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.

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On March 3, 2025, the Trump administration confirmed that the United States would proceed with imposing blanket tariffs on imports from Canada and Mexico, and increases to existing tariffs on China, effective March 4, 2025. These tariffs include a 25% tariff on all imports from Canada and Mexico, with the exception of Canadian energy resources and minerals, which face a reduced 10% tariff. The tariffs were initially planned to take effect on February 4, 2025, but were delayed by the Trump administration pursuant to ongoing negotiations with Canada and Mexico. The White House has also announced the imposition of 25% U.S. tariffs on all steel and aluminum imports with an expected effective date for imposition of March 12, 2025.

On March 4, 2025, the Government of Canada announced that, in response to U.S. tariffs, the Government of Canada would move forward with 25% tariffs on $155 billion worth of imported U.S. goods, beginning immediately with a first tranche covering $30 billion worth of goods. The scope of the Canadian counter tariffs will be increased to $155 billion if the current U.S. tariffs are maintained, and may also be increased if new U.S. tariffs are imposed. Beyond the federal government’s response, several Canadian provinces have implemented their own retaliatory measures. These include restricting government procurement opportunities for U.S. suppliers, terminating existing contracts and disqualifying future bids from U.S. companies, and removing American alcoholic products from provincially-controlled liquor stores. Ontario Premier Doug Ford has also indicated that he is considering imposing an export tax on Ontario-produced energy, and even halting energy and certain mineral resource exports altogether.

The implementation of U.S. tariffs and Canadian counter tariffs on imported goods will have widespread effects across various industries, including the franchise sector. Franchisors and franchisees must understand and prepare contingencies on how to navigate the legal and business consequences posed by the rising costs, disrupted supply chains and shifting market dynamics associated with these tariffs.

Supply Chain Analysis: Key Considerations for the Franchisor-Franchisee Relationship

Franchisees that depend on imported goods—whether for equipment, supplies, or inventory—may face substantial cost increases due to tariffs. For instance, tariffs on raw materials, such as steel and aluminum, as well as finished products, will likely drive up operational expenses and delay deliveries, potentially disrupting the system’s supply chain. This will impose increased costs on franchisees, which will necessitate a difficult decision between absorbing such costs, passing them on to customers, or a combination of both. Many franchise agreements also require the use of specific materials and equipment to maintain consistency throughout the system, which may limit (absent franchisor intervention) the ability of franchisees to easily adapt to changing economic circumstances.

Maintaining a strong franchisor-franchisee relationship is key in navigating these changing market conditions. Below are certain key considerations for franchisors in navigating this relationship:

• Initial Investment: Franchisors must consider whether they should make changes to their initial investment expectations and requirements for franchisees. If tariffs increase the cost of equipment, supplies, or inventory, franchisors should consider reviewing and revising the initial investment estimates to reflect these higher costs. Failure to do so may mislead potential franchisees about their expected expenses. Moreover, failing to account for such changes may be setting franchisees up for failure before they even begin operating.
• Ongoing Expenses and Unit Economics: Franchisors should evaluate how tariff-induced cost increases affect their unit economics, including per-location profitability, break-even points, and overall financial sustainability. Clearly presenting this data can help franchisees make informed investment decisions. If tariffs impact ongoing costs, such as supply procurement or vendor agreements, these changes should be disclosed. Franchisees should be made aware of potential cost fluctuations. Franchisors should assess franchisee costs on a market-by-market basis, and prepare to be flexible on procurement where necessary to ensure that franchisees’ unit level economics remain viable in light of this volatility.
• Supply Chain and Sourcing Restrictions: If a franchise system mandates specific suppliers affected by tariffs, these restrictions should be transparently disclosed. Franchisors may also explore whether allowing some flexibility in supplier selection can help mitigate disputes, and actively work with franchisees to assess whether domestic alternatives exist that will (while perhaps not entirely consistent with brand standards applicable in the U.S.) allow the franchisee to continue operating without further hardship than is necessary.
• Financial Performance Representations: Franchisors should monitor profit margins and other financial metrics due to tariff-related cost increases and assess whether tariff-related cost increases are a development that impacts financial performance representations. Providing outdated or overly optimistic projections could expose franchisors to legal claims and otherwise adversely impact the franchisor-franchisee relationship.

Consumer Price Sensitivity

Franchisors should also consider whether to authorize or encourage price increases for goods and services. However, price-sensitive consumers may reduce their spending or seek alternatives, particularly in highly competitive industries such as quick-service restaurants, retail, and hospitality. It is critical that franchisors consider balancing necessary price adjustments with consumer expectations in order to maintain brand reputation and profitability. In light of these challenges, franchisors should consider which obligations currently imposed on franchisees are crucial to maintaining brand standards, and which others may be more flexible.

Adapting to Tariffs for Growth and Expansion

Predictable costs and strong unit economics are the hallmarks of a successful franchise system. While tariffs imposed by the U.S. and Canada’s counter tariffs may create new cost pressures, they also present opportunities for Canadian brands to emphasize domestic production and sourcing, which can resonate with consumers and differentiate them in the market. Similarly, U.S. brands entering Canada may still find opportunities to expand, particularly when the favourable exchange rate helps offset tariff impacts, allowing cost-competitive pricing in the Canadian market. Franchisors and businesses that adapt their supply chains, pricing strategies, and brand positioning to these evolving dynamics can still find opportunities for growth and expansion despite the shifting trade landscape.

Opportunities and Competitive Shifts

While tariffs impose significant challenges for businesses of all stripes, they also provide opportunities for savvy and opportunistic businesses. For example, Canadian franchise systems with predominantly domestic supply chains may reap the benefits of changing consumer preferences towards Canadian-made products, while products previously bound for the U.S. may be sold domestically at the same or lower prices. Franchisors can also re-evaluate global sourcing strategies to mitigate tariff exposure.

To address ongoing challenges, franchisors should consider the following actions:

• Supply Chain Diversification: The tariffs should prompt franchisors to carefully re-evaluate suppliers and explore domestic alternatives where feasible.
• Negotiating Terms: Franchisors and franchisees should also work with suppliers to share or reduce tariff-related cost burdens.
• Efficiency Measures: Franchisors and franchisees should invest in technology or streamline operations to offset increased expenses.
• Franchise Disclosure and Agreement Revisions: It is critical that franchisors assess whether franchise disclosure documents and franchise agreements need adjustments to address unforeseen consequences arising from the tariffs.

Advertising Considerations: Made in Canada

While not the primary focus of this article, businesses should keep in mind that promoting products as “Made in Canada” or “Product of Canada”, or highlighting Canadian ownership, can be a valuable strategy for brands seeking to reduce the impact of tariffs between Canada and the United States. However, businesses must ensure that such claims comply with Canadian law, including the Competition Act, the Consumer Packaging and Labelling Act, and the Textile Labelling Act. These acts prohibit false or misleading representations, and restrict how and when such claims can be used. Businesses that choose to make “Made in Canada” or “Product of Canada” claims must ensure their claims meet the appropriate guidelines and thresholds. Our firm works closely with companies to develop compliant, strategic branding approaches that not only highlight Canadian origins, but also help navigate cross-border trade challenges.

Conclusion

U.S. tariffs present significant challenges for the franchise industry, with potential legal and financial implications for franchisors and franchisees alike. If you have any concerns as to how these tariffs will affect your system, and how to navigate these challenges, Sotos LLP can help. At Sotos LLP, we have acted for hundreds of clients in every aspect of the franchising process for over forty years. We have extensive knowledge of the regulatory issues that may arise from the introduction of tariffs and regularly assist with supply chain evaluations, contract revisions, and strategic planning to mitigate risks and seize opportunities in this complex regulatory environment. Our firm can assist in developing tailored strategies to mitigate the impact of tariffs, whether through supply chain restructuring, trade compliance planning, or leveraging available exemptions We can also assist in reviewing disclosure requirements in light of the tariffs.

Please contact Peter Viitre at 416.977.7754 or pviitre@sotos.ca, Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca, or Nicole Perez at 416.977.3674 or nperez@sotos.ca to see how we can help your franchised business adapt to ever-changing economic conditions.

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Overview of Canada’s Single-use Plastic Prohibition Regulations:

Effective December 20, 2022, the Government of Canada has banned the manufacture and import for sale of single-use plastics (“SUP”), including plastic grocery bags, cutlery, stir sticks, and straws through the Single-use Plastics Prohibition Regulations (“Regulations”)[1]. In addition to the items mentioned above, foodservice wares made from hard-to-recycle plastics are also banned effective December 22, 2022, while a ban on the manufacture and import of plastic ring carriers (think six-packs of your favourite beverages) will come into effect in June, 2023.[2]

The Regulations come in advance of Canada welcoming the world to the 15^th Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity, and are a step in the Canadian Government reaffirming its steadfast commitment to addressing plastic pollution and protecting biodiversity in Canada, and around the world. According to the Government, “Over the next decade, this world-leading ban on harmful single-use plastics will result in the estimated elimination of over 1.3 million tonnes of hard-to-recycle plastic waste and more than 22,000 tonnes of plastic pollution, which is equivalent to over one million full garbage bags.”[3] These measures will put Canada among the world’s leaders in the fight against plastic pollution and will help them to meet their commitments to the Ocean Plastics Charter.

Franchised and non-franchised businesses in the retail, grocery and restaurant industry sectors will be required to adjust their customer offerings to adhere to the ban, including by switching to more natural, biodegradable and/or reusable alternatives, such as paper or reusable shopping bags, wooden utensils, paper straws, and fully-recyclable or biodegradable food packaging materials.

Exceptions to the Ban:

Exceptions to the Regulations allow flexible SUP to remain available for people in Canada who require it for medical or accessibility reasons.[4] This includes for use at home, in social settings, or in healthcare settings, such as hospitals and long-term care facilities. SUP items that are not flexible will be prohibited in all circumstances.

More specifically:[5]

• The manufacture and import of SUP flexible straws is allowed;
• Retailers can sell SUP flexible straws in packages of 20 or more, as long as they are not on public display and are only provided if requested;
• Individuals can give SUP flexible straws to others in a family or social setting;
• Care institutions can provide SUP flexible straws to their patients or residents; and
• A business may sell SUP flexible straws in packages of 20 or more to another business.

Additional exceptions are available for waste and bags for containing waste, as well as “products in transit.” Whether a SUP product is considered “in transit” is determined based on the final shipping destination of the product.

Ban will be effective in December 2023

Bans on both the sale and the  manufacture, import, and sale for export of SUP will not begin until December 20^th , 2023. This gives manufacturers and retailers alike time to adjust their offerings and processes. However the government is not currently planning to offer subsidies or other financial assistance to offset the costs of changing from SUP like plastic cutlery to wooden cutlery or even new materials starting to enter the market, like edible cutlery made of cereals.

Stores may also still sell their existing SUP until December of 2023, but that does not mean stores should not start planning for the future now.[6] For example, in 2021, McDonalds eliminated plastic stir sticks, straws and cutlery in more than 1,400 restaurants across Canada, replacing them with wooden alternatives, which saved an estimated 840 tonnes of plastic from landfills annually. Additionally, Sobeys eliminated SUP bags at its checkout counters in 2020, and Walmart followed suit in April, 2022. Finally, Loblaws recently announced it will ban plastic bags by spring 2023.[7]

Store owners need to begin the transition away from SUP by, firstly, assessing how much SUP they currently have stocked, and then evaluating the best way to proceed; whether that be by continuing to normally sell the products until the end of 2023, exporting the products to a jurisdiction where they are not banned, or deciding they can fit into one of the government exceptions. In conjunction with this exercise, plans to gain access to new, approved products will also need to be implemented. Oliver Bourbeau, the vice-president of federal affairs at Restaurants Canada, said there are already supply chain issues at play, mentioning that one restaurant chain with dozens of restaurants in Ontario and Quebec is so far only receiving half of its orders for non-plastic takeout containers.[8]

Due to such supply chain issues, and the substantial expected operational changes that compliance with the Regulations will entail, the costs will likely be high for stores to adopt compliant product policies. In the franchise context, this means that franchisors and franchisees will need to come to an agreement on who will actually bear the costs of changing supply policies in order to maintain viable unit-level economics.

Key Takeaways:

There are a few key takeaways and steps franchised and non-franchised store owners need to take or keep in mind regarding the ban of SUP by the Government of Canada:

1. All store owners should carefully read the Government of Canada’s technical guidelines on what counts as SUP and what falls under the above exceptions. The guidelines can be found here: https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/reduce-plastic-waste/single-use-plastic-technical-guidance.html
2. An assessment of inventory should be done, to ascertain compliance of current inventory with the future rules, to give owners an idea of how much SUP inventory they have to sell, export, etc., and to determine how extensive and expensive the changes will be.
3. Retailers should create a workable plan for December, 2023 now. This means speaking with potential suppliers, assessing costs, and in the franchise context, coming to an arrangement with franchisees on how new, potentially large costs will be shared.

If you have any questions about the new prohibitions ore any other regulatory matters affecting your business, please contact Peter Viitre at pviitre@sotos.ca. At Sotos LLP, our lawyers advise businesses in the restaurant and hospitality industry and we look forward to being of assistance to you.

[1] Single-use Plastics Prohibition Regulations 2022-138. Online: https://laws-lois.justice.gc.ca/PDF/SOR-2022-138.pdf
[2] “Change is here: Canada’s ban on certain harmful single-use plastics starts to take effect this month” Government of Canada. December 17, 2022.  Online: https://www.canada.ca/en/environment-climate-change/news/2022/12/change-is-here-canadas-ban-on-certain-harmful-single-use-plastics-starts-to-take-effect-this-month.html
[3] Ibid
[4] “Fact sheet: Exceptions for single- use plastic flexible straws” Government of Canada. Online: https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/reduce-plastic-waste/exceptions-flexible-straws-factsheet.html
[5] Ibid.
[6] Supra, note 2.
[7] Mia Rabson, “Government will ban some single-use plastics over the next 18 months” The Canadian Press June 20^th 2022. Online: https://www.cbc.ca/news/politics/plastics-ban-countdown-1.6494379
[8] Ibid.

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About Legal 500 Comparative Guides

The Legal 500’s Country Comparative Guides are produced in association with the World’s leading lawyers and give the in-house community a practical overview of the laws and regulations in key jurisdictions, for specific practice areas.

About Sotos LLP

As Canada’s leading franchising, licensing and distribution law firm, with over 20 legal professionals dedicated to the industry, Sotos provides a comprehensive range of franchise law, corporate, private equity financing, commercial, litigation, intellectual property, employment and real estate services to franchisors. For over 40 years, Sotos has worked with regional, national and international franchisors in every sector of the franchise industry from launch to exit including with their international expansion.

About Peter Viitre, CFE

Peter Viitre is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is also chair of the firm’s corporate department, and head of the firm’s home services and retail franchise practice areas. Peter has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. Peter can be reached directly at 416.977.7754 or pviitre@sotosllp.com.

About Jason Brisebois, Sotos LLP

Jason Brisebois is an 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. He has been recognized as a “Legal Eagle” by the Franchise Times as a leading Canadian franchise law practitioner. Jason can be reached directly at 416.572.7323 or jbrisebois@sotosllp.com.

The post Sotos LLP is the exclusive contributor to Legal 500 Comparative Guides 2021 appeared first on Sotos LLP.

To read the full chapter, click here.

About Legal 500 Comparative Guides

The Legal 500’s Country Comparative Guides are produced in association with the World’s leading lawyers and give the in-house community a practical overview of the laws and regulations in key jurisdictions, for specific practice areas.

About Sotos LLP

As Canada’s leading franchising, licensing and distribution law firm, with over 20 legal professionals dedicated to the industry, Sotos provides a comprehensive range of franchise law, corporate, private equity financing, commercial, litigation, intellectual property, employment and real estate services to franchisors. For over 40 years, Sotos has worked with regional, national and international franchisors in every sector of the franchise industry from launch to exit including with their international expansion.

About Peter Viitre, CFE

Peter Viitre is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is also chair of the firm’s corporate department, and head of the firm’s home services and retail franchise practice areas. Peter has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. Peter can be reached directly at 416.977.7754 or pviitre@sotosllp.com.

The post The Legal 500 Comparative Guide: Franchise & Licensing in Canada appeared first on Sotos LLP.

COVID-19, or the 2019 novel coronavirus, has been dominating news cycles since the beginning of 2020. Considering the interconnectivity of the global economy, analysts are predicting that the virus will have a profound impact on every facet of day-to-day business activities, and the franchising industry is no exception. Franchise operations in China have already seen severe disruptions, with many foreign franchisors having shut their doors at multiple franchised locations as a result of the outbreak.[1]

Beyond the obvious risks the coronavirus poses to human health and well-being, the virus also has the potential to severely disrupt franchisors’ and franchisees’ operations alike. As Papa John’s International Inc. (the parent company of the “Papa John’s” pizza franchise) succinctly noted in its Form 10-K annual report on February 26^th, “[i]nfections may become more widespread, including to other countries where we have operations, and travel restrictions may remain or worsen, all of which could lead to lower sales, widespread store closures or delays in our supply chain, which could have a negative impact on our business and operating results”[2]. Although Canadian-based franchise operations have not yet seen disruptions of this severity, the virus’ growing footprint in Canada could soon make such disruptions a reality.

The coronavirus has the potential to negatively impact customer traffic to brick and mortar franchised locations, while also interfering with every facet of franchisor and franchisee operations, including supply procurement, logistics, staffing, and beyond. It will likely also see customers continue to trend even further towards “stay-at-home” online services, including delivery services such as Uber Eats or Grubhub[3], assuming, of course, that drivers are available and restaurant have staff willing and able to work.

In response, franchisors should be proactively preparing a coronavirus response plan and beginning to implement additional procedures in order to protect their customers, staff, franchisees, and brand. In particular, franchisors should consider taking the following steps to help minimize potential business disruptions and losses:

Keep franchisees and corporate store managers up to date: A franchisor should ensure that it is keeping its unit franchisees and corporate store managers informed as to developments relating to the coronavirus, any impacts it is having on the system and its own operations, and any potential future disruptions it may have on product offerings, the system’s supply chain, and the business of individual franchisees. Ongoing communication will allow the franchisor to reassure its franchisees that it is monitoring the situation and taking proactive steps to protect franchisee interests. As part of these communications, and in order to manage franchisee expectations, the franchisor should ensure that it is being forthcoming with its franchisees as to challenges being faced by the system and potential issues on the horizon. Franchisees can also be expected to surface with their own approaches to how they believe they should be responding to local conditions. The franchisor should be flexible in how it assesses and addresses such input given franchisees’ independent obligations.

Impose enhanced cleaning protocols on franchisees: Every franchisor, especially those in the food and hospitality spaces, should revisit its operations manuals with respect to ongoing cleanliness standards currently imposed on franchisees and/or issue special instructions. It should increase the frequency and thoroughness with which franchisees are required to clean their outlets, with special emphasis placed on kitchens and food preparation spaces (where applicable), high-traffic areas, and frequently touched surfaces, such as doors and doorknobs, countertops, railings, tables, chairs, menus, touchscreens, washrooms, and POS systems.

Franchisees should ensure that their employees are complying with all health and hygiene standards, including regular and rigorous hand washing.

Assess core suppliers and vendors and arrange alternative supply sources: Some Canadian businesses are already experiencing supply chain disruptions, especially those that purchase key supplies and goods from vendors based in China, Italy, or South Korea. It is necessary to remain in constant contact with core suppliers and vendors to assess their current status, whether these suppliers and vendors are expecting any disruptions that may impede their ability to meet the franchisor’s demands, and whether it is possible to address any supply bottlenecks or shortages before they have a substantial impact on the franchisor’s operations. Key suppliers and vendors, especially in the food, retail, and hospitality spaces, should be required to demonstrate that they have implemented additional health and safety measures concerning their own operations to assure the safety of products being provided to franchisees for resale. When possible, alternative suppliers should be sourced and crucial materials and products should be stockpiled to ensure continuity of business.

Assess whether current contracts contain force majeure provisions: Many contracts will contain force majeure provisions, which typically excuse one party from completing its obligations under the contract as a result of a listed event. Such listed events often include war and unrest, but often also reference global health issues or contain general language that cover such events. Key contracts need to be assessed to determine whether a force majeure provision is present, whether its scope addresses this issue, and whether there is any risk of the other party exercising such provision to excuse its performance under the contract. Contracts for upcoming franchisor conferences should be reviewed to determine any rights and obligations upon which these contracts can be cancelled by either party.

Review current lease agreements: A review should be made of all lease agreements for corporately-owned and sub-leased franchised locations to assess the parties’ rights and obligations in light of the coronavirus. Many commercial leases will afford landlords special powers in light of a public health emergency and the franchisor should consider whether these landlords may have the ability to take any action that may disrupt the franchisor’s business or the business of its franchisees.

Assess whether product offerings should be altered: In light of potential or realized supply chain disruptions, as discussed above, every franchisor should assess whether its current roster of product offerings will be impacted by the coronavirus’ emergence. Supply shortages and other disruptions may mean that it is no longer viable to offer certain menu items (for restaurant and hospitality franchisors), or other items or services. If so, the ramifications of such alterations and the necessary adjustments that will need to be made to complimentary business efforts (such as product marketing and logistics) must be considered. Moreover, services and product delivery systems may also be impacted – Starbucks and Tim Hortons have already curtailed the use of reusable coffee cups; such safety measures should be immediately adopted by restaurant and hospitality franchisors.[4]

Assess core staff needs: Franchisors and franchisees alike should assess staffing levels in light of potential wide-scale absences. Businesses should ensure that essential staff positions are backed up by designated alternate staff members and franchisors and franchisees should emphasize that any staff members feeling unwell should remain at home and should avoid the businesses’ offices and operations. Franchisors are, however, reminded to consider the risks of any attempt to directly manage, schedule, direct, or otherwise control the employees of their franchisees to avoid joint employer liability, and to consult counsel where appropriate.

Assess employee travel: Franchisors should assess whether work-related employee travel is critical to the business’ operations. All work-related employee travel that is not essential to the franchisor should be curtailed, particularly to virus hotspots, which presently include China, Italy, and South Korea. Employees returning from coronavirus hotspots should monitor themselves for any signs of illness for at least fourteen days following their return. Franchisors should also closely monitor governmental updates regarding the status of the virus and abide by all guidance provided. Finally, the necessity of franchisee meetings and conferences should be reassessed on a case-by-case basis.

Assess and enhance franchisor employees’ ability to work remotely: In the event that employees are quarantined or otherwise are unable to make it into the office, a franchisor should ensure that it can provide its essential employees with the tools to be able to work remotely. The coronavirus may have a severe impact on employee mobility, which will require franchisors to equip their employees to work from home in order to minimize potential disruptions to operations.

Franchisors should bear in mind that employees who are working remotely are an attractive target to hackers and other malicious actors, as the business’ information technology security may be weakened by the dispersed nature of the employees and their reliance on personal equipment. This adds further impetus for businesses to begin contemplating remote work and its implications as soon as possible.

Review and reassess business interruption and other insurance coverage: Franchisors should review their current business interruption insurance policies to assess their ability to file claims as a result of virus-related business interruptions. In addition to business interruption insurance, franchisors should also review other active insurance policies, such as directors’ and officers’ insurance and general liability insurance, among others, that may be implicated by complications caused by the coronavirus. It is crucial that franchisors understand the extent of their current coverage, any weaknesses in their coverage that should be addressed, and what their options are in the event of business disruptions or other adverse events.

Crisis management plans: Now is a good time to test the performance of your organization’s crisis management plan. Franchisors should practice how the system would address and respond to a potential crisis, including related to health emergencies. At a minimum, in light of the current situation, the plan should be reviewed, updated, and circulated across the system to ensure all parties understand what their obligations are under the plan.

Although the risk the coronavirus poses to business is severe, franchisors should avoid taking any premature drastic actions that may adversely impact their businesses and those of their franchisees. Measured and proactive steps, such as those explored above, can allow the franchisor to minimize potential coronavirus risks to its business in the interim while a better understanding of the true nature and severity of the virus is sought.

Peter Viitre, CFE, Sotos LLP

Peter Viitre is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is also chair of the firm’s corporate department, and head of the firm’s home services and retail franchise practice areas. Peter has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. Peter can be reached directly at 416.977.7754 or pviitre@sotosllp.com.

Jason Brisebois, Sotos LLP

Jason Brisebois is an 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, licensing, and distribution. Jason can be reached directly at 416.572.7323 or jbrisebois@sotosllp.com.

[1]  Nicholas Upton, “Market effects from coronavirus are minor, so far”, Franchise Times (19 February 2020), online: <http://www.franchisetimes.com/March-2020/Market-effects-from-coronavirus-are-minor-so-far/>.

[2]  Papa John’s International, Inc, Form 10-K for Fiscal Year Ended December 29, 2019”, United States Securities and Exchange Commission (26 February 2020), 19, online, EDGAR: <https://www.sec.gov/ix?doc=/‌Archives/‌edgar/‌data/901491/000155837020001393/pzza-20191229x10kcbc0c2.htm>.

[3]  Paul R La Monica, “Coronavirus is helping Netflix, Amazon and other ‘stay at home’ stocks”, CNN Business (2 March 2020), online: <https://www.cnn.com/2020/03/02/investing/coronavirus-stay-at-home-stocks/index.html>.

[4] Pete Evans, “Fears of coronavirus contamination prompt coffee chains to temporarily ban reusable mugs”, CBC News (5 March 2020), online: <https://www.cbc.ca/news/business/starbucks-mugs-coronavirus-1.5486559>.

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The background to the Ministry of Labour’s report involves the Ontario government’s announcement in March 2016 to modernize Ontario’s business laws. Modernizing Ontario’s business laws is one aspect of “the government’s economic plan to build Ontario up and deliver on its number-one priority to grow the economy and create jobs.”

For the modernization project, the Ministry of Labour conducted a review of the Employment Standards Act, 2000 (“ESA”) and the Labour Relations Act, 1995 (“LRA”). Its review generated great interest, involving 12 days of public hearings and more than 300 written submissions by labour and employer groups alike.

The result of the Ministry’s consultations and review was recently published on July 27^th in a document entitled “Changing Workplaces Review: Special Advisors’ Interim Report”. The purpose of the report is to explain the different views presented, the legislative options under consideration, and to invite comments.

Of particular interest to franchisors carrying on business in Ontario is section 4.2.2, entitled “related and joint employers.” The report explained that “in an increasing range of circumstances, it has become important to determine which of two entities is the employer, whether a number of entities are a related employer, or whether entities are joint employers.”

As we explained in an earlier blog post, “joint employer” issues have the potential to result in an extension of franchisor liability for franchisees failing to comply with employment and labour laws and other laws. This has been a hot topic in the U.S. for some time, involving controversial decisions by the U.S. Labor Relations Board.

In its report, the Ministry of Labour canvassed different views about holding franchisors liable for franchisee operations. On the one hand, it said, “franchisees must comply with the franchise agreement and the requirements of a franchisor, which could affect the manner in which they manage their workforce or operate the business.” On the other hand, the Ministry of Labour also took note of concerns that “any changes could threaten established business models.” By and large, the report noted, it was argued that “franchisors have little if any authority over a franchisee’s employees, and […] the franchisee is the entity that exercises control over terms and conditions of employment and is the real employer in a franchise’s day-to-day operation.”

The Ministry of Labour set out many different options for legislative reform, including maintaining the status quo, “expressly excluding franchise relationships from the LRA” and “establishing clear statutory criteria for a related employer declaration, particularly in a franchise context.”

Although the prospect of legislative reform that would make franchisors liable for the conduct of franchisees is worrisome to some, the interim report states that the Ministry “has not yet come to any conclusions about our recommendations and we have an open mind on all issues.”

To these ends, the Ministry of Labour’s interim report will be subject to comment by Ontario’s new Business Law Advisory Council, which has as its goals to “recommend changes to corporate and commercial laws to strengthen Ontario’s competitive advantage in the global economy, [and] solidify Ontario’s position as a jurisdiction of choice for business […].”

Sotos LLP Partner Peter Viitre is one of eleven professionals appointed to the Business Law Advisory Council, and he looks forward to advising the Ontario Government on these issues, and to discussing them directly with the authors of the Report.

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This is the final part of a three part article outlining common provisions in franchise agreements that you might want to consider revamping. Don’t miss part 1 and part 2.

Dispute Resolution Clauses and Waiver of Class Actions

Increasingly, franchise agreements include clauses whereby the franchisee waives its right to pursue a class action.  Based on current case law, such clauses are not invalid.  However, they will not necessarily be enforced by a court.

In 1146845 Ontario Inc. v. Pillar to Post Inc.[1], a franchisor sought to stay a class action brought by some of its franchisees.  The franchise agreement contained a class action waiver clause and mandatory arbitration provisions.  The franchisees argued that Section 4 of the Act (which provides franchisees the right to associate with other franchisees and prohibits franchisors from interfering with that right) included the right to bring a class action.  The court rejected that argument.  However, in granting the franchisor’s motion to stay the class action, the court relied on the mandatory arbitration clause in the franchise agreement, not the class action waiver.  Thus, while the class action waiver clause was not specifically invalidated by the court, the clause was not specifically upheld, either.

In addition, in 2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corporation[2], the court found that the mere fact that a class action waiver clause was in a franchise agreement was insufficient justification for staying a class action proceeding.  However, the court noted that a class action waiver clause would be a strong factor in determining whether a class proceeding is the preferable procedure.

In light of the Pillar to Post and Quizno’s decisions, therefore, we can conclude that inclusion of a mandatory arbitration provision in a franchise agreement might be more effective for those franchisors wishing to avoid class action proceedings than inclusion of a class action waiver clause, alone.

On a related note, if arbitration is provided for in the franchise agreement, franchisors should consider specifying the related processes and procedures.  For example, the franchise agreement should set out how an arbitration proceeding is initiated, how an arbitrator is chosen, timelines, etc..  With respect to choosing the arbitrator, the franchise agreement may allow the franchisor to choose the arbitrator[3] provided that such discretion is exercised in good faith as required by Section 3 of the Act (e.g., appointment of a non-arms length party would likely not be upheld by a court).

Non-Competes

Developing a successful franchise system requires significant time, effort and resources.  Naturally, a franchisor’s proprietary information, including its operating methods, standards and specifications, is incredibly valuable.  Post-term restrictive covenants, such as non-competition provisions, can help ensure that franchisees do not use that know-how to run a competing business and damage the goodwill of the franchise system once the relationship ends.  Under Canadian law, non-compete provisions are generally considered to be contrary to public policy, in that they constitute restraints on trade.  They will, however, be enforced if the restrictions they contain are reasonable, having regard to both the interest the covenantee is seeking to protect and the extent to which they prevent the covenantor from being able to make a living.  The key parameters to consider in such an analysis are the duration of the covenant (i.e., for how long the covenantor is prohibited from competing) and its geographic scope (i.e., the area in which the covenantor is prohibited from competing).  For this reason, franchisors are advised to consider very carefully how much protection they actually need and to draft the temporal and geographic scope of their non-compete provisions to reflect that minimum amount of protection.

Two additional practices also deserve consideration.  First, franchisors will sometimes insert into their franchise agreements a non-compete clause that contains a cascade of restricted times and/or areas in which the prohibition will apply, with the intention that the court will strike out (i.e., “blue pencil”) the overly-broad parameters, thus leaving the parties with a clause that is properly enforceable.  An example of such a clause is as follows:

“Following the expiration of this Agreement the Franchisee shall not, for a period of two (2) years, operate, carry on or be engaged in or be concerned with or interested in a Competing Business:

(a)       within the Territory; or

(b)       within a radius of 3km of any office and each and every other office from which the Franchisor or franchisee thereof operates; or

(c)       within the Province of Ontario; or

(d)       within Canada; or

(e)       within Canada and the United States; or

(f)        within Canada, the United States and Europe.

The Franchisee agrees that the restrictions in Section 15.3 are reasonable, that sub sections (a),(b) (c), (d), (e),and (f) thereof are separate and distinct agreements, that the greatest restriction of them should apply, failing which the next greatest restriction, and that if one of them is determined to be void or unenforceable it shall not affect the validity of the other.”

Unfortunately, while this practice is quite common and effective in other jurisdictions, such as the United States, Canadian courts have historically been quite reluctant to give effect to it, primarily on the argument that the court is not there to “re-make” the contract between the parties (i.e., to amend an otherwise unenforceable contract to render it enforceable).

Notably, in Shafron v. KRG Insurance Brokers (Western) Inc.[4], the Supreme Court of Canada confirmed that “blue-pencil” severance, may only be applied if the parties would have agreed to the remaining obligation without varying other terms of the contract (in other words, the part that is severed is not the main purpose of the clause).  Accordingly, non-compete provisions that include multiple geographic scopes, such the above example, would likely not be enforceable under Canadian law.  Again, the better practice would be to draft such provisions to stipulate only the minimum distance and time period necessary to protect the franchisor’s legitimate business interests.

The second practice franchisors typically employ to get around this issue is to insert non-solicitation clauses into their franchise agreements, either in addition to or in place of the non-compete.  Canadian courts are generally much more willing to enforce clauses that restrict the covenantor from soliciting the employees or customers of the covenantee, primarily because the nexus between the restriction and the interest that the covenantee is seeking to protect is much clearer, and the damage the covenantor would cause by violating the restriction much more readily foreseeable.

Conclusion

When reviewing and revising your franchise agreement, the importance of clear and comprehensive drafting cannot be overemphasized.  Since franchise agreements have been found to be “contracts of adhesion” (i.e., they are typically in a standard form and presented on a “take it or leave it basis”), courts will interpret the provisions of franchise agreements with a view to protect the more vulnerable contracting party (i.e., the franchisee).[5]  This means that any ambiguities in drafting will be resolved in favour of the franchisee, and even where the drafting is clear, the court will construe the provisions to give the franchisee the most preferable position possible as opposed to construing the provisions in accordance with commercial reasonableness.

As a final tip, franchisors must ensure that the franchise disclosure document and ancillary agreements are updated to accord with any changes made to their form of franchise agreement and consider whether and how such amendments might be implemented for franchise agreements currently in force.

[1] 2014 ONSC 7400.

[2] [2008] O.J. No. 833.

[3] 2162683 Ontario Inc. v. Flexsmart Inc., 2010 ONSC 6493.

[4] 2009 SCC 6.

[5] Cora, para 38.

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To help get you started, we have created a three part article outlining common provisions in franchise agreements that you might want to consider revamping.

General Releases

Franchise agreements often stipulate that franchisees must release all claims against the franchisor as a condition for granting a transfer or renewal of the franchise.  For example:

“The Franchisor shall not unreasonably withhold its approval of a transfer, provided that the following conditions are met:

… The Franchisee must have executed a general release, in form satisfactory to the Franchisor, of any and all claims against the Franchisor…”

Recently the Ontario Court of Appeal confirmed that a franchise agreement provision requiring a franchisee to release its claims against the franchisor under the Arthur Wishart Act (Franchise Disclosure), 2000[1] (the “Act”), violates Section 11 of the Act and is therefore unenforceable, and that any release obtained pursuant to such a provision will be void.[2]  Although the provision set out above does not specifically reference the Act, it states that any and all claims are to be released, which would, on a plain reading of the provision, include claims under the Act.  One way to revise such a general release provision in light of Cora could be to add a carve-out for claims under the Act (e.g., “all claims are released except to the extent limited or prohibited by the Arthur Wishart Act (Franchise Disclosure), 2000”).

Interest Rates

U.S.-based franchisors ought to be wary of carrying over their form of franchise agreement when expanding into Canada as certain legal concepts may not translate to the Canadian context.  One example is the American practice of stating interest rates as “the lesser of [X]% and the highest lawful rate of interest permitted by applicable law”.  In the US, many state laws provide for certain statutory maximum interest rates that may be charged (called the “usury limit”).  The usury limits differ from state to state and range from approximately 5% to 24%.  State law also provides state-specific exemptions from usury limits.  Given these differences, the interest provision set out above ensures that the franchisor is on-side of such usury laws without the need to adapt its form of franchise agreement for each state.

Unlike the U.S., however, Canada does not have usury limits under provincial laws which franchisors would be at risk of contravening in the normal course.  Instead, franchisors must take note of other legislation governing interest rates when drafting such provisions.  First, it is an offense under the Criminal Code to charge and collect interest over 60% per annum.[3]  In that regard, a common pitfall for franchisors is the failure to realize that lump sum penalties levied against franchisees for late payments may also be considered interest, especially since these penalties are often assessed monthly for every month the arrears remain outstanding.  Accordingly, when such lump sum penalties are levied against franchisees in addition to the interest charged for late payments, the aggregate amount can result in the effective rate of interest under the agreement being greater than the criminal rate.  Franchisors should also be wary, more generally, of applying late payment penalties of any sort, particularly when the penalties are very large in comparison to the actual amounts of the late payments to which they are applied.  Second, the Interest Act requires that for interest rates exceeding 5%, the interest rate must be expressly stated on a yearly basis regardless of whether the interest is payable at a rate for a period that is less than a year (e.g., monthly interest rate).[4]  Failure to state the effective annual interest rate will result in interest rate being limited to 5% and any sum paid for interest over that amount would need to be returned.

[1] S.O. 2000, c. 3.

[2] 2176693 Ontario Ltd. v. The Cora Franchise Group Inc 2015 ONCA 152 [Cora].

[3] Section 347, R.S.C. 1985, c. C-46.

[4] Section 4, R.S.C. 1985, c. I-15.

Check back tomorrow for part 2 of this 3-part blog post Give your franchise agreement a facelift.

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The answer is almost always the same, as well: “I want this person to feel a sense of ownership in the company — I want them to share in its success.”

What the client typically does not realize (and what I am forced to explain to them, much like the proverbial rain falling on their parade), is that there are a number of consequences that flow from giving someone a minority share interest in a Canadian federal or provincial corporation. And they’re not all good.

Canada’s federal and provincial corporation statutes provide a number of serious protections to minority shareholders that need to be considered, and weighed very carefully, before issuing shares to any person.

On the lower, less invasive end of the spectrum, there are rights to requisition shareholder meetings, to see annual financial statements, and to be treated equally to all other shareholders of the same class. Moving up the ladder, there are statutory “super-majority” approval thresholds and shareholder dissent rights (including the right to be bought out at fair value) in respect of fundamental matters involving amendments to the corporation’s articles, amalgamation and sale of the business. Depending on the number of shares to be issued, any or all of these rights may place real limits on what the majority shareholders can cause the corporation to do and how the corporation will be governed.

And we’re not even at the high end of the spectrum yet.

At the high end, minority shareholders have the right:

• to apply to the court for an investigation of the corporation and any of its affiliates;
• to apply to the court for leave to bring a “derivative action” (i.e., to sue on behalf of the corporation, or to intervene in an existing action to which the corporation is a party) if they feel the corporation is not adequately prosecuting or defending its rights;
• in certain circumstances, to cause the corporation to be wound up; and
• to apply to the court for relief from oppression (i.e., for any remedy that the court deems appropriate), if they feel that the corporation is being run in a way that is oppressive or unfairly prejudicial to them.

The addition of these rights and remedies can tip the balance of power within the corporation’s ownership (and change the very nature of the franchise, employment or other relationship in question) in ways that the parties may neither anticipate nor want. From the employer’s, franchisor’s or other majority shareholder’s perspective, these changes are almost always unwelcome and, absent a full analysis, understanding and acceptance of the consequences by the client, are to be avoided if at all possible.

So what is the client to do if she wants to reward an important participant in her business, to give him a bit more “skin in the game”?

There are many ways to contractually mimic the functions of share ownership and to create the desired incentives and rewards without invoking the drastic (and potentially game-changing) rights and remedies discussed above. These can range from the very simple (such as a linear bonus or commission structure based on measurable, objective performance criteria) to the very complex (such as the design and implementation of a “phantom stock” arrangement which approximates the gains and losses that the phantom stockholder would receive if they were holding actual shares).

The point is, like most things in the world, what seems simple today may end up being extremely complicated tomorrow. Franchisors, employers and other business owners would be well- advised not to let the deceptively simple idea of “just issuing some shares” launch them into the incredibly complex world of minority shareholder rights. At the very least they should first speak to their lawyers about the consequences of doing so and seriously consider some contractual alternatives.

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