Franchise Law in B.C. and upcoming changes

UPDATE ON FEBRUARY 1, 2017

This blog will serve to demystify franchising law in B.C. First, I'll describe what franchising is. Then I'll give an overview of the applicable law in B.C. If you're reading this and considering purchasing a franchise, hopefully by the end of the blog you'll better understand the franchising business model and have some tools to help you navigate your business opportunity.

                                      Look before you leap, and understand what lies below!

                                      Look before you leap, and understand what lies below!

What is Franchising?

Franchising is a business model where an individual (franchisee) is granted the right to use a business model/concept and brand for a prescribed period of time. In return, the franchisee pays prescribed upfront costs and ongoing dues to the franchisor. 

Franchising is widely popular because the franchisor avoids the liability and cost of building chain stores and expanding to new locations themselves, and the franchisee has support and training from the franchisor as well as licensed use of the franchisor's brand and other proprietary intellectual property. Franchising as a business model is unique in many ways and the success of the franchisor is greatly dependent on the success of its franchisees (and vice-versa). The following are other hallmark characteristics of franchising:

  • The franchisor controls many aspects of the franchisee's business operations.
  • The franchisor has superior economic resources and bargaining power. 
  • Because the franchisee relies on the franchisor for information about whether to purchase the business, disclosure is key.

Are there special laws in place to govern franchising?

In some provinces, yes. Franchising is regulated in five provinces: Ontario, Alberta, Manitoba, New Brunswick and Prince Edward Island. In these provinces the laws are largely based on a uniform set of laws.

As of Feb 1, 2017, the new BC Franchises Act (based on Bill 38 http://www.leg.bc.ca/40th4th/1st_read/gov38-1.htm) will come into force. 

I'm a potential franchisee. What do I need to know?

The franchise agreement negotiated between franchisor and franchisee governs. Further, if the franchisor is a member of the Canadian Franchise Association (CFA), the franchisor must adhere to the CFA's Code of Ethics, namely, the requirements of the Code's disclosure policy. Failure to do so and the CFA may sanction the franchisor. (But that's little comfort to the franchisee as there are no other statutory remedies). 

If you're thinking about getting "in" on a franchise, be sure to:

  1. Read any and all disclosure documents the franchisor provides before you sign anything. And if nothing is provided, ask!
  2. Understand the financial statements and pro-forma financial projections given by the franchisor - do the numbers make sense? Consider going over the figures with an accountant.
  3. Understand who is the franchisor, and their reputation (are they a member of a franchise association?) Try to find out where other franchisees are located.

With respect to the franchise agreement itself, pay careful attention the terms, especially the following:

  • Review and Cooling off period. Does the franchisee have time to review disclosure documents before signing a franchise agreement? And after signing, is there a period of time which the deposit (if paid) can still be refunded if the franchisee wants to walk away?
  • Deposit structure. How much is required up-front and how much time is required to make the payments? What (if any portion) of it is refundable?
  • Royalty payment obligations. Because payments and fees are usually calculated based on gross sales, crunch the numbers to understand how much sales is necessary to break-even or make a profit.
  • Supply-purchase obligations. Must the franchisee purchase supplies from the franchisor's preferred supplier? Are the supply terms unfavourable to the franchisee? Find out if the prices are inflated and if it is more cost-effective to purchase from another supplier instead.
  • Territory restrictions. What is the territory/location that the franchisee is permitted to operate in? Can the franchisor restrict or limit operations of the franchisee in that territory at any time, or operate competing businesses in that territory?

In practice, if you're thinking about purchasing a franchise location, many of the franchisors you've heard of, or come across, operate nationally. For example, the CFA is a massive association and many franchisors are members of it. If the franchisor is reputable and has their ducks in a row, they likely have a streamlined approach to providing disclosure documents (harmoniously across the provinces), and already adhere to the laws required in the five provinces with specialized franchising laws.

B.C.'s NEW Franchises Act

After Feb 1, 2017, the new Act and its regulations will introduce numerous changes (for the better!) on the franchising law landscape in B.C., including:

  • Disclosure. While most franchisors already provide disclosure documents to the franchisee, they were actually not required to before the Act was passed. Now the Act includes the duty of disclosure, and franchisors will be legally required to disclose prescribed information including financial statements, information about the franchise system, the business records of the franchisor and the franchise location. Also, timing is key. Disclosure must happen at least 14 days before the franchise agreement is signed. Disclosure may also be done by e-mail.
  • Rescission. If disclosure is deficient, or no disclosure is made at all, the franchise agreement may be rescinded at franchisee’s option up to 60 days after entering the franchise agreement. If no disclosure document was ever provided, the franchisee has up to two years to rescind. In both cases, without penalty or obligation to franchisee.
  • Duty of Fair Dealing. Both franchisor and franchisee have a duty of fair dealing in performance of the agreement. Additionally, parties have a duty to act in good faith.
  • Right of association. The franchisee has the right to associate with other franchisees without interference by the franchisor (including forming or joining an organization of franchisees).
  • Statutory right of action for misrepresentation. The right to sue for misrepresentation exists now, but if legislation is passed, this just gives franchisees another avenue to sue if misrepresentation happens. What is unique about this provision is that the right to sue will also extend to include misrepresentations in financial projections and pro-forma revenue/operating forecasts. Franchisors should be cautious and state that financial statements are based on assumptions about the future and that actual results may vary. If disclosure statements are accompanied by such cautionary language, such a right to sue may not be available.
  • Direct distribution rights disclosure.  If the franchisor wishes to reserve the right to sell goods and services directly and in competition with its franchisees, this intention should be declared in the disclosure document.
  • Fully refundable deposit. Some provinces have allowed franchisors to obtain a fully refundable deposit up to a certain dollar amount before disclosure is made. In these cases, the deposit must be refundable in the event that the franchisee does not sign a franchise agreement. It is recommended that since the franchisor gives up commercially sensitive information and may be placing a territory “on hold” for a prospective franchisee during negotiations, the deposit is an indication of the franchisee’s good faith prior to receiving disclosure. The maximum level of the deposit is not to exceed 20% of initial franchise fee.

Final Recommendations

If you're considering purchasing a franchise, make sure to read your disclosure documents and franchise agreement thoroughly, and talk to legal and financial professionals about your obligations before signing. It may be helpful to keep notes of your communications with franchisors and talk to other franchisees to hear their experiences. Lastly, make sure to understand start-up costs and on-going financial liabilities of purchasing the franchise.

Free Webinar with Courthouse Libraries on the New BC Franchises Act

Are you ready for the  chances coming into force Feb 1, 2017?

Register now for my free 1-hour CPD eligible webinar offered with Courthouse Libraries BC: https://attendee.gototraining.com/10r2h/register/225377174004678657 Space is limited!

This webinar is aimed at existing franchise owners/franchisors or those just thinking to purchase one, as well as for lawyers and other professionals.

If you haven't already, read my blog for a quick summary of franchise law and the new Act.

See you there!

Conference season: Clio Cloud Conference and Shape the Law

This fall is shaping up to be a busy one!

If you're visiting the Clio Cloud Conference in Chicago September 19- 20 visit my sessions and say hi!

While in Chicago I am also excited to be able to attend Shape the Law "Designing the Future of the Legal Workplace: An Unconference for Legal Professionals" on September 16.

Looking forward to meeting old and new friends at both these events. Chicago, can't wait to see you soon!

Legal Workshop for Entrepreneurs and Start-ups

Join us WednesdayJuly 20, 2016 from 6-8pm at the Beta Collective in Surrey for this not-to-be-missed event!

Courtesy of Surrey Startups: register here or contact us for more info.

So you're about to start a business...or maybe you're running one already. Good for you!

But do you know exactly how your company needs to be structured in order to avoid potential legal and financial headaches down the road?

Sadly, many entrepreneurs do not. And those who've fallen into the trap in the past, know that the consequences can be costly.

Fortunately, part 2 of our legal workshop series will explore the nuts and bolts of properly structuring (or restructuring) a business so as to avoid any unpleasant surprises in the future.

What's more? You can talk to an experienced business lawyer for free!

Here are the topics being covered:

  • How to start or incorporate a company - the pros and cons between sole proprietorship, partnership and corporation, and their differences 
  • Do I need all those corporate documents? - discussion of shareholder agreements and stock option plans, and how these documents along with some planning can guide operational concerns like responsibilities of management and decision-making authority
  • Employment matters - minimum standards under Employment Standards Act, confidentiality issues, non-compete issues, collaborative arrangements to enable synergies amongst employees and outside parties 

Events and Workshops around the city

Did you know? We give workshops and lunch & learns to co-working spaces and other partner organizations around the region on various legal topics.

Some events we recently held:

Stay tuned to attend the next one or get in touch if you'd like to learn about inviting us to speak at your next event.

New Societies Act Coming to B.C.

You may have heard there is a new Societies Act (the "Act") coming into force this November, 2016 which will replace the current Society Act. 

The new Act will bring significant changes to the current regime which governs some 27,000 non-for-profit entities in the province. From November 2016, societies will have two years to transition under the new Act. During this time societies will need to determine how the new Act will affect their society, and file a transition application with the BC Registry along with a copy of its constitution, bylaws, and statement of directors and registered office of the society.

The B.C. Registry website has released a summary of the changes brought on by the Act. I would highly recommend bookmarking and staying tuned as the province makes announcements on the changes:

http://www.bcregistryservices.gov.bc.ca/bcreg/societiesact/overview.page  

The new Act brings changes that will serve to increase flexibility for governance but also beef-up certain disclosure and accountability mechanisms. The following is a highlight of some of the major changes:

Electronic-Filing

If you work with a society you have likely experienced the joy of filing an annual report or incorporation package by traditional snail-mail. Let me tell you, this is one change that I'm certain 100% of us can get behind. Gone will be the days of sending off packages to Victoria, never knowing quite when they receive the package until you follow-up with them several days (or weeks) later.

The Act will permit e-filing via the BC Registry website. Existing societies will need to consolidate their bylaws and submit these as a part of their transition under the new Act.

Member-funded vs. Public-funded societies

  • The Act brings a new distinction that didn't exist before: treating member-funded and public-funded societies differently, and requiring unique requirements for each on corporate governance, financial disclosure, and distribution of assets upon dissolution (I will touch on a number of these in the post).
  • Member-funded societies are those that are primarily funded by its own members to carry on activities for the benefit of its members. Sports clubs and professional organizations fall in this category. 
  • Public-funded societies are those that receive government or public funding above a threshold amount (which will be set by future regulations). Registered charities and hospital societies fall in this second category.

Director Requirement and Ex-Officio Directors

  • A public-funded society must have at least 3 directors, at least 1 must be a resident of B.C..  Whereas a member-funded society needs only 1 director, without any residency requirement.
  • All directors must have no recent convictions for fraud, be bankrupt and in almost all cases be at least 18 years of age. If a director doesn't meet these qualifications they will be required to resign. Additional qualifications may be set by a society's bylaws.
  • The Act creates and permits a new type of “ex officio” director – a director who holds a position because of a particular attribute or position, not as a result of an election.

Dissolution

  • Upon dissolution, a public-funded society may only distribute assets to a "qualified recipient" such as a registered charity. This requirement does not apply to a member-funded society.

Remuneration

  • A public-funded society must set out in its financial statements the remuneration of its directors and 10 most highly remunerated employees/contractors above a threshold amount (which will be set by future regulations).  This requirement does not apply to a member-funded society.
  • For a public-funded society, a majority of its directors must not receive or be entitled to receive remuneration under contracts of employment or services other than remuneration for acting as a director. This requirement does not apply to a member-funded society.

Special Resolution

  • The Act will change the threshold for passing a special resolution in meetings from 75% to 66%; bringing it in-line with the same threshold required by corporate law in B.C. However, if a society wanted it could set a higher threshold for special resolutions - up to 100%. This gives societies greater flexibility in decision-making.

Unalterable Provisions

  • Under the current regime, a society's constitution could have unalterable provisions - provisions that could live on to the end of time. Not surprisingly, these have been somewhat problematic as societies have had no way to remove them. Until now. Under the new Act, unalterable provisions will no longer be allowed and when a society transitions, any "unalterable provisions" must be moved to the society's bylaws and then may be alterable.
  • Even though unalterable provisions will no longer be permitted under the new Act, societies could set a special resolution at 100% to ensure changes with respect to that provision could only be made on a unanimous basis.

These are just some of the big changes expected. Some societies will be impacted more than others in modernizing its organizing documents and reviewing its board composition. The transition will impact all societies; as, at the very least, all societies will be required to complete and submit a transition application to B.C. Registry.

It will be interesting to see how B.C. Registry manages with the influx of submissions and queries generally from societies during (and in anticipation of) the transition period. The transition doesn't have to be difficult but it would be wise for societies to begin the preparation early. Now would also be a good time for societies to look over and revise its bylaws and constitution and see what other changes might be relevant moving forward.

If you'd like more information, visit http://lawfornonprofits.ca/ and sign up for events/workshops and news on legislation as it's released. Law for Non-Profits is an initiative of the Pacific Legal Education and Outreach Society. 

Venture Issuers Subject to Streamlined Requirements

The Canadian Securities Administrators have recently streamlined continuos disclosure obligations for venture issuers. This simplifies some obligations and may also enable issuers access or pursue acquisitions on a more timely basis. A highlight of the changes are below:

1. Quarterly Reporting Now Optional: Venture issuers now have the option to provide "highlights" disclosure in place of full interim MD&A for quarterly reports. The highlights would include a short discussion of all material information about the company's operations, liquidity and capital resources. 

2. Executive Compensation Filing Deadline Clarified: Venture issuers must file applicable executive compensation disclosure within 180 days after the financial year-end for venture issuers.

3. Business Acquisition Report (BAR) Filing Threshold Increased: There will be fewer BARs required to be filed as the significance acquisition threshold (either an asset or investment test) has been increased from 40% to 100%. The new threshold will apply to instances of when (a) proceeds of a prospectus offering will be used to finance a proposed acquisition and (b) information circulars relate to a proposed acquisition. 

To read more, view the full details on the BC Securities Commission website here: https://www.bcsc.bc.ca/51-102_[NI_and_F_Amendment_Advance_Notice]_09042015/

New crowd-funding rules introduced in several provinces

On May 20, 2015, regulators in BC (along with Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia) adopted new rules which will allow companies to raise money by crowd-funding while also distributing shares. The new rules provide a new opportunity for companies because previously, companies could only raise money by crowd-funding if securities were not also being distributed.

The rules will enable private (non-reporting) companies to raise money without having to file a Prospectus and enable an online funding portal to assist with the distribution of shares or securities without being Registered as an investment dealer.

For a company to rely on the exemptions, it must:

  • not be a reporting issuer anywhere in Canada;
  • have a head office in one of the provinces listed above;
  • not use the exemption more than twice annually, and each distribution must be $250,000 or less. 

Investors relying on the exemptions may not invest more than $1,500 per distribution.

To operate a funding portal through which the securities would be distributed, and rely on the dealer registration exemption, that entity must:

  • have a head office in Canada and have a majority of its directors resident in Canada;
  • not charge a commission for the distribution of securities;
  • host a website through which the funding portal can receive payments from investors for their subscriptions, and through which it can provide information in connection with the distribution.

This is an excellent opportunity for companies to finance by crowd-funding while offering equity in the form of securities to their investors. Companies should however also consider what kinds of securities investors under the crowd-funding category should receive as they will be likely be unique from shares or convertible securities issued to founders or as seed capital.