Canada is an attractive but highly regulated market for foreign vehicle original equipment manufacturers (“OEMs”). Canada has a safe and stable economy and adheres to the rule of law, making it an attractive destination for OEMs looking to introduce their products into new foreign markets. While the Canadian marketplace often appears similar to the United States at first glance, dealer regulation, franchise protections, different legal systems, tariffs, environmental law requirements, data privacy laws, consumer protection laws, and countless other regimes create a very distinct legal and commercial environment. Careful dealer network structuring at the outset is critical to avoiding regulatory friction, dealer disputes, and costly restructuring later.

This article outlines certain principal considerations non-Canadian OEMs should review when expanding into the Canadian marketplace and designing a Canadian dealer network.

1. Choosing the Right Market Entry Structure

Many OEMs enter Canada by establishing a wholly-owned Canadian subsidiary entity, which contracts directly with dealers and manages national distribution, marketing, and compliance. This structure offers simplicity regarding certain tax, employment, regulatory, and other matters, while also providing liability containment.

Alternative models, such as appointing an independent importer and distributor, may offer speed to market, but may also result in reduced brand control and imaging and increased difficulty transitioning to a direct manufacturer-dealer relationship later. Once dealers are entrenched under a third-party distributor, re-alignment can be highly contentious and expensive.

Regardless of the model an OEM ultimately adopts, early cross-border tax planning is essential. Canada’s corporate tax, sales taxes, transfer pricing, and withholding tax regimes, among other considerations, can materially affect OEM and dealer economics, pricing, and overall profitability if not considered and addressed upfront. Misalignment between legal structure and tax planning can result in compliance exposure and costly retroactive restructuring.

2. Dealer Network Architecture and Coverage Strategy

Canada’s geography, population distribution, and climate materially affect the planning and breadth of any proposed dealer network. While Canada is geographically vast, its population is highly concentrated in a small number of urban corridors, namely southern Ontario, Québec’s St. Lawrence corridor, and pockets of British Columbia and Alberta. This leaves a number of regions with low population density and long travel distances between service points. This uneven distribution complicates dealer placement, service coverage, and vehicle and parts logistics.  Moreover, with the country’s latest emphasis on increased immigration, the country’s population has grown significantly over the last five years.

In the seven provinces in Canada that have (or will soon have) franchise disclosure and relationship laws, including Ontario, British Columbia, and Alberta, OEMs should be aware that automotive dealerships generally constitute “franchises” under such laws (regardless of how the contract attempts to define each party and their relationship). As a result, a franchise relationship will often exist between the OEM and each dealer, even if one is not intended, imposing additional franchise disclosure and relationship obligations on the OEM.  Failing to recognize and comply with these obligations will have significant monetary and reputational impacts on OEMs, and may serve to severely impact an OEM’s entry into the Canadian marketplace.

Moreover, certain OEMs have been moving away from the traditional franchisee dealer model to an agency or direct-to-consumer (D2C) model, where dealers are no longer directly responsible for owning and selling each vehicle, but instead fill certain other primary functions, such as vehicle delivery, test drive and customer touchpoints, service, and used vehicles sales. The reasons for this transition include OEMs making an effort to establish stronger ties with purchasers and reducing floor plan requirements for its dealers, all the while capturing a greater share of the profits to be made from selling new vehicles.

For this and other reasons, and together with the increasing prevalence of direct to consumer and/or hybrid agency models for vehicle sales, certain key considerations for any dealer network include:

• Whether to adopt a traditional franchise dealer model, an agency (D2C) model, or a hybrid between the two models, and whether to apply the chosen model(s) to all of the OEM’s vehicle lines or only to a select line(s).
• How to ensure adequate national and regional coverage, including rural and remote markets, if such markets are to be included in a proposed network.
• Whether dealers may operate single-brand or multi-brand rooftops, including whether existing dealers of other OEMs would be considered to further adopt a new entry OEM.

Manufacturers should expect scrutiny from dealers around network density, point allocation and closures, the opening of additional locations—particularly in growing urban markets, and facility requirements. Dealers currently operating dealerships of other OEMs may also face restrictions in their ability to take on new OEM banners.

3. Dealer Agreement Design and Termination Risk

Dealer agreements in Canada must balance brand control with enforceability and commercial realities. As dealer relationships may last for years, or even decades, such agreements need to be thorough, well-drafted, and as forward looking as possible. Moreover, dealer agreements must provide dealers with a reasonable opportunity to recoup their investment in the dealership. As discussed above, dealer agreements typically constitute “franchise agreements” under applicable franchise disclosure and relationship laws.

Critical drafting considerations include, but are not limited to:

• Term length, renewal rights (if any), and clearly defined performance criteria;
• Facility, branding, staffing, training, and equipment standards;
• Floorplan requirements;
• Sales performance and operational criteria;
• Export restrictions (to avoid grey-marketing);
• Ownership, assignment, and change of control provisions;
• Termination rights and notice periods; and
• Many other legal and business considerations.

4. Provincial and Federal Legal and Regulatory Considerations

Canada’s federal system has a material and often underestimated impact on foreign OEMs and other businesses expanding into the Canadian marketplace. Legislative authority is divided between the federal government and Canada’s ten provinces and three territories, resulting in multiple overlapping regimes across varying laws, regulations, and industries. While matters such as competition law, customs, and certain safety standards are in the federal domain, provinces regulate (among other things) dealer licensing, consumer protection, franchise and disclosure laws, employment standards, and aspects of sales tax and environmental compliance.

With respect specifically to dealer regulations and licensing (such as Ontario’s OMVIC framework), such matters are provincial in nature. As a result, OEMs may need to juggle and maintain compliance with multiple provincial frameworks at any given time. OEMs should also be mindful of laws and regulations, whether at the federal or provincial level, of:

• Advertising and marketing laws, including signage.
• Franchise disclosure laws.
• Competition laws.
• Consumer protection laws.
• Language laws, including in the province of Quebec.
• Environmental laws and mandated emission standards.

Successful expansion into or further into Canada therefore requires a coordinated national strategy that is deliberately adapted to provincial realities, rather than a one-size-fits-all approach.

5. Data, Digital Retail, and Customer Ownership

Data is becoming an ever-important tool and asset for businesses of all types, including OEMs. The nature of the products and services sold by OEMs and their dealers allows manufacturers to be especially-well positioned to capitalize on the ability to collect and employ significant data, including data about its customers.

That being said, OEMs should be acutely aware of the large number of rules and regulations governing data collection, use, disclosure, storage, and destruction in Canada. At the federal level, the Personal Information Protection and Electronic Documents Act (PIPEDA) governs the collection, use, disclosure, storage, and destruction of personal information in commercial activities, while several provinces have enacted enhanced private-sector privacy regimes that impose even stricter requirements.

For OEMs, these laws directly affect digital retail platforms, dealer CRM systems, marketing programs, connected-vehicle and telematics data, and cross-border data transfers. PIPEDA and other legislation places significant emphasis on meaningful consent, purpose limitation, and accountability across the entire data lifecycle. As a result, OEMs expanding into Canada must carefully align their data architecture, dealer agreements, and customer engagement strategies to ensure compliance across multiple jurisdictions’ laws, rules, and regulations – even when all interaction is between the customer and the dealer.

6. Dispute Resolution

To mitigate litigation risk with dealers, OEMs should carefully consider the provisions of their dealer agreements, with mechanisms existing to manage disagreements or issues before and after they escalate into formal conflicts and litigation. This can be achieved through provisions such as:

• Dealer advisory councils created and maintained by the OEM;
• Escalation and remediation frameworks; and
• Tiered dispute resolution clauses (such as mediation and arbitration).

In parallel, most OEMs selling vehicles in Canada participate in the National Automobile Dealer Arbitration Program (often referred to as NADAP), an industry-funded mediation and arbitration program that provides binding dispute resolution for disputes between OEMs and their dealers. Although NADAP is not mandatory for OEMs, most OEMs operating in Canada have adopted it as it provides a more efficient and confidential process than dealing with disputes through the courts, and by having disputes mediated and arbitrated by individuals with specific automotive knowledge and experience.  Foreign OEMs should carefully assess whether their vehicles, distribution model, and market entry plans necessitate participation in NADAP and ensure that their agreements and internal escalation processes are aligned accordingly.

Finally, since Canadian provincial franchise legislation expressly permits franchisees to associate amongst themselves, it should be noted that dealer associations are quite common in Canada and may, depending on the situation, either simplify or complicate the dispute resolution process.

Conclusion

Canada is a stable, sophisticated, and attractive market with significant automotive history and expertise for OEMs, but it is not a “plug-and-play” extension of other jurisdictions. Manufacturers that invest early in thoughtful dealer network structuring, compliance, and balanced dealer economics are far better positioned for sustainable growth and brand stability.

Being informed of all of the various issues impacting OEMs and making sound business decisions will be essential for an OEM to successfully expand into Canada.  This includes carefully considering the operational, contractual, and legal elements of a proposed expansion into Canada.  If you have any questions about expanding into Canada, Sotos LLP can help. Sotos LLP has extensive automotive experience in advising new and established OEMs in all facets of their business.

Please contact Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca , John Yiokaris at 416.977.3998 or jyiokaris@sotos.ca, or Peter Viitre at 416.977.7754 or pviitre@sotos.ca,  to discuss your automotive industry related inquiries.

About the Authors

Jason Brisebois, Sotos LLP

Jason Brisebois is a partner at Sotos LLP. His practice focuses on corporate, commercial, and franchise law, with a particular emphasis on the automotive sector.

Jason was awarded the Lexology 2024 Client Choice Award, is listed as “Ones to Watch” in Best Lawyers in Canada, and is recognised as “Recommended” in Lexology Index: Canada. He has also been named a “Legal Eagle” by Franchise Times Magazine.

John Yiokaris, Sotos LLP

John Yiokaris is a partner at Sotos LLP and serves as co-managing partner of the firm. He has extensive experience acting as lead counsel for major automotive manufacturers and dealers. John is also head of the firm’s Trademark practice and advises on intellectual property matters, including the registration and licensing of trademarks.

John was awarded the Lexology 2019 Client Choice Award, is ranked by Chambers Canada, and has been consistently listed in Best Lawyers in Canada. He is also recognised in the Best Lawyers Global Business Edition, listed in the Canadian Legal LEXPERT Directory, and recognised in Lexology Index: Canada. John was inducted into the Franchise Times “Hall of Fame” in 2022.

Peter Viitre, Sotos LLP

Peter Viitre is a partner at Sotos LLP and head of the Corporate and Commercial practice. He regularly advises domestic and international clients, including in the automotive sector, on market entry, dealer and franchise network structuring, regulatory compliance, and risk management across Canada.

Peter is ranked in Band 1 by Chambers Canada, has been consistently listed in Best Lawyers in Canada, and has been named “Lawyer of the Year” by Best Lawyers in Canada in 2015 and 2018. He is also recognised in the Best Lawyers Global Business Edition, listed as “Most Frequently Recommended” in the Canadian Legal LEXPERT Directory, and recognised as “Recommended” in Lexology Index: Canada. Peter has further been recognised as “Most Highly Regarded” and as a “Global Elite Thought Leader” by Lexology Index, and was inducted into the Franchise Times “Hall of Fame” in 2022.

The post Vehicle Sales in Canada: How Foreign OEMs can structure a compliant and efficient Dealer Network appeared first on Sotos LLP.

The Canadian Trademarks Opposition Board announced the Pilot Project in December 2024. Beginning January 2025, the Canadian Intellectual Property Office (“CIPO”) will send notices to registered trademark owners asking them to prove that their trademarks are actively in “use” in Canada. If the registered trademark owner is not able to provide proper evidence, the trademark registration may be cancelled.

Background

Unlike other countries, Canada does not require trademark owners to provide evidence of use of their trademarks prior to a mark being registered or to file any evidence during the lifespan of the registration that the trademark owner continues to use the registered mark.

Under Section 45 of the Canadian Trademarks Act (the “Act”), the Registrar can ask a trademark owner to prove that it has been actually using its trademark in Canada over the past three years. If the trademark owner is not able to provide evidence that the trademark as been in use, and that there is no exceptional circumstances for the non-use, the trademark registration can either be changed to only cover the goods and services that are actually being used or the registration may be cancelled entirely.

Who will be examined?

Registered trademarks will randomly be picked from the following categories:

• registrations based on use;
• registrations that said they would be used in the future, and proof of use was given;
• registrations that are used or registered in another country;
• registrations that fall into more than one of these categories; or
• registrations that have been registered for more than three years.

What is the purpose of the Pilot Project?

The goal of the Pilot Project is to ensure that the Trademark Register includes only trademarks that are actively being used in Canada. It is essentially cleaning up old or unused trademarks – as CIPO has stated, clearing out the “deadwood” from the Trademark Register.

The Pilot Project has three main goals:

• make it easier and faster for businesses to register new trademarks;
• help to maintain fairness by getting rid of unused trademarks that block new ideas for brands; and
• keep the trademark system honest by ensuring the Trademark Register only shows active trademarks and what they are being used for.

How will the Pilot Project work?

The Pilot Project will happen in two steps.

Step 1: Starting in January 2025, CIPO will send out 100 notices. Then, in February and March 2025, CIPO will send out two more groups of 50 notices each. The notices will target trademarks that are over three years old, and will ask trademark owners to prove that they have been using their trademarks in Canada over the past three years.

Step 2: CIPO will ask the public for feedback on the project. CIPO is hoping to gather information on whether the process should be permanent and how it should work in the future.

How to respond to a notice?

To help trademark owners, CIPO has shared resources, such as a guide and sample affidavit, to help prepare evidence. However, CIPO warns that any evidence submitted will be made public, as required by Section 29(1)(f) of the Act. Trademark owners should therefore be careful not to include personal or sensitive business information that is not necessary and should redact the information before submitting. It is strongly recommended that you speak with legal counsel experienced in trademark matters to assist you in responding to any notice from CIPO.

Registered trademark owners can prove that their trademark was used in Canada in the last three years by submitting a detailed affidavit or statutory declaration, complete with exhibits and supporting evidence. This document should confirm that the trademark is being used in Canada and include examples to demonstrate how the trademark was used for all the goods and/or services listed in the registration.

If the trademark has not been in use, registered trademark owners can submit an affidavit or declaration explaining why the trademark has not been in use and if there were any special circumstances. The Registrar will consider:

• how long the trademark was not used;
• if the reason for not using the trademark was out of the owner’s control; and
• if the owner plans to start using the trademark again soon.

Trademark owners must send their evidence demonstrating use within three months of getting the notice from CIPO. If the trademark owner fails to do so, CIPO may unilaterally cancel the trademark registration.

Why is this important?

With the Pilot Project sending out Section 45 notices more often, trademark owners need to be ready to prove that they are actually using their trademarks in Canada. This includes keeping copies of invoices, photographs of products, and marketing materials that show the trademark is being used with the goods and/or services that it is registered for. Trademark owners need to be proactive not only to protect their trademark but also to follow CIPO’s rules and requirements.

For more specific details on the Pilot Project, please see the Government of Canada’s practice note.

How can Sotos LLP help?

If you receive a Section 45 notice, want to review the status of your registrations, or have any other trademark related concerns, Sotos LLP can help. Specifically, we can assist in ensuring that your evidence is properly prepared and submitted to meet CIPO’s requirements.

At Sotos LLP, we have acted for hundreds of trademark owners in every aspect of protecting their intellectual property for more than 40 years. We have extensive knowledge of intellectual property issues, and regularly act in the procurement and licensing of trademarks, as well as in defending our clients’ trademarks rights and opposing trademark applications on behalf of our clients.

Please contact John Yiokaris at 416.977.3998 or jyiokaris@sotos.ca or Bailee Kleinhandler at 416.573.7311 or bkleinhandler@sotos.ca to discuss your intellectual property and trademark issues.

The post Clearing Out the “Deadwood”: CIPO’s Pilot Project Puts Section 45 on the Fast Track appeared first on Sotos LLP.

For automotive dealers, the investment required to establish a new dealership can be significant, covering everything from tools and machinery to vehicle inventory and due diligence, along with other associated start-up costs. Meanwhile, manufacturers face ongoing challenges of staying competitive in a rapidly evolving automotive market. A key strategy for manufacturers to remain relevant is ensuring a sufficient number of dealerships exist to meet customer demands and expectations. However, this strategy can sometimes lead to conflicts known as “encroachment”.

Understanding Encroachment

Encroachment occurs when a new dealership is opened or an existing one is relocated closer to another dealership in the same network. Such moves often lead to disputes between existing dealers and manufacturers. To mitigate these conflicts, manufacturers typically include provisions in their dealership agreements that reserve the right to establish new locations or relocate existing ones. However, beyond the agreement’s terms, both dealers and manufacturers need to be mindful of other important factors, such as standards set by the National Automobile Dealer Arbitration Program (NADAP), if applicable, and the obligation to engage in good faith dealings.

The Role of NADAP

NADAP was established to provide a structured process for resolving disputes between manufacturers and dealers for those manufacturers and dealers that have opted into NADAP. Initially, parties are encouraged to use the manufacturer’s internal dispute resolution process. However, if that process is unavailable or fails to resolve the issue, mediation through NADAP is the next step.

For encroachment disputes, Rule 6 of NADAP is particularly important. This rule grants manufacturers the right to determine the size and structure of their dealer network, including the creation of new dealer points, relocation of existing dealerships, and appointment of new dealers. However, manufacturers are required to provide notice to existing dealerships before establishing a new dealership location or relocating an existing dealer point.

Generally, in metropolitan areas, an existing dealer selling identical vehicle brands as those of the proposed new dealer point or relocated dealership may challenge a new or relocated dealership within 8 km (20 km in non-metropolitan areas). If these distance requirements are not offended, an existing dealer cannot bring its NADAP challenge. While these distance requirements are a common basis for challenges, they are not definitive. According to Rule 6(e), even if the distance requirements are met, the dealer must also prove potential losses in sales and profits as a precondition for obtaining relief.

Good Faith Obligations

Separate and apart from any NADAP rules regarding new dealer points and relocation, pursuant to Canadian law, automotive manufacturers are required to exercise the powers granted to them by a dealership agreement honestly, fairly, and in good faith. Given the potential power imbalance between local dealerships and automobile manufacturers, courts work to ensure that neither party engages in conduct that undermines the core purpose of their business relationship.

How are courts dealing with claims of encroachment?

1. Consideration of dealer interests: Courts have clarified that even when a manufacturer retains broad powers under a dealership agreement, it must still consider the interests of existing dealers. Manufacturers are required to evaluate the potential adverse impact on individual dealers before making decisions that could affect them.
2. Case-by-case approach: Courts emphasize that every encroachment case is unique. As a result, an existing dealer must provide substantial expert evidence demonstrating that a new or relocated dealership would harm its financial interests.

Conclusion

When a dealer is granted an exclusive selling territory or a designated market area, it has a reasonable expectation that the manufacturer will not encroach on its territory. Manufacturers are under an obligation to treat their dealers fairly, and exercise the powers they have reserved for themselves under the dealership agreement in such a manner so as to not unfairly disadvantage their dealers. At the end of the day, a well planned dealership network not only meets the needs of the marketplace, but it provides its dealers with a favourable environment in which to obtain a reasonable return on their investment.

John Yiokaris, Partner

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Bailee Kleinhandler, Associate

Bailee is an associate in the corporate and commercial group of Sotos LLP. She is building a diverse practice in corporate and franchise law. Bailee can be reached by email at bkleinhandler@sotos.ca or by phone at 416.572.7311.

The post Keep your distance! appeared first on Sotos LLP.

Social media is fundamentally about sharing content, making the risk of copyright infringement ever-present in a climate of legal uncertainty.  Consider this scenario:  A customer posts a photo from her cell phone on Facebook of herself eating a burrito at a Mexican restaurant that was taken by her friend.  Who is the copyright owner of the photograph?

The Law in Canada

The question of who owns the rights in a photograph has an answer in Canada’s Copyright Act as amended by the Copyright Modernization Act in 2012. Prior to 2012, photographers were not the automatic copyright owners of their photographs; if a photographer took photos for a customer, copyright instead belonged to the individual who commissioned the photographs, as opposed to the individual who took them.  Since 2012, photographers have the same rights as other creators under the law, regardless of the nature of their work. Generally speaking, if you take a photo, you are the copyright owner.  In the case of the burrito photograph, it was the burrito-eater’s friend who snapped the photo.  While there are exceptions under the law, in this instance, the copyright owner is, in all likelihood, the burrito-eater’s friend.

Social Media and Copyright

Is it an infringement of copyright to post someone else’s photo on social media? Under Section 27 of the Copyright Act, “[i]t is an infringement of copyright for any person to do, without the consent of the owner of the copyright, anything that by this Act only the owner of the copyright has the right to do.”  So, if you post a photo on Facebook without permission of the copyright owner, generally speaking, it is an infringement of copyright.  There are, however, exceptions to this foundational rule:

1. Fair Dealing: This exception permits the use of copyrighted photographs in certain circumstances, including research, private study, criticism or review and news reporting.
2. User-Generated Content: Another exception applies to non-commercial user-generated content created using existing work which was published or otherwise made available to the public.
3. Personal Purposes: It is generally not an infringement of copyright for an individual to use for private or non-commercial purposes a photograph that was commissioned by the individual for personal purposes and made for valuable consideration.
4. Determining the applicability of these exceptions (as well as others) in practice raises a host of questions beyond the scope of this article. We will walk through copyright infringement exceptions in our next blog post in this series.

Now let’s take the example of the burrito-eater and her friend. The burrito-eater posted the photo on Facebook, but is not the copyright owner.  However, her friend encouraged her to post it, but asked to be tagged in the photo. In this scenario, it could be said that the burrito-eater’s friend gave her permission to use the photo on Facebook on condition that she be associated with the photo.  When the photo is publicly posted to Instagram by the burrito-eater, it is wildly popular and is shared on Instagram by hundreds of people within a few hours.  In fact, it becomes so popular that the Mexican restaurant owner sees a promotional opportunity and copies the photo and posts it to the restaurant’s Instagram account.  Does the Mexican restaurant owner have the right to do this?

Social Media Terms and Conditions

Navigating copyright laws is complicated by social media platform terms and conditions.  In a recent Quebec case, Chung c. Brandy Melville Canada Ltd., a photographer took photos for a company but limited the right of the company to use the photos.  The company was only permitted to use the photos on Instagram and Facebook as long as the photographer’s name was associated with the photos – any other use required a licence in writing.  The company later went on to use one of the photos in promotional postcards. The court found that the photographer was the author of the photo used commercially by the company and he had not authorized such use.

However, in the case, the question arose as to the impact of using Instagram to share photos. The company argued that Instagram’s rules and regulations stipulate that posting photos on the platform results in the loss of all intellectual property rights.  However, the matter was not proven as the rules and regulations were not produced into the court record. Nevertheless, the company’s argument raises an important question: how do social media platform terms and conditions affect copyright owners’ rights when photos are posted and shared publicly? How about when the photos are posted and shared by someone other than the copyright owner? The short answer is: it depends on the terms and conditions.

In the case of the burrito-eater, the photo was posted on Facebook with the permission of the copyright owner.  When you post a photo on Facebook, you grant Facebook (via its current Statement of Rights and Responsibilities) a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any intellectual property content that you post.   Basically, you grant Facebook the right to use your photos in advertisements or for other commercial purposes, to generate a profit from your photos, and to allow others (including other companies) to use your photos (all while not paying you a dime).  That being said, if you are the copyright owner of a photograph that you have posted on Facebook, you do not give up or dispose of all of your intellectual property rights when the photo is posted.

In the case of the Mexican restaurant owner, assuming he did not obtain permission from the copyright owner or a licence from Facebook, posting the photo on Instagram was an infringement of copyright and a violation of Instagram’s current Terms of Use.  Under Instagram’s Term of Use, you must comply with copyright laws and warrant that you own the photos posted by you on Instagram. Now let’s assume that the burrito-eater’s friend contacted the Mexican restaurant owner about the infringement and they end up entering into a licence agreement so that the Mexican restaurant can now use the photo for promotional purposes. However, let’s not forget about the burrito-eater who is the subject of the photo.  In this case, she is not comfortable with all of the attention the photo has generated.  So, what rights does our burrito-eater have?  The use of the photo in association with the promotion of the Mexican restaurant may involve certain rights held by the burrito-eater, including privacy and publicity rights.  We will save discussion of these rights for a later blog post.

Exercise Caution

In this age of social media, the rules around copyright and photography can be blurry. However, ignorance is not an excuse when it comes to copyright law.  An innocent copyright infringement is still an infringement and while, in most cases, the worst case scenario involves a demand to remove the copyrighted content, you may face more severe repercussions, especially if a photo is being used for commercial purposes. When in doubt, do some digging: review the terms of the social media platform you are planning on using, obtain permission in writing, consult a lawyer, and exercise caution.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

The post Social Media and Copyright: Can I Post that Photo? appeared first on Sotos LLP.

• Effective January 22, 2024, every privately held corporation registered under the CBCA must prepare and maintain a register of individuals with significant control over the corporation (“ISC Register”) and file that information with Corporations Canada. Federal private corporations should begin to review existing corporate records and procedures to prepare for the new information reporting requirements.

• Effective January 1, 2023, every privately held corporation registered under the OBCA must prepare and maintain an ISC Register. Ontario private corporations should begin to review existing corporate records and procedures to prepare for the new information reporting requirements.

• Effective October 19, 2021, Ontario-registered corporations must file their mandatory annual returns using the Ontario Business Registry (“OBR”). They can no longer file their annual returns through the Canada Revenue Agency using their corporate accountant.

1. Meeting the New Individuals with Significant Control Disclosure Requirements

• Registered shareholdings;
• Beneficial ownership;
• Direct or indirect control over shares;
• Direct or indirect influence that, if exercised, would result in control-in-fact of the corporation; and
• Interests or rights prescribed by regulations under the CBCA or OBCA, as applicable.

1. The name and date of birth of each individual with significant control;
2. The country (or countries) where the individual with significant control of the corporation is considered a resident for income tax purposes;
3. The address for service of each individual with significant control of the corporation;
   1. In the context of federal corporations, due to proposed legislation under Bill C-42 that would make some personal information from the register public, a preferred address for service should be provided. If no address for service is provided, Corporate Canada may make the individual’s residential address public in its place.
4. The day on which each individual became or ceased to be an individual with significant control;
5. A description of how each individual qualifies as an individual with significant control including, as applicable, a description of their interests and rights in respect of the corporation’s shares; and
6. A description of the steps that the corporation has taken during its financial year to ensure that:
   1. It has identified all individuals with significant control over the corporation; and
   2. The information in the register is accurate, complete, and current.

2. Meeting the New Annual Filing Requirements

The post Important Updates on Federal and Ontario Corporate Compliance Requirements appeared first on Sotos LLP.

Automotive dealers know all too well, the cost of establishing a new dealership is substantial. The showroom and service area must be constructed, the land must be developed, costly tools and machinery must be purchased, and an initial inventory of vehicles must be acquired. This is in addition to a host of additional costs associated with start-up, including conducting business due diligence, hiring professional advisors, and advertising expenses.

At the same time, manufacturers are under constant pressure to remain relevant in a hyper-competitive automotive market environment. In order to ensure that customers are adequately serviced, manufacturers are constantly re-evaluating key markets to ensure that an adequate number of image-compliant dealerships are available to meet customer needs and expectations. This constant tension between providing the best available standard of service to customers, while ensuring that individual dealerships are able to recoup their substantial investment, is an ongoing concern for dealers and manufacturers alike. Understanding whether the establishment of new dealer points or the relocation of existing dealerships is within the powers of the manufacturer, or otherwise an encroachment on the market area of a dealership, requires a careful consideration of the unique circumstances facing the existing dealership.

What is encroachment?

Put simply, encroachment occurs when a new automotive dealer point is established or an existing dealership is relocated in closer proximity to another existing dealership. This may occur in response to demographic or socioeconomic changes in a market area which has made the establishment of a new dealership point viable, or when an existing dealer has found better premises within its market area to relocate its dealership. Not surprisingly, the establishment of new or relocated nearby dealerships can quickly put existing dealers and their manufacturer into conflict.

Manufacturers will almost always include broad provisions in their dealership agreement reserving their right to manage the overall dealer network, including by establishing new dealer points or relocating existing dealerships. In addition to the terms of the dealership agreement, however, dealers and manufacturers alike should be mindful that a manufacturer’s ability to establish nearby dealerships is also affected by a variety of other requirements and considerations, including the guidelines set out in National Automobile Dealer Arbitration Program (NADAP), if applicable, and the obligation that manufacturers deal with their dealers in good faith.

The National Automobile Dealer Arbitration Program (NADAP)

If the manufacturer and dealers have opted into NADAP, the manufacturer must consider the NADAP rules when considering its right to establish a new dealer point or relocate an existing dealership. Under Rule 6 of the NADAP rules, the manufacturer has the right to determine the size and structure of its dealer body and to create new dealer points, relocate dealerships, appoint new dealers, and fill existing dealer points. The manufacturer is obligated, however, to provide notice to an existing dealership of its intention to create a new dealer point or relocate an existing dealership. Generally, in metropolitan markets, an existing dealer that sells identical vehicle brands as those of the proposed new dealer point or relocated dealership may challenge a new dealership that is established or relocated within 8 km of the existing dealer (20 km for nonmetropolitan markets).

If these distance requirements are not offended, an existing dealer cannot bring its NADAP challenge. However, the distance requirements are not an absolute rule. If the new dealer point or relocating dealership offends the distance requirements, the existing dealer must still prove that it is more likely than not that it will suffer a significant loss of sales and profits as a result of the new dealer point or relocated dealership.When considering whether encroachment has occurred, the arbitrator must balance the dealer’s alleged significant loss of sales and profits with the interests of the manufacturer in creating the new dealership or relocating the existing dealership, as well as the collective interests of the manufacturer and all of its dealers, and the interests of the customers of those dealerships.

The manufacturers’ Duty of Good Faith

Separate and apart from any NADAP rules regarding relocation, pursuant to Canadian law, automotive manufacturers are required to exercise the powers granted to them by a dealership agreement honestly, fairly, and in good faith. Considering that a power imbalance may exist between a local dealership, on the one hand, and an automobile manufacturer on the other, courts are keenly focused on ensuring that neither party, through its conduct, can defeat the very purpose they entered into business together in the first place.

On multiple occasions, the courts have been called upon by aggrieved dealers to rule on whether a manufacturer, through its establishment of a new or relocated dealership, is encroaching upon the territory of an existing dealer, which will, ultimately, harm the existing dealer’s profitability. The courts’ analysis in these cases have provided us two key insights into how such claims will be dealt with.

Firstly, the courts have confirmed that, even if a manufacturer reserves itself broad powers under its dealership agreement, this does not mean it can act without consideration of the interests of existing dealers. Although manufacturers are not required to prioritize the interests of an individual dealership over its own interests or those of the dealership system generally, they are required to consider the interests of that individual dealership when the manufacturer’s decision could have an adverse impact upon it. Manufacturers are well-advised to ensure that prior to taking any such action, proper consultation and studies are conducted to fully consider the impact
on existing dealers.

Moreover, the courts have stressed that each situation involving dealership encroachment is different, and the existing dealer will need to provide substantive evidence that the establishment of a new dealer point or relocated dealership will harm its financial interests before a court will intervene. Dealers challenging the encroachment of a new or relocated dealership should be prepared to provide meaningful evidence that the new or relocated dealership will have a significant impact on its business, including relevant consumer data, customer records, business and market reports, and expert evidence. Conversely, manufacturers should be prepared to prove that they have undertaken their own business and market research, and can demonstrate that their decision will not have a substantial effect on the profitability of the existing dealership and not substantially prejudicial to the dealership in question.

Conclusion
When a dealer is granted an exclusive selling territory or a designated market area, it has a reasonable expectation that the manufacturer will not encroach on its territory. Manufacturers are under an obligation to treat their dealers fairly, and exercise the powers they have reserved for themselves under the dealership agreement in such a manner so as to not unfairly disadvantage their dealers. At the end of the day, a well planned dealership network not only meets the needs of the marketplace, but it provides its dealers with a favourable environment in which to obtain a reasonable return on their investment.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Best Lawyers in Canada in the Ones to Watch category. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

The post Keep your distance! Navigating New Dealer Points and Relocated Dealerships appeared first on Sotos LLP.

Nearly every franchise system includes a franchise marketing and promotion fund, often referred to as an “ad fund.” Typically, an ad fund operates as follows: individual units are obliged to contribute a specific percentage of their revenue to the ad fund, and the franchisor utilizes these funds for advertising and promotional activities to benefit the overall system and brand.

Ad funds serve as a potent tool for fostering system growth and expansion. They create a pool of funds for promotional endeavours that might otherwise be financially burdensome for either the franchisor or individual franchisees to undertake independently. In addition, initiatives funded by the ad fund contribute to maintaining consistent and brand-aligned messaging, as they are centrally coordinated by the franchisor.

However, ad funds can also become a focal point for discontented and divisive franchisees to unite around. Dissatisfied franchisees may join forces to raise concerns – real or “strategic” – regarding the management or administration of the ad fund. Even if these grievances lack merit, they can consume valuable time and resources for franchisors. Moreover, they can sow discord within the franchise system and among franchisees. In the most extreme scenarios, franchisees may unite and utilize their collective resources to initiate and maintain vexatious lawsuits concerning the ad fund, which can result in significant expenses and protracted legal battles for the franchisor.

This article aims to provide guidance on ad fund best practices and to highlight essential considerations for franchisors in creating and managing their ad funds.  Implementing these practices and thinking about these issues can help franchisors avoid the most common potential ad fund pitfalls.

1. Consider what geographic area the advertising fund will cover, and whether franchisees will have additional local marketing obligations

Prior to establishing its ad fund, a franchisor should think carefully about the geographic area the fund will cover. Should the ad fund be national in scope, and responsible for promoting the brand across the country, or should there be multiple regional funds to account for Canada’s size and the distinctness of its many regions?  Or should there be both a national fund and various regional funds? A franchisor should consider these questions in light of the nature of its brand and operations and the current market conditions. Are there important local or regional differences that the franchisor wants to address in its marketing efforts?  Or is it better to focus on a single advertising strategy Canada-wide?

A franchisor should also determine whether franchisees will be required to invest in a local ad fund geared towards promoting their local markets (over and above their obligation to contribute to the franchisor’s national fund), and/or whether they must individually meet certain self-directed local marketing spend minimums.  Making advertising a joint responsibility, by requiring individual unit spend minimums, can be an effective way to preempt complaints about the franchisor’s advertising strategy and decisions.  As discussed in more detail, below, franchisors that opt to require franchisees to participate in marketing should ensure there is appropriate franchisor oversight over the content of such marketing initiatives.  Franchisors should implement a tracking, approval, and reporting system to ensure that franchisees’ marketing efforts align with system standards, and that individual franchisees achieve minimum marketing spend requirements.

2. Management and reporting considerations: creating a special purpose “ad fund” entity, preserving the right records, and reporting to the franchisees

With very few exceptions, it’s generally advisable that the franchisor set up and manage the ad fund as a separate entity within the franchise system.  A general best practice is to incorporate a separate corporate entity whose sole purpose is to be responsible for all matters relating to the ad fund.  Ad fund contributions should not generally be co-mingled with other funds.  Instead, they should be maintained in a separate account in the name of the special-purpose entity that the franchisor has created for management of the ad fund.  While it is technically not improper to deposit ad fund monies into a mixed purpose account, such practice can create significant practical difficulties relating to tracing funds in the event the franchisor receives a demand to account for its use of ad fund monies.  To that end, any transfers in or out of the ad fund account should be properly memorialized.  Original source documentation relating to ad fund expenditures (for instance, invoices from third party marketing services providers) should be organized and preserved for a reasonable period, in accordance with the franchisor’s document retention policies.

A franchisor should maintain accurate financial records detailing contributions to and expenses drawn from the ad fund.  Such financial records should be distinct from those kept by the franchisor as part of its overall business operations.

A franchisor should consider whether it will provide franchisees with some degree of financial reporting relating to the revenue and expenses of the ad fund.  For example, will the franchisor provide regular financial reports to the franchisees about the ad fund?  Or will such reports be provided only in response to franchisee requests?  In any case, a franchisor should make sure it adheres to whatever reporting requirements it may put in place, as failure to do so can provide a pretext for disgruntled franchisees to stir up trouble.

The franchisor will also want to carefully consider the type of financial information it wants to make available to the franchisees in relation to the ad fund.  Will the franchisor provide financial statements, which may require the franchisor to engage external accountants to prepare?  Or, more commonly, will the franchisor provide only a statement of income and expenses, summarizing the revenue and expenses of the ad fund in a particular fiscal period?  In either case, it is generally recommended that franchisors provide such summary financial information to franchisees, rather than access to all source documents relating to the ad fund (for instance, general ledgers, invoices and other information relating to the financial activities of the ad fund).

3. Consider whether all franchisees will benefit equally from, and contribute equally to, the advertising fund, and specify if that is not the case

As a fundamental matter, a franchisor should carefully consider which entities will contribute to the ad fund, how the quantum of such contributions shall be calculated, and what use may be made of the funds.  For instance, is there any obligation for the franchisor to make ad fund contributions and, if not but the franchisor nonetheless contributes to the ad fund, how will such contributions be accounted for and used?  Will corporate and franchisor-owned stores be required to contribute?  What about stores that operate seasonally, or operate in a format that is different from the majority of stores in the system (kiosks, food trucks, special venue stores, ghost kitchens, etc.)  Will all franchisees contribute equally to the ad fund in accordance with a prescribed formula?

Is it fair for all units to pay the same ad fund fees if some units are only operating for a portion of the year?  The answer to this question is not always clear or straightforward.  Sometimes, units with reduced hours or seasonal units are in a prominent location, for instance, major sporting venues or pop-ups during special events, and have the potential to greatly increase brand awareness and attract new customers to existing units operating in traditional formats in the future.  Are these special location units creating goodwill for other franchisees to enjoy, or are they trading off the goodwill that other franchisees have created?

In addition to these considerations, a franchisor should specifically outline whether rebates, marketing allowances, and other amounts received by the franchisor will be contributed to the ad fund or retained by the franchisor for its own use.

Addressing these matters clearly, in both the franchise disclosure document and in the franchise agreement, can help to ensure that the ad fund is administered in a manner that franchisees perceive as transparent and fair.

4. Clearly define the key terms of the ad fund, including how much franchisees are required to contribute, the mediums and content of advertising that are permissible, whether the ad fund will be administered internally and/or externally, and who will pay for ad fund’s administrative expenses

While franchisors generally have a great deal of discretion as to how ad fund monies should be spent, it is important that the scope of this discretion is clearly communicated to the franchisees to avoid accusations of “unfairness” later.  It’s important to preserve the franchisor’s ability to spend the ad fund as it sees fit.  This might mean applying ad fund monies towards assisting troubled regions, or towards initiatives that seek to have the system enter new markets.

A franchisor should consider how the monies it collects for the ad fund will be apportioned, and whether franchisees can expect the ad fund to devote a proportional amount of the collected funds to specific markets or regions. Many franchisors will explicitly state in their franchise agreement that the ad fund has been created for the benefit of the system as a whole, and that franchisees should not expect that ad fund spend will benefit individual units on a proportionate or equal basis relative to their contributions or other franchisees.

To avoid potential disputes, a franchisor should address in specific detail the following considerations when structuring its ad fund:

• What amounts will franchisees be required to contribute? The franchisor should clearly define the amount that franchisees will be required to pay into the ad fund, the frequency with which they will contribute to the fund, and how the contribution will be paid to the franchisor. A franchisor should consider whether the franchisees will be required to make payments in pre-determined amounts, or whether their ongoing contributions will be determined by way of a formula based on their gross revenues or another metric.
• What media and content may the ad fund employ? A franchisor should ensure it reserves the right to employ any and all types of content and mediums of advertising (including television, radio, online, social media, etc.) for the fund as part of its activities.
• Will the ad fund rely on third-party advertising agencies, an in-house advertising department, or a combination of both to carry out its activities? A franchisor should consider whether the ad fund will be administered internally or externally, or through a combination of both. Expenses incurred by a franchisor in directly administering the fund, including direct expenses such as printing and ad placement, and indirect expenses such as salaries and head office rent, may be properly chargeable to the ad fund. When considering what and how much to charge to the ad fund, a franchisor should make a commonsense determination as to whether there is a nexus between the expenses it has incurred and whether these expenses furthered the objectives of the ad fund. Additionally, the quantum of the allocation should be proportional to the expense incurred by the franchisor and assessed reasonably. For instance, if one quarter of the franchisor’s head office space is dedicated to offices for internal marketing personnel, it may be appropriate to charge one quarter of the franchisor’s head office occupancy costs to the ad fund.
• Will the ad fund be used for purposes other than traditional marketing of the system and brand? There are a variety of promotional-related activities in which franchisors are increasingly required to engage. For instance, increased reliance on social media means that, sometimes, a franchisor must engage in reputational “damage control” or respond to negative comments on social media.  What about the cost of administering customer surveys across all or part of the system?  Franchisors should consider whether the ad fund provisions of their franchise agreements permit them to charge the cost of these activities to the ad fund. Ultimately, the franchisor should thoughtfully consider all uses or potential uses of the ad fund monies.

Finally, a franchisor should reserve the right to change and amend the rules relating to its use of ad fund monies, as necessary, to keep up with new advertising mediums and technologies, and to ensure the best possible use is being made of ad fund dollars.

5. Decide who will manage the fund, who will be responsible for its decision making, and whether there will be a franchisee advisory council.

Prior to forming the ad fund, a franchisor should carefully consider who will operate and administer the fund, and whether an advisory committee should be established to oversee and make suggestions as to the ad fund’s activities. In a majority of cases, the franchisor (or an affiliate of the franchisor) will be responsible for administering the fund and crafting the message and media to be employed in its advertising. Such centralized leadership allows the franchisor to broadcast a consistent message to potential consumers regarding its brand and products.

Some franchisors also establish franchisee advertising and marketing advisory councils, which bring together franchisees to make recommendations as to how the ad fund should carry out its activities. Most such councils are limited to making only non-binding recommendations.  However, engaging franchisees can allow franchisors to tap into franchisees’ valuable on-the-ground knowledge.  In addition, involving franchisees in the operations of the ad fund heightens transparency which can, in turn, preempt potential ad fund disputes.

6. Consider how much leeway individual franchisees will have to undertake their own advertising

One of the key advantages of franchising is establishing a common brand which can provide customers with a consistent experience. In establishing an ad fund, a franchisor can ensure that all advertising it produces is consistent with the brand’s policies, standards and image. A franchisor should carefully consider whether there is a place in its system for individual franchisees to undertake their own advertising at a local level, and whether there should be controls on the form and content of such local advertising. A franchisor should consider whether local advertising directed by individual franchisees would complement or conflict with national and regional advertising undertaken by the system’s ad fund.

A franchisor should be especially wary when it comes to a franchisee’s use of social media to promote its franchised business. Social media content and messages can spread quickly and easily.  A franchisor should be sure to clearly delineate the system’s policies on social media usage and content.  Franchisors should also ensure they have effective mechanisms to step in when and if a franchisee’s advertising is inappropriate or inconsistent with the brand.

7. Consider how the franchisor’s disclosure will be affected by the establishment of, or the reservation of the right to establish, an advertising fund

A franchisor should ensure that its franchise disclosure document fully discloses the material specifics of the ad fund it has established and its use of funds, as required by franchise legislation.

If particular franchisees are required to contribute different amounts to the ad fund, the franchisor should consider how widespread these variations are across its system, and whether knowledge of these variations is information that would be material to a decision by a prospective franchisee to acquire a franchise.

Conclusion

A well-managed ad fund, which pools contributions from franchisees, can be a valuable asset and a competitive advantage for a franchise system. However, the process of developing and administering such a fund can be complex. It is important to engage professional advisors throughout all stages of the ad fund’s lifecycle to ensure legal compliance and alignment with the system’s best interests.

At Sotos LLP, we specialize in assisting both emerging and established franchisors in navigating these complexities. Our expertise includes designing systems that adhere to best practices and crafting agreements and disclosure documents tailored to each franchise system’s unique needs.  We also have substantial experience in defending against ad fund-related claims. No matter the system or the issue, Sotos LLP is here to support and guide franchisors in optimizing their ad funds for success.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. She has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Best Lawyers in Canada in the Ones to Watch category. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

The post Franchise Advertising Funds: A Blueprint for Success and Pitfall Prevention appeared first on Sotos LLP.

Trademarks are some of the most valuable intellectual property that businesses may own. Do you have a unique trademark or design mark associated with your products or services that you’ve been considering registering? Now is the time!

Effective January 1, 2024, the Canadian Intellectual Property Office (CIPO) will increase most of their fees by 25%. Annual fee adjustments on certain CIPO fees will also come into effect.  

Prior to the implementation of the regulatory changes allowing for this significant 25% increase, CIPO’s fees were already scheduled to increase on January 1, 2024, to reflect the economic changes over the last 12 months.

For 2024, a one-time 25% fee increase will also be applied to most CIPO fees (including trademark application fees) along with the annual CPI adjustment. The new fee amounts will be effective January 1, 2024, and are listed on CIPO’s fee pages. For more details on the increases to trademark fees in particular, you can visit https://ised-isde.canada.ca/site/canadian-intellectual-property-office/en/trademarks/fees-trademarks.

For all fees subject to an adjustment:

• If payment is received before January 1, 2024, you will need to pay the prescribed fee for the current year (i.e. the 2023 fees).
• If payment is received on or after January 1, 2024, you will need to pay the adjusted higher prescribed fee for next year (i.e. the 2024 fees).

For example, if you file an application for the registration of a trademark but a filing date cannot be granted because the prescribed application fee was not paid, the amount you need to pay will depend on the date on which the Registrar receives the payment of the entire prescribed fee. If the payment is received after January 1, 2024,  you will need to pay the (higher) adjusted prescribed fee for the new year. Similarly, the amount required for any additional Nice classes also depends on the date on which the payment is received, even if the prescribed fee for the first class of goods or services to which the application relates was paid prior to the annual adjustment. If the payment is received after January 1, 2024, you will need to pay the adjusted prescribed fee for the new year.

As everyone who has interacted with the Canadian trademark process knows, applications that do not need to respond to any examiner reports or which are not opposed by any third parties currently take approximately 36 to 48 months to become registered. CIPO is funded entirely by fee revenues from its services. By increasing their fees, CIPO intends to address the critical capacity and technological investments needed to provide improved services. Whether this translates into faster overall processing times remains to be seen.

If you would like to get ahead of these fee hikes and start your trademarking process today, Sotos LLP is happy to help. At Sotos LLP, we have acted for hundreds of trademark owners in every aspect of protecting their intellectual property for more than 40 years. We have extensive knowledge of intellectual property issues, and regularly act in the procurement and licensing of trademarks, as well as in defending our clients’ trademarks rights and opposing trademark applications on behalf of our clients. Please contact John Yiokaris at jiokaris@sotos.ca 416-930-3609 to discuss your intellectual property and trademark needs.

The post Fee-l the Rush: Canada’s Trademark Application Fees are increasing! appeared first on Sotos LLP.

A traditional exit option available to dealer principals is selling your dealership to an unrelated third party. Leaving your dealership to the next generation or a family member isn’t always a viable option for principals looking to exit their business. As a result, dealer principals (and dealership groups) should understand the key issues when it comes to selling their dealership.

Preparing for the Sale:

Before beginning the search for a purchaser, principals looking to sell should critically analyze their dealership.  Consider how the dealership has been performing over the previous months and years, whether the dealership has outstanding obligations (facilities upgrades, for instance) that will need to be addressed prior to its sale, what the state and health of the local automotive market are, and what the dealership’s outlook is for the future.  From an early stage, it’s critical to understand your business and the market in which it is operating to properly assess the value of the dealership and what steps will need to be taken to unlock any potential value.

Equally critical upon making the decision to sell is to ensure you’re properly managing your dealership’s inventory levels, both with respect to vehicles and parts.  Potential purchasers will typically not purchase obsolete or unauthorized vehicles and parts inventory that they’ll struggle to resell.  Moreover, old and obsolete inventory adversely affects your cash flow, as you are not able to fully recapture funds tied up in this inventory.  To ensure you maximize your return and avoid costly negotiations, you will need to manage your inventory in the leadup to a sale and begin to sell-off or dispose of any items that a purchaser will not want.

It is critical to involve your business and accounting advisors early in the sale process to help determine a fair asking price and what the potential tax consequences may be for your business and you personally.  It’s crucial to ensure that, well in advance of any sale, your financial and tax records are current and that you’ve discussed the topic of tax planning with your accountant.  In most cases, effective tax planning will help secure more money for yourself once the transaction closes.

It’s equally critical to engage your legal advisors from an early stage to assist you with structuring a potential transaction (as further explored below) and addressing potential roadblocks to closing the sale, including:

• ensuring that your manufacturer is prepared to consent to the proposed sale and what requisitions it may impose on both you and the purchaser as part of any transaction;
• understanding the requirements of your dealership agreement;
• ensuring that the corporation’s legal records are up to date and that contracts necessary to the operation of the dealership can be assigned to the purchaser, if necessary;
• ensuring that the proper consents have been obtained from the landlord and other third parties in order to effect the transaction without risk to the dealership, its operation, or its continued possession of the dealership premises, as applicable;
• managing any potential environmental liabilities that may exist on the premises as a result of the dealership’s operations;
• addressing employment law considerations and minimizing risk arising from potential employee transfers or layoffs at the time of sale;
• addressing any outstanding litigation or potential litigation concerning the dealership and its operations that may impede its sale; and
• tax and estate planning, which is crucial to consider as part of the sale process to proactively manage potential personal tax and legal exposure.

Most of these processes take several months to complete; as a result, it’s crucial to engage your legal advisors as soon as possible after making the decision to sell.

How to Structure the Transaction

The eventual transaction can be structured in two different ways: an asset sale or a share sale.  Both transaction structures have unique advantages and drawbacks (especially with respect to tax planning), and your legal and accounting advisors should be consulted well in advance of any sale to determine which structure is most beneficial for you and your business.

In an asset sale transaction, the buyer purchases your business’ assets (often including equipment, land and building, customer lists, inventory, and goodwill), but does not purchase or take control of your operating corporation.  As a result, you retain the unpurchased assets and all liabilities (including any debt) of your operating corporation.  This structure allows the buyer to pick and choose what assets it would like to purchase, while avoiding any liabilities owed by the seller.  As the seller, you will still be required to address the obligations and liabilities associated with your corporation (including paying down outstanding debt on or before closing), and you may be required to use some of the proceeds payable to you on closing to pay off any existing loans, financing arrangements, etc.  At the end of the day, the purchaser’s lawyer will not permit the transaction to close unless he/she has confirmed that the assets the seller is selling to the buyer are free and clear of any and all liens and encumbrances.

Asset sales are generally less risky for the purchaser, as they won’t be assuming any unforeseen or then-unknown liabilities associated with the operating corporation.  Nonetheless, the purchaser will have to ensure they’re able to transfer all purchased contracts, licenses, and permits into the purchasing corporation’s name and that the new business will be able to secure the approval of the Ontario Motor Vehicle Industry Counsel (or similar bodies).

In a share purchase transaction, the buyer purchases all of the outstanding shares in your operating corporation.  At the culmination of the transaction, total legal ownership of your corporation is transferred to the purchaser, who assumes all assets and liabilities associated with this corporation.  This form of transaction is generally simpler, as there is (generally) no need to effect the transfer of assets, specific licenses, or permits to a new corporation.  Nonetheless, any personal assets of the seller, or any assets the purchaser does not wish to purchase (i.e. obsolete inventory), will need to be flushed out from the seller’s corporation prior to the sale, which may have negative tax implications on the seller.

In a share transaction, keep in mind that the resulting change in control of the operating corporation may nonetheless require consent and approval from other parties relevant to the business, including the manufacturer, landlord, and major suppliers.  Typically, these consents take time to obtain.

Consider the Terms of your Dealership Agreement

In addition to ensuring that the transaction is organized in a manner that won’t prejudice your interests, dealer principals also need to ensure that the sale is not running afoul of the requirements found in their dealership agreement.  In particular, be on the lookout for the following types of provisions:

• Manufacturer’s Consent: Manufacturers will typically require that you seek and obtain (1) their consent to you selling your dealership, and (2) their consent as to the acceptability of the proposed purchaser. Manufacturers will generally reserve broad powers to reject sales or the proposed purchaser should they not deem them to be in the best interests of their brand or dealer network. Be sure to understand what steps must be taken to obtain the manufacturer’s consent and understand that obtaining such consent can take time.
• Right of First Refusal: Consider whether the manufacturer has the right to exercise a right of first refusal (ROFR) to purchase the dealership if you receive an offer for your dealership.  If so, consider if the manufacturer has a history of triggering this ROFR, and ensure the proposed purchaser understands you’re subject to this right. Purchasers may be hesitant to explore a transaction (beyond making an initial offer) if a manufacturer does not first waive its ROFR. It’s crucial to understand what information the seller must provide the manufacturer in light of a ROFR existing, and it’s equally important for both you and the buyer to understand the timelines for dealing with a manufacturer’s ROFR.
• Reimaging and Renovations: Consider whether there are requirements that, upon the sale of the dealership, reimaging or substantial renovations must occur at the dealership.  As a result of such requirements, it may even mean that the manufacturer will require your dealership to relocate to new premises better suited for such reimaging or upgrades.  Such renovations can be extremely costly and complicate the transaction (especially if new premises are required), and it should be verified if the manufacturer will require them as part of any sale to ensure adequate capital can be allotted for this work.
• Leasing and Financing Records: Manufacturers often require that all original records relating to the dealership’s leasing and financing activities are kept at the dealership premises, despite a sale.  You will need to ensure that all such records are, in fact, in existence and readily available to the purchaser on closing.

Each dealership agreement is different, and failing to abide by its provisions as part of a transaction can endanger the transaction and your operation of the dealership itself.  Be sure you understand the obligations placed on you by your dealership agreement, and plan in advance as to how best to comply with them.

Conclusion

Selling a dealership is a complicated matter, and sufficient time should be allotted to carrying out the work associated with preparing and planning for such a transaction, obtaining the necessary consent to undertake the transaction, and coming to terms with the buyer and other interested parties.  Remember that a deal isn’t complete until all of the agreements are fully signed, the conditions of the transaction have been fulfilled, and the purchase price has been made into your bank account.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner.

John practices business law with a specific focus on the automotive industry, franchising, and disputes, and he is a trusted counsel to both automotive dealers and manufacturers. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is head of the firm’s personal services franchise practice area, and practices business law with a focus on franchising, distribution, and licensing. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

The post Headed on the Highway: Selling your Dealership appeared first on Sotos LLP.

1. New Financing Amounts

The maximum loan amount for a borrower has been increased from $1 to $1.15 million,  which includes:

• $1 million for term loans of which a maximum of $500,000 is comprised of (1) equipment and leasehold improvements of up to $350,000; and (2) $150,000 for intangible assets and working capital costs.

and

• $150,000 for lines of credit for working capital costs. This would be over and above the $150,000 that can be used for working capital costs under the term loan product (above).

2. Term Loans

The amendments include two new financing classes – intangible assets and working capital costs can now be financed as term loans.  Intangible assets are defined as non-monetary assets without physical substance that can be sold, transferred, licensed, rented or exchanged or that arise from a contractual or other legal right.  This includes franchise fees, goodwill, incorporation costs and permits and licenses.

Maximum Loan Term

All term loans used to finance real property, leasehold improvements, equipment and intangible assets and working capital costs can now be made for a maximum of 15 years.  Equipment and leasehold improvement loans that are already registered (or disbursed and not registered) can be amended to the new 15 year term.

Appraisal of Eligible Expenditures

The time period to finance expenditures or commitments for any term loan has been increased from 180 days to 365 days prior to the date the term loan is approved.  If the lender is required to obtain an appraisal to finance a term loan, the date that the appraisal is made has been changed from 180 days before the term loan is approved to 365 days before the term loan is disbursed.

Security

For real property and equipment term loans, lenders must continue to take security in the assets financed.  Lenders must take security in any assets of the small business for the value of the loan for the following items:  leasehold improvement, computer software, website, intangible assets and working capital costs.

3. Line of Credit

Eligible businesses can now access a line of credit to be used for working capital costs (costs necessary to cover the day-to-day operating expenses of the business). Examples include: inventory, expenses related to the creation and development of software and websites, printed materials, professional fees (e.g. legal, accounting, appraisal), research and development costs, payroll and rent.  The line of credit may be used to pay for ongoing expenditures or commitments that arise or were invoiced no more than 365 days prior to the date that the line of credit was authorized. Lenders will be required to take security in any assets of the small business for the authorized amount of the line of credit.

Term and Renewal

The maximum term for the line of credit is 5 years beginning on the day after the line of credit is opened by the lender.  Prior to the end of the 5 year term, borrowers will have the following 3 options:

1. Re-register the line of credit for a new period of 5 years. In this case, a new registration form and a registration fee of 2% on the renewed authorized line of credit amount must be submitted to the CSBFP.
2. Borrowers can also convert the line of credit amount to a CSBFP term loan with a maximum 10-year CSBFP coverage. Any such term loan would need to meet the following conditions:

• • The interest rate must not be greater than the prime rate plus 5%;
  • The terms of the loan conversion must be set out in a document signed by the lender and the borrower and that provides a minimum of one principal and interest payment each year, with the first payment scheduled to be made within one year of the date of the conversion; and
  • The borrower and lender must enter into an agreement to repay the balance of the line of credit with a conventional loan.

3. The borrower and lender may enter into an agreement to repay the balance of the line of credit with a conventional loan.

Claim Process Documents and CSBFP Liability

Lenders must submit an attestation form signed by the borrower at the time the line of credit is registered stating that (1) the line of credit is to be used to pay for working capital costs of the day-to-day operational expenses of the small business, and (2) the expenses paid through the line of credit did not arise (and were not invoiced) more than 365 days before the line of credit was authorized.

The CSBFP’s liability for lines of credit for a lender is limited to 15% of the total amount of the lines of credit authorized and registered by that lender, separate and apart from a lender’s liability calculation for its registered term loans.

.   .   .

As noted above, one of the most significant changes for franchisees and franchisors is that franchise fees can now be financed under the CSBFP.  Prior to these changes, franchise fees were ineligible for financing under the program and had to be paid for out-of-pocket or through other credit products offered by financial institutions.

At Sotos LLP, we advise franchisors on all aspects of their franchise sales process including how to inform prospective franchisees on the availability of financing. We also help franchisors establish lending programs offered by preferred financial institutions to their prospective franchisees. We also assist prospective franchisees in their purchases of franchises. We would be happy to assist to provide tailored advice relating to the changes created to this important financing program. Please contact Anna Thompson-Amadei (athompson-amadei@sotos.ca) or John Yiokaris (jyiokaris@sotos.ca).

[1] https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/find-loan-your-small-business/about-program/helping-small-businesses-get-loans
[2] https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/documentation-centre/bulletins/2022-changes-canada-small-business-financing-program

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