IFA s 45 th Annual LEGAL SYMPOSIUM

Transcription

1 LEGAL SYMPOSIUM

2 Basics Track: Best Practices in Franchise Administration Charlene York Moderator Akerman Senterfitt LLP Jennifer Yiangou Anytime Fitness Inc. Joanna Lim Cheng Cohen LLC

3 Best Practices in Franchise Administration 1. Franchise Law Overview 2. Registration 3. Managing Multi-State Registrations 4. Internal Training 5. Pre-Sale Compliance 6. Post-Sale Compliance

4 States with Franchise Laws Registration States In California, Hawaii, Illinois, Maryland, Minnesota, New York, North Dakota, Rhode Island, Virginia and Washington, submissions are reviewed by a state franchise examiner Although technically registration states, Indiana, Michigan, South Dakota and Wisconsin now only require the filing of an annual notice Notice States One-Time Filings - Kentucky, Nebraska and Texas Annual Filings - Florida and Utah

5 If No Registered Trademark Connecticut and North Carolina-registration required if no federal registered trademark South Carolina-registration required if no state or federal registered trademark Georgia and Louisiana-consent to service of process required if no state or federal registered trademark Maine-if no federal registered trademark, a franchisor may only sell one franchise without registering under the state business opportunity statute

6 Exclusions from the Amended Rule Employer-employee relationships and general partnerships Cooperative associations, including agricultural cooperatives and retailer-owned cooperative chains Certification and testing services, such as those offered by Underwriters Laboratories and Good Housekeeping Single trademark licenses

7 Exemptions Under the Amended Rule Federal exemptions (automatic) Nominal or Minimum Payment Fractional Franchise/Leased Department Oral Contract Petroleum Marketers and Resellers Large Initial Franchise Investment Experienced, High-Net-Worth Franchisee Related Party or Insider Exemption

8 Exemptions Under State Laws State exemptions (generally not automatic) Some action is required by the franchisor in order to claim the exemption Do not reduce the franchisor s pre-sale disclosure obligation There are a wider variety of exemptions some similar to the federal exemptions and some unique to a particular state

9 State Advertising Requirements California, Maryland, Minnesota, New York, North Dakota, Rhode Island and Washington require the filing of the advertising and promotional materials before use in that state Franchisors are prohibited from using any information in advertising materials that is not either contained in or substantiated by their FDD Franchisors are prohibited from using any untrue statement of a material fact or from omitting a material fact necessary to make the statements in the advertising materials not misleading

10 Franchise Sellers and Brokers California, Hawaii, Illinois, Indiana, Maryland, Minnesota, North Dakota, New York, Rhode Island and Washington require franchise sellers to register by submitting a Franchise Seller Disclosure Form (Form D) In California- franchise sellers whose information is disclosed in Item 2 do not have to complete and submit Form D the submission of a Form D after an initial or renewal filing has been made effective is considered a posteffective amendment filing and requires payment of an additional fee

11 Franchise Sellers and Brokers New York a franchise seller must file a Sales Agent Disclosure Form with the Department of Law and wait for the issuance of a registration order before offering and selling franchises Washington franchise sellers must register before offering or selling franchises In New York and Washington, a franchise broker is also independently responsible for registering annually with the state before engaging in the offer or sale of franchises

12 Initial Registration The registration packet contains: A cover letter and required application fees Form A Uniform Franchise Registration Application (indicate initial, renewal or amendment) Form B Franchisor s Costs and Sources of Funds Form C Uniform Consent to Service of Process (including corporate acknowledgment) Form D Franchise Seller Disclosure form Form E Auditor s Consent Form F Guaranty of Performance State specific forms (advertising materials, CA forms)

13 Annual Renewals State registrations expire either 90, 110 or 120 days following the close of the franchisor s fiscal year end: Hawaii expires 90 days after fiscal year end California expires 110 days after fiscal year end Illinois, Minnesota, New York and Rhode Island expire 120 days after fiscal year end Or 1 year from the date of the order granting registration Indiana, Maryland, Michigan, North Dakota, South Dakota, Utah, Virginia and Washington

14 Annual Renewals In order to be considered timely, a renewal application must be filed before the expiration of the registration Illinois-1 business day before expiration North Dakota - 15 business days before expiration Rhode Island - 30 days before expiration If a registration lapses before the renewal is declared effective, the franchisor must go dark and may not offer or sell in the state during the lapse period Once the renewal is effective, the franchisor must redisclose any serious prospect and re-observe the waiting periods before closing the sale of the franchise

15 Partial Filings I n practice, some states will accept partial filings: Illinois, North Dakota, Rhode Island and Washington will accept documents and a check without an FDD California, Maryland and Virginia will accept documents, a check and an FDD without financials Indiana, South Dakota and Wisconsin must be filed as a complete package

16 Amendments Under the Amended Rule, a franchisor is required to update its disclosure document on the occurrence of a material change. A material change is any fact, circumstance, or set of conditions which has a substantial likelihood of influencing a reasonable franchisee or a reasonable prospective franchisee in the making of a significant decision relating to the franchised business or which has any significant financial impact on a franchisee or prospective franchisee.

17 Amendments Some state laws list specific events which constitute a material change, but events that generally trigger the need to amend include: The termination or failure to renew a substantial portion of a system s franchisees (5% or 10% is considered substantial by some states) A significant change in the franchisor s management team A significant change in the franchisor s corporate structure (a sale, for example) An adverse change in the franchisor s financial condition A change in the terms of the offering itself (e.g. a change in the initial fee or a drastic change in the type of products or services offered)

18 Amendments - Timing The time within which a franchisor has to amend its FDD after the occurrence of a material change varies. Under the Amended Rule, the update must be done on at least a quarterly basis Under state statutes, the time allowed for amending the FDD is described as promptly after the event, upon the occurrence of a material change or as soon as reasonably possible

19 Comment Letters Common issues addressed in comment letters: undercapitalization escrow, fee deferral or surety bonds missing information required by the Amended Rule or state law inconsistencies in the disclosure document or franchise agreement extraneous information or information in the wrong place in the disclosure document risk factors required

20 Pros and Cons of a Multi-State FDD Pros Disclosure Tracking Manageability Cons State specific requirements Timing of effectiveness may result in different forms

21 Managing Multi-State Registrations Differing requirements by different states if the franchisor doesn t want to include the changes in the base FDD, the state-specific requirements usually can be placed in riders and amendments Creating multiple FDDs to deal with things like risk factors required by certain states Moving renewal dates closer together and closer to the franchisor s fiscal year end

22 Multi-State FDD Non registration states IL, IN, MI, SD, WI Non-Material Change State Specific Change Material Change Multi-State FDD with changes Amendment to states already approved Revise and send to states where registration is pending State specific FDD

23 Mirror electronic file structure to physical Document Management Distinguish filings Client X 2012 Renewal Key Sub-files Client Y 2011_Oct Amendment Correspondence Comment Letters 2011 Renewal FDD State Registration Materials Applications Franchise Seller Forms Costs and Sources of Funds NY Annual Report Auditor s Consent Orders of Registration Advertising

24 Internal Training Importance of Sales & Legal working together Gathering the Sales team s input on FDD Test the Sales team (Secret Shops) Collecting proper documentation Proper staffing to administer a program

25 Staffing Needs Head of Sales Sales Reps Sales Coordinators Real Estate Reps Real Estate Coordinators Sales/Real Estate Operations General Counsel VP Operations Operations Manager Paralegals Compliance Coordinators VP Support Franchise Consultants Marketing Consultants Affiliate Companies Support

26 Compliance Training Choose strong & engaging speakers Get creative make it fun Bring in the outside counsel to hear a different view point Review Financial Performance Representation in FDD

27 Other Important Items Waiting Periods Checks & Balances Dealing With Downtime Electronic Disclosure Advertising Materials Discovery Days FDD Receipts & Supplemental Questionnaires

28 Technology/CRM Database

29 Shared Legal Docs

30 Tracking Protected Territories

31 Example of a Prospect Pipeline

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