediately preceding the date of the disclosure document. Alberta is currently the only province with franchise legislation that does not have this precondition to the financial statement exemption. As a result, Alberta is viewed as having less onerous requirements for the exemption, although, it is worth noting that New Brunswick and PEI have lower monetary thresholds ($2 million) that trigger the exemption.
Cassels Brock is following the developments on this front and will provide an update if legislative changes are proposed.
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