Providing a disclosure document that complies with Ontario franchise law can be an arduous undertaking, and we have written extensively in the past on the importance of meeting those requirements. What can be overlooked by franchisors is that the need to focus on disclosure does not end once the disclosure document has been drafted – a franchisor’s disclosure document is truly an evergreen document. A disclosure document is not analogous to an annual report or a financial statement; it is not reflective of a period of time or updated at one time of year. Disclosure documents must be specific to the moment when the franchisor provides them to prospective franchisees. The consequences of providing outdated disclosure can be as drastic and draconian as providing no disclosure at all.
The purpose of a disclosure document is to set out all regulated and other material facts which might influence a prospective franchisee’s decision to invest or not invest in a specific franchise opportunity. When those facts change, or facts exist that are relevant to a particular prospective grant, the disclosure document which the franchisor may have used initially may no longer be compliant.
The franchisor must take steps to provide the prospective franchisee with current and compliant disclosure before entering into any formal agreement or accepting funds. Whenever a “material change” has occurred since the date of the disclosure document, the Act requires a franchisor to provide a “statement of material change” to supplement the disclosure document provided to the prospective franchisees.
Don’t Fear Change
It has become common practice for franchisors to disclose each time a franchise agreement is entered into, extended, or renewed. However, the Act’s definition of “material change” reveals that franchisors may take a more pragmatic approach by considering the nature of any changes that have occurred in the franchise system from time to time.
Under the definition in the Act, a material change “means a change in the business, operations, capital or control of the franchisor or franchisor’s associate, a change in the franchise system or a prescribed change, 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…”
The phrase “significantly adverse effect” has been too often overlooked, even though it has a significant effect on the franchisor’s obligations to disclose. Not every minor change to a franchise system requires a revamped disclosure document or a statement of material change. The franchisor must closely track and consider all changes for their impact on existing and potential franchisees. If the noted changes cannot reasonably be expected to have an adverse effect on franchisees, the disclosure is still valid and the franchisor is shielded from the severe remedies for non-disclosure.
A healthy franchise system will be constantly evolving. As a result, franchisors must keep their eyes focussed on their disclosure document to keep it evergreen. But disclosure obligations are not intended to lock franchisors into certain practices. Change is a welcome and necessary component to a franchise system, and even changes that have potentially adverse effects may be inevitable. Disclosure obligations are intended to bring those potentially adverse effects into the open.
As we commonly advise franchisors after the preparation of an initial disclosure package, each person in the organization would be wise to ask themselves at the end of each day whether anything that occurred that day would have an adverse impact on the value of the franchise or a potential franchisee’s decision to invest. If so, those changes ought to be recorded and considered for purposes of keeping their disclosure package evergreen.