Published on November 23, 2017
Posted in: Blog, Peter Viitre
On November 14, 2017 Ontario’s Bill 154, the Cutting Unnecessary Red Tape Act, 2017, received Royal Assent and, in doing so, amended the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act” or the “Act”) in a number of positive ways.
First, the Wishart Act was amended to allow franchisors to enter into confidentiality agreements and location or territory reservation agreements, as well as to take fully-refundable deposits of $20,000 or less, without triggering the disclosure obligation. This brings Ontario into line with other provinces, most notably British Columbia, and, particularly with the permitted use of confidentiality agreements, allows Ontario franchisors to engage in prudent business practices that are accepted in some form in most jurisdictions around the world.
Second, a number of the Act’s exemptions received badly-needed clarifications, including the following:
- the Act contains an exemption for a licence granted by a licensor to a single licensee (the “single licence exemption”) – the exemption has been clarified to state that the relevant licence must be granted for Canada in order to trigger the exemption;
- the Act contains a disclosure exemption for a franchised business that is to be operated within a larger business (the “fractional franchise” exemption) where the sales of the franchised business are not expected to exceed 20% of the sales of the larger business – the exemption has been clarified to state that the time period for measuring the anticipated percentage of sales is the first year of operation of the franchise;
- the Act contains a disclosure exemption where the prospective franchisee is or was a director or officer of the franchisor (the “director and officer” exemption) – that exemption has been expanded to apply to corporations controlled by the director or officer, but the exemption now expressly expires 4 months after the director or officer left the franchisor; and
- the Act contains disclosure exemptions both for situations where the prospective franchisee is required to spend less than $5,000 to acquire and operate the franchise (the “de minimis investment” exemption) and where he or she is required to invest more than $5,000,000 on the acquisition and operation of the franchise in its first year (the “large investment” exemption), but unfortunately, the Act has never provided any guidance as to what goes into either of those calculations. With the current amendments, the Act now states that each amount (now referred to as the “total initial investment”) is to be determined as prescribed under the Regulations. Further, it’s expected that the Regulations will be amended to require that the total initial investment be calculated in the same manner as the “franchisee’s costs associated with the establishment of the franchise” under section 6(1)(i) of the existing Regulation.
Finally, the Wishart Act now provides that a “statement of material change” – whose precise form and content have always been unclear – will have to contain the elements prescribed by Regulation.
These changes were recommended by Ontario’s Business Law Advisory Council (the “BLAC”), on which I serve as Chair of the Franchise Working Group, in its Fall 2016 Report, which can be found here. Still to come are the BLAC’s second round of recommendations, contained in its Fall 2017 Report, which is expected to be released by the Ontario Government for public consultation in the coming weeks. This second round of recommendations builds on the first and addresses such issues as the definition and scope of “material facts”, the standard to be used in assessing a franchisor’s compliance with its statutory disclosure obligations, and the ability to use franchise disclosure documents prepared for use in other jurisdictions in Ontario. The BLAC also recommends a number of other amendments that will inject further certainty into the disclosure compliance process for the benefit of both franchisors and franchisees, as part of its ongoing mandate to assist the Government in streamlining its corporate and commercial legislation and making Ontario a more welcoming place to do business.