1. FRANCHISE DISCLOSURE
The Nuts and Bolts

2. Introduction
5 provinces with franchise disclosure legislation – British Columbia is next
Significant remedies for franchisees
More court cases everyday
Sometimes even minor administrative errors create disastrous consequence

3. Disclaimer
This webinar is intended to outline the basics of compliance with the disclosure requirements of these statutes, to draw attention to the most common pitfalls and to outline best practices to keep errors and omissions to a minimum.
This webinar is not intended to be legal advice for the attendees or to replace the need to use other material in the preparation of franchise disclosure documents or for competent legal advice from a lawyer experienced in franchise law.

4. Triggering Events for Disclosure
Payment of money
Signing of agreements
Exception, with conditions, for deposit agreements

5. One Document Everything must be delivered as one document at one time
Exception in Manitoba
Date of delivery is date the last document is delivered
Very little else about the form of the FDD
Emphasis is on content

6. Delivery Methods Personally or registered mail
Only Manitoba, PEI and New Brunswick permit electronic delivery with specific requirements

7. When Delivered?
An FDD must be delivered not less than 14 days before the prospective franchisee signs an agreement or pays any money relating to the franchise.
Challenge: It is best to make the 14 days clear days, i.e. do not count the day the FDD was delivered and do not take money or have documents signed on the 14th day following delivery.

8. Who Should Receive an FDD?
If individual franchisee(s), then each one
If franchisee is a corporation, then the corp.
All guarantors

9. Certificate
Originally signed and dated certificate must be included in and FDD
One signature if only one director or officer
Two signatures if more than one director or officer

10. Receipt Not required by any of the statutes
Absolutely critical in any legal proceeding

11. Record Keeping
A complete copy of the signed FDD and all signed receipts should be retained for proper record keeping and any future challenge or litigation.

12. Material Facts Defined very broadly in all of the statutes
In addition to specified information
Could be just about anything
Most important is if the fact would have reasonably been expected to have a significant impact on the decision of a prospective franchisee to purchase the franchise, or the price the prospective franchisee would be willing to pay

13. All Agreements Must be Attached to FDD
This means every agreement
Should include agreements the franchisee is required to sign with third parties

14. Other Attachments and Information for the FDD
The table of contents for the system operating manual should be attached to the FDD, (which is mandatory in Manitoba and New Brunswick). In Manitoba only, if no manuals are to be provided, there must be a statement to that effect.
Concern where the franchise agreement incorporates the manual into the agreement

15. Earnings Claims and Operating Costs Projections
Optional in all statutes
If providing them then need:
assumptions, accuracy, place where information substantiating claims and projections can be inspected
Can be a challenge to avoid being misleading

16. Financial Statements of the Franchisor
Exemption for larger more mature franchise systems
Must be audited or review engagement
For last completed fiscal year plus 180 days
New corporation only needs opening balance sheet
Avoid consolidated statements

17. Disclosure for Specific Circumstances

18. Renewals Exempt from disclosure in Alberta
Exempt in other provinces, provided there is no material change since the signing of the original franchise agreement
Best practice is to disclose in any event

19. Renewals Continued Areas for adaption of pro-forma FDD:
costs to renew instead of costs to establish
attach copies of agreements dealing with renewal only
revise references to provisions of franchise agreement that have changed

20. Resales of Franchises by Franchisees
Exemption, with conditions, in all provinces
Tricky condition is "by or through the franchisor”
Best practice is to always disclose

21. Resales Continued Areas for adaption of pro-forma FDD:
description of the transaction and the franchisor’s role
attach copies of agreements dealing with the resale only and specifically, i.e. assignment or new franchise agreement
costs to establish the franchise should be replaced with the costs necessary to effect the purchase of the franchise, i.e. refurbishing

22. Sale of a Corporate Unit
Areas for adaption of pro-forma FDD:
terms of purchase instead of costs to establish
add copy of agreement of purchase & sale
add all relevant historical financial and operational information concerning the business

23. Provinces Without Franchise Legislation
A good practice, but optional
Include a cover letter stating:
disclosure not required and prospective franchisee should be cautioned that the information included in the FDD may not relate to the province in which the franchise business will be operated or the franchise being acquired and that the FDD is being provided for information purposes only
No certificate should be given

24. U.S. Franchisors
U.S. franchisors are very familiar with franchise disclosure legislation, as they must comply with U.S. federal and many state regulations. While the Canadian provincial franchise statutes have many similarities to the U.S. statutes, there are some fundamental differences which must be taken into consideration when a U.S. franchisor enters the Canadian market.

25. Master Rights for All of Canada
While no court has ruled on the question, it is widely assumed that most of the provincial statutes take jurisdiction when master or other franchise rights are granted for all of Canada. Best practice dictates that a U.S. franchisor provide a franchise disclosure document, which is compliant with all of the provincial franchise statues, to such a prospective franchisee.

26. Use of U.S. Disclosure Documents
Use of wrap-around disclosure is permitted or not prohibited
However, cost and time to conform very close to creating a Canadian FDD
Concern about the “clear & concise” requirement

27. Costs
Care needs to be taken to adjust anything that is different in Canada than in the U.S., i.e. construction costs, costs of supplies and inventory, operating costs, labour costs, leasing costs, food costs, etc.

28. Financial Statements
U.S. financial statements may be used, but they need to be prepared in accordance with standards that are at least equivalent to the Canadian standards
Popular in the U.S. to have consolidated financial statements, which could be a problem

29. Updates No annual update required in Canada
All information must be current as of the date of the delivery of the FDD, unless specifically related to fiscal periods

30. Updates Continued Some items that often change: directors and officers
costs of establishing the franchise
litigation, insolvency proceedings and administrative proceedings
list of existing franchisees

31. Updates Continued
As soon as new financial statements are prepared for the previous fiscal year, they must replace the existing financial statements used in the franchisor's standard form FDD. Such new financial statements must be prepared no later than 180 days following the end of the last fiscal year

32. Updates Continued The following items relate to fiscal years:
advertising contributions and expenditures
former franchisees – 1 year and 3 year categories

33. Material Changes
Definition is similar to “material facts”, except that only negative facts are relevant
Need to disclose if arise after disclosure and before signing or payment of money
Only the provinces of New Brunswick, Manitoba and Prince Edward Island prescribe any form and technical requirement for a notice of change, other than the notice merely has to be in writing

34. The Unknown
What to do when key information or documentation is simply not available at the time of disclosure, i.e. no location or lease?