Disclosure Documents

Transcription

1 Disclosure Documents

2 Introduction Code imposes extensive disclosure obligations on franchisors disclosure document ongoing disclosure Focus on challenges of drafting disclosure documents items 13.3 to 13.5 item 13.6A (introduced in July 2010) item 13A (introduced in July 2010) item 17A(introduced in July 2010) item 17C (introduced in July 2010)

3 General Requirements Form of the disclosure document annexure 1 (detailed form) annexure 2 (short form) expected turnover of less than $50,000 must be signed by a director, officer or authorised agent of the franchisor specific order and format for information

4 When to Disclose prospective franchisee - at least 14 days before they enter into an agreement (eg. franchise agreement or agreement to franchise) take a transfer/novation of a franchise agreement make any non-refundable payment existing franchisee - at least 14 days before a renewal, extension or extension of the scope of a franchise agreement

5 Ongoing Disclosure franchisee may request a copy of disclosure document no more than once every 12 months update disclosure document at least once a year within 4 months of the end of the franchisor s financial year item 18 of the Code - disclose certain materially relevant facts to franchisees and/or prospective franchisees within a reasonable time of (but no more than 14 days after) becoming aware of the information

6 Ongoing Disclosure Cont d type of information includes any changes in the majority ownership or control proceedings by a public agency, judgment in criminal or civil proceedings or an award in arbitration against the franchisor or a director for breach of a franchise agreement breach of the Competition and Consumer Act (formerly the Trade Practices Act) breach of the Corporations Act

7 Ongoing Disclosure Cont d unconscionable conduct misconduct dishonesty any judgment entered against the franchisor, other than for unfair dismissal, under part 3 of the Independent Contractors Act 2006, section 106 of the Industrial Relations Act 1996 (NSW) or section 276 of the Industrial Relations Act 1999 (Qld)

8 Ongoing Disclosure Cont d civil proceedings against the franchisor or a director by 10% or 10 of its franchisees in Australia (whichever is lower) any judgment entered against the franchisor and not discharged within 28 days for $100,000 (for a small company) or $1,000,000 for any other company any judgment that is entered against the franchisor in a matter mentioned in section 4.2 of annexure 1 or section 3.2 of annexure 2

9 Ongoing Disclosure Cont d if the franchisor becomes an externally-administered body corporate (what amounts to an externally administered body corporate is set out in the Corporations Act) a change in the intellectual property, or ownership or control of the intellectual property, that is material to the franchise system the existence and content of any undertaking or order under section 87B of the Competition and Consumer Act

10 Establishment Costs 13.3 Details of the range of costs to start operating the franchised business, based on current practice, for the following matters: (a) (b) (c) real property, including property type, location and building size equipment, fixtures, other fixed assets, construction, remodelling, leasehold improvements and decorating costs inventory required to begin operation

11 Establishment Costs Cont d (d) (e) (f) security deposits, utility deposits, business licences, insurance and other prepaid expenses additional funds, including working capital, required by the franchisee before operations begin other payments by a franchisee to begin operations

12 Establishment Costs Cont d 13.4 For item 13.3, the details for each payment must include: (a) description of the payment (b) (c) amount of the payment or the formula used to work out the payment to whom the payment is made

13 Establishment Costs Cont d (d) (e) when the payment is due whether the payment is refundable and, if so, under what conditions 13.5 For item 13.4, if the amount of the payment cannot easily be worked out the upper and lower limits of the amount

14 Ongoing Costs Payable to Persons Other than Franchisor 13.6A For each recurring or isolated payment, that is within the knowledge or control of the franchisor or is reasonably foreseeable by the franchisor, that is payable by the franchisee to a person other than the franchisor or an associate of the franchisor: (a) (b) (c) a description of the payment the amount of the payment or formula used to work out the payment to whom the payment is made

15 Ongoing Costs Payable to Persons Other (d) (e) than Franchisor when the payment is due whether the payment is refundable and, if so, under what conditions 13.7 For item 13.6A, if the amount of the payment cannot easily be worked out the upper and lower limits of the amount

16 Unforeseen Capital Expenditure 13A.1 Whether the franchisor will require the franchisee, through the franchise agreement, the operations manual (or equivalent), or any other means, to undertake unforeseen significant capital expenditure that was not disclosed by the franchisor before the franchisee entered into the franchise agreement

17 Unilateral Variation of Franchise Agreement 17A.1 If a franchise agreement is entered into in a financial year commencing on 1 July 2011, 1 July 2012 or 1 July the circumstances in which the franchisor has unilaterally varied a franchise agreement since 1 July A.2 If a franchise agreement is entered into in a financial year commencing after 1 July the circumstances in which the franchisor has unilaterally varied a franchise agreement in the last 3 financial years 17A.3 The circumstances in which the franchise agreement may be varied, unilaterally, by the franchisor in the future

18 Arrangements to Apply at End of Franchise Agreement 17C.1 Details of the process that will apply in determining arrangements to apply at the end of the franchise agreement, including: (a) whether the prospective franchisee will have any options to renew, or extend, or extend the scope of the franchise agreement or enter into a new franchise agreement and, if so, the processes the franchisors will use to determine whether to renew, extend, or extend the scope of the franchise agreement or enter into a new franchise agreement

19 Arrangements to Apply at End of Franchise Agreement Cont d (b) whether the prospective franchisee will be entitled to an exit payment at the end of the franchise agreement and, if so, how the exit payment will be determined or earned

20 Arrangements to Apply at End of Franchise Agreement Cont d (c) details of the arrangements that will apply to unsold stock, marketing material, equipment and other assets purchased when the franchise agreement was entered into, including: (i) whether the franchisor will purchase the stock, marketing material, equipment and other assets (ii) if the franchisor is to purchase the stock, marketing material, equipment and other assets - how prices will be determined

21 Arrangements to Apply at End of Franchise Agreement Cont d (d) (e) (f) whether the prospective franchisee will have the right to sell the business at the end of the franchise agreement if the prospective franchisee will have the right to sell the business at the end of the franchise agreement - whether the franchisor will have first right of refusal, and how market value will be determined whether the franchisor will consider any significant capital expenditure undertaken by the franchisee during the franchise agreement, in determining the arrangements to apply at the end of the franchise agreement

22 Arrangements to Apply at End of Franchise Agreement Cont d 17C.2 If a franchise agreement is entered into in a financial year commencing on 1 July 2011, 1 July 2012 or 1 July details of whether the franchisor has, since 1 July 2010, considered any significant capital expenditure undertaken by franchisees, in determining the arrangements to apply at the end of franchise agreements between the franchisor and those franchisees

23 Arrangements to Apply at End of Franchise Agreement Cont d 17C.3 If a franchise agreement is entered into in a financial year commencing after 1 July details of whether the franchisor has, in the last 3 financial years, considered any significant capital expenditure undertaken by franchisees, in determining the arrangements to apply at the end of franchise agreements between the franchisor and those franchisees

24 Conclusion Some of the recent changes to the Code's disclosure requirements create challenges for franchisors due to the uncertainty of the requirements and the breadth of the information that it appears is required to be disclosed There is no guidance on these requirements as yet and many franchisors will still be feeling their way through the new requirements, particularly as the "stepped in" obligations in items 17A and 17C have only recently started to apply to franchise agreements entered into after 1 July 2011