Complying with Ontario’s franchise disclosure requirements: Continuous disclosure

Under the Arthur Wishart Act (Franchise Disclosure), 2000, Ontario’s franchise disclosure statute, franchisors are required to provide prospective franchisees with a disclosure document containing all disclosures required by the statute’s regulations, as well as all material facts regarding the franchise to be granted to prospective franchisees.  Even after a disclosure document has been provided to a prospective franchisee, a franchisor is obligated to issue a material change statement to the prospect if a material change has occurred from between the time of the initial disclosure and the date on which the prospect has signed any document or paid any amount to the franchisor (with some exceptions). Prudent franchisors therefore regularly revise and update their disclosure documents, and they do not wait to do so on a scheduled or intermittent basis.  

Avoiding litigation

The question of updating disclosure documents, addressing material changes and the currency date of the disclosure documents are critical to managing an effective disclosure practice.  Failure to provide prospective franchisees with an up-to-date and accurate disclosure document may have grave consequences as it may provide an aggrieved franchisee with some powerful statutory remedies, including a recission claim which would require the franchisor to refund to the franchisee any money received from or on behalf of the franchisee, to purchase back any inventory, supplies and equipment and to compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise.  

In addition, breach of the disclosure obligation could give rise to a right of action for damages as against the franchisor, its associate, brokers and agents and every person who signed the disclosure document or statement of material change.  

While franchisors are obligated to provide continuous and up-to-date disclosure, many US and other foreign based franchisors simply ignore this obligation and only update their documents on a semi-annual or annual basis.  This dangerous practice is particularly evident with US franchisors who are unaccustomed with the Canadian franchise disclosure practice of continuous disclosure, as US franchisors are more inclined to prepare amendments to their US FDDs on an annual or semi-annual basis.  US franchisors do so because they wish to avoid incurring the costs associated with US based franchise disclosure registration requirements.  

Recommendations

Due to the continuous disclosure requirements imposed by the Ontario franchise disclosure legislation, franchisors are urged to regularly review their documents for accuracy and to update them as facts and circumstances change.  Some of the matters typically addressed in a disclosure document review since the last disclosure document issued include the following items:

1. Has there been a change in the directors or officers of the franchisor?
2. Has there been a reorganization of the franchisor and its affiliated entities?
3. Has there been a change in personnel at the officer or director levels in association with the franchisor?
4. Has the franchisor violated any laws, or is there any litigation or bankruptcies?
5. Has the franchisor prepared financial statements for the recently completed fiscal year?
6. Have the costs associated with establishing the franchise changed since the date of the last disclosure document?  
7. Is there a need to update the percentages of the brand fund spent and retained on national and local marketing campaigns for the 2 fiscal years immediately preceding the date of the disclosure document?   
8. Has the franchisor added or deleted any trademarks from its list of trademarks associated with the system or have the applied for marks proceeded to registration?
9. Has there been any change in the number of terminations, cancellations, non-renewals and repurchases by franchisor within the last 3 fiscal years?
10. Have there been any closures within the last fiscal year immediately preceding the date of the disclosure document?
11. Has there been any change in the list of locations of all franchises in Ontario?
12. Are there any other material facts that have arisen since the date of the last disclosure document?