Disclosure Documents Requirements Summary

The Arthur Wishart Act (Ontario's franchise legislation) requires franchisors, to provide all prospective franchisees with a disclosure document. A disclosure document is required to be one document delivered at one time; a disclosure document cannot be delivered in piecemeal. The Arthur Wishart Act, requires all information in disclosure documents and material change statements be accurately, clearly and concisely set out. It takes a significant amount of time and effort to create a disclosure document and thereafter to maintain the disclosure document, to ensure that the disclosure document is complete, accurate and current at the time of every disclosure to be compliant with the Arthur Wishart Act.

Section 5(4) of the Arthur Wishart Act, sets out the content required to be contained in every disclosure document, being:

1. all material facts, including material facts as prescribed. Material fact is broadly defined in the Arthur Wishart Act as information about the business, operations, capital or control of the franchisor, or about the franchise system that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or on the decision to acquire the franchise;
2. financial statements as prescribed;
3. copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee;
4. statements as prescribed for the purposes of assisting the prospective franchisee in making informed investment decisions; and
5. other information and copies of documents as prescribed.

Part II of the Arthur Wishart Act Regulations details the mandated disclosure requirements, which includes:

1. background and historical information about the franchisor and its directors, officers etc.;
2. franchisor's financial statements;
3. all the franchisee's costs associated with establishing the franchise: including, deposits, franchise fees, inventory, leasehold improvements, equipment, leases, rentals and all other franchisee costs;
4. details of any training or assistance provided by the franchisor;
5. details of whether the franchisee is obliged to purchase or lease from the franchisor or its approved suppliers;
6. restrictions on the goods and services the franchisee may sell and the persons to whom the franchisee may sell goods or services to;
7. a description of every licence, registration, authorization or permission a franchisee is required to obtain to operate the franchise;
8. a statement of whether the franchisee is required to participate personally and directly in the operation of the franchise;
9. a description of the exclusive territory granted to the franchisee, if one is granted;
10. a description of the franchisor's policy on the proximity between an existing franchise and another franchisee or corporate store, if any;
11. contact details for all franchisees that operated a franchise that has been terminated, cancelled, not renewed, reacquired by the franchisor or otherwise left the system within the last fiscal year immediately proceeding the date of the disclosure document;
12. the reason for the closure of each franchise that occurred within the 3 fiscal years immediately preceding the date of the disclosure;
13. franchise location and contact details for all franchises located in Ontario, if there are less than 20 franchises in Ontario, then the disclosure needs to provide this information for franchises outside Ontario;
14. a description of all restrictions or conditions related to the termination or renewal of the franchise agreement and the transfer of the franchise; and
15. various statements.

Certificate

Furthermore, every disclosure document is required to contain a certificate certifying the accuracy of the disclosure document and the fact that the disclosure document includes every material fact and all other material and information required by the Arthur Wishart Act and/or Regulations. The certificate is required to be dated and signed by:

1. the franchisor if the franchisor is not incorporated; or
2. if the franchisor is incorporated, and if:
   1. the franchisor only has one director or officer, then the certificate shall be signed by that person; or
   2. the franchisor has more than one officer or director, then the certificate shall be signed by at least two persons who are officers or directors.

Timing of Disclosure

The Arthur Wishart Act requires a disclosure document be provided to all prospective franchisees at least 14 days in advance of the earliest of:

1. the prospective franchisee signing any agreement relating to the franchise; and
2. any payment of consideration on behalf of the prospective franchisee to the franchisor or franchisor's associate relating to the franchise.

Exceptions:

1. No Obligation/Refundable Deposit Exception - An exception exists that permits a prospective franchisee to pay consideration to a franchisor if, the payment:

1. is a maximum of 20% of the initial franchise fee, to a maximum of $100,000.00;
2. is fully refundable, without any deductions; and
3. in no way requires the prospective franchisee to enter into a franchise agreement.

2. Confidentiality / Site Designation Agreement Exception – A further exception exists that permits a prospective franchisee to enter into an agreement in relation to the franchise if, the agreement only contains terms that:

1. require information/material provided to the prospective franchisee be kept confidential;
2. prohibit the use of any information/material provided to a prospective franchisee; or
3. designate a location, site or territory to a prospective franchisee.

Requiring the disclosure document be delivered at least 14 days in advance of payment and/or signing agreements, provides prospective franchisees an opportunity to undertake adequate due diligence and have sufficient time to consider the opportunity and make an informed business decision regarding the franchise opportunity, prior to committing to and/or investing money in the franchise.

Statement of Material Change

In the event a material change occurs after the franchisor delivers a disclosure document to a prospective franchisee, but prior to the prospective franchisee signing an agreement relating to the franchise and prior to receipt of consideration from the prospective franchisee (unless the same were an exception), the Arthur Wishart Act mandates a franchisor to provide the prospective franchisee with a written statement of such material change.

Material change is broadly defined in the Arthur Wishart Act to capture changes of the franchisor, franchise system or franchise etc. that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise.

Additionally, a statement of material change is required to include a certificate certifying the accuracy and the fact that the statement includes every material change. The certificate is required to be dated and signed by:

1. the franchisor if the franchisor is not incorporated; or
2. if the franchisor is incorporated, and if:
   1. the franchisor only has one director or officer, then the certificate shall be signed by that person; or
   2. the franchisor has more than one officer or director, then the certificate shall be signed by at least two persons who are officers or directors.

Acceptable Methods of Delivering the Disclosure Document:

1. personally;
2. registered mail;
3. electronically provided that the document can be viewed, stored, retrieved and printed and such other specified requirements are satisfied; and
4. pre-paid courier.

Understanding franchise law is crucial for both franchisors and franchisees/prospective franchisees. The complexities of franchise agreements, disclosure requirements, and regulatory compliance demand careful consideration and expert guidance. By staying informed about the key aspects of franchise law, businesses can navigate the legal landscape more effectively, ensuring that their franchise operations are both legally sound and successful. For anyone involved in the franchise industry, remaining updated on legal developments and seeking professional advice can make a significant difference in achieving long-term success.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.