Many franchisors find themselves asking: should we issue a statement of material change (SMC) or provide new disclosure altogether?
Understanding a “material change” under Ontario law
The Arthur Wishart Act (Franchise Disclosure), 2000 (AWA) defines a material change as any change related to the franchisor or the franchise system that could reasonably be expected to have a significant adverse effect on the franchise being granted, or on a prospective franchisee’s decision to acquire it.
Ontario courts have interpreted this broadly, encompassing changes in a franchisor’s business operations, capital, or control, as well as instances such as a franchisee rescinding another location.
When such a change occurs, a franchisor must provide an SMC as soon as practicable, and crucially, before the signing of the franchise agreement or the payment of any fees by the prospective franchisee.
When to issue new disclosure
By contrast, new disclosure is required when the original disclosure is deficient. This may occur where there has been a misrepresentation, such as an untrue statement of a material fact or the omission of one.
In these cases, the franchisor must provide a fresh disclosure document, effectively restarting the process. The franchisee must receive this new document and then be given at least 14 days before signing any agreement or paying any fees. In essence, both parties start from a clean slate, as if the initial disclosure never occurred.
Practical scenarios: SMC vs. new disclosure
| Factual scenario | SMC or new disclosure? |
| New financial statements issued after the franchisor’s fiscal year end (post-initial disclosure but before the 14-day period) | New disclosure |
| Discovery that financial statements in the initial disclosure document were not signed by all directors | New disclosure |
| Change in ownership structure of the franchisee corporation | Neither – not a material change or material fact |
| Changes to the franchise agreement during negotiations after initial disclosure but before signing | SMC |
| A new civil court judgment against the franchisor (unrelated to the franchisee) during the 14-day cooling-off period | SMC |
| Opening new franchise outlets in other locations | Not a material change |
| New renovation requirements on renewal for an existing franchisee | Not a material change |
The bottom line
The distinction between an SMC and new disclosure is not merely procedural; it is central to managing legal risk. Franchisors should carefully assess whether a change qualifies as a material change, warranting an SMC, or reveals a previously undisclosed material fact, requiring new disclosure.
Either mechanism, when used appropriately, helps protect against potential rescission claims and ensures compliance with Ontario’s franchise disclosure requirements.
This article comes courtesy of Dipchand LLP, leading franchise legal specialists in Canada dedicated to helping franchisors and franchisees navigate disclosure compliance, system growth, and the evolving landscape of franchise law.
