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A reminder to Franchisors that the Disclosure Update Window is Open

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By Raynia Theodore, Principal, MST Lawyers

Franchisors, the time has come to review and update your Disclosure Document for the financial year ending 30 June 2015. As you know, a new Franchising Code of Conduct has been effective since 1 January 2015 (“New Code”).

A provision in the New Code allows Franchisors a grace period for updating their Disclosure Document pursuant to the New Code requirements. Pursuant to the New Code, those Franchisors whose financial year ends on 30 June 2015 are required to convert to the new format of Disclosure Document prescribed by the New Code by 31 October 2015, in addition to completing the standard annual update of their Disclosure Document.

Further, pursuant to the New Code there are additional disclosure items Franchisors will need to consider, including but not limited to:

  • a new Item 7 to be completed where the Franchisor is a Sub-franchisor or Master Franchisee;
  • a new Item 12 requiring disclosure of arrangements relating to sales of goods and services online by the Franchisor, an associate of the Franchisor, the franchisee or other franchisees;
  • litigation that must be disclosed now extends to current proceedings against an associate of the Franchisor or a director of an associate of the Franchisor; and
  • mandatory statements are now required to make it clear what will happen at the end of the term of a franchise agreement when there is an option to renew and when there is no option to renew or extend the franchise agreement.

Increasing importance of a current Disclosure Document

In the past few years there has been a substantial amount of activity generated by Australian Competition and Consumer Commission (“ACCC”) investigations of Franchisors and civil claims brought by Franchisees against Franchisors alleging non-compliance with the old Code.

Pursuant to the New Code, the ACCC has been given greater audit and investigative powers and can now issue infringement notices of up to $8,500. With these additional powers it is expected that there will be increased activity in this area. Further, there are now pecuniary penalties of up to $51,000 that can also be ordered by the Federal Court for non-compliance with the New Code.

Provisions of the New Code which attract a penalty for non-compliance include obligations of franchisors to:

  • create a compliant disclosure document (clause 8(1));
  • update their disclosure document within 4 months after the end of each financial year (clause 8(6));
  • give each prospective franchisee a copy of the Code, the disclosure document and the franchise agreement in executable form at least 14 days before the prospective franchisee enters into a franchise agreement or makes a non-refundable payment in connection with the proposed franchise agreement (clause 9(1)); and
  • give an existing franchisee a copy of the Code, the disclosure document and the franchise agreement in executable form at least 14 days before renewal or extension of the franchise agreement (clause 9(2)).

 Updates You Can Make

Because many of the changes required for the purposes of the annual update will be factual, you can do a lot of the Disclosure Document update yourself, including updating the following:

  • details of any litigation (Item 4);
  • details of the number of existing franchisees and franchised businesses, including their addresses, telephone numbers and year each franchisee commenced operation (Items 6.1 to 6.3);
  • details of the following key events for each of the last three completed financial years (2013, 2014 and 2015) (Item 6.4):
  • details of any unilateral variations made to existing franchise agreements in the last 3 financial years (Item 17A);
  • details of whether, in the last 3 financial years, you have considered any significant capital expenditure undertaken by franchisees in deciding what arrangements will apply at the end of a franchise agreement (Item 18.2);
  • any changes to your intellectual property (Item 8);
  • marketing fund expenditure for the 2015 financial year (Item 15);
  • payments (Item 14), including payments to third parties (Item 14.7).
        • Franchises transferred;
        • Franchised businesses that ceased operating;
        • Franchise agreements that either the franchisor or franchisee terminated;
        • Franchise agreements that were not extended (as defined in the New Code);
        • Franchised businesses that franchisor bought back;
        • Franchise agreements that ended when the franchisor acquired the franchised business.
        • you must also disclose contact details for franchisees involved in any of these key events, unless they have specifically asked that their details remain undisclosed;

As mentioned, you can make all these changes yourself.  However, we do recommend that you ask us to check your changes against the New Code requirements.

MST Lawyers’ Role in Your Update

MST Lawyers can assist you in both the annual update of your Disclosure Document and to ensure you comply with the New Code. We can also help you review your internal processes and your franchise agreement in light of the additional disclosure items specified in the New Code.

Further, the following sections of the Disclosure Document involve legal rather than factual updates, so we recommend you review these sections and advise whether they reflect what occurs in your network:

  • Items 9 and 13 (franchise sites or territories);
  • Item 10 (supply of goods and services to franchisees);
  • Item 11 (franchisee’s supply of goods or services);
  • Item 12 (supply of goods or services – online sales);
  • Item 16 (finance);
  • Item 18 (arrangements to apply at the end of the franchise agreement);

If not, we recommend that you have us make the changes (or check any amendments you make).

Importantly, if you provide earnings information or intend to do so, you need to update Item 20.  It is critical to have a lawyer complete this, as it is an area that can expose Franchisors to claims by franchisees of misleading or deceptive conduct, and misrepresentation.

We will conduct trademark searches and company searches of the franchisor and its related entities to ensure all trademark information and information about the associates and officers of the Franchisor in the Disclosure Document is correct.

Final Reminders

You need to include in your Disclosure Document a solvency statement signed by at least one franchisor director and the franchisor’s financial reports for the last two financial years or an independent audit report prepared by a registered company auditor in respect of the 2015 financial year.

If you operate a Marketing Fund, before 31 October, you must also prepare a statement that shows your marketing fund’s receipts and expenses for the 2015 financial year.  You must provide the statement to each of your franchisees within 30 days of its preparation. You must have the marketing fund statement audited before 31 October, unless 75% of your Australian franchisees who contribute to the fund vote to agree that an audit is not required.  Note:  the vote must be held by 30 September 2015 and by virtue of the New Code the vote is required to be conducted annually as opposed to every 3 years.  If your franchisees vote that your marketing fund does not require an audit, there is no need to obtain an audit report this financial year.

More Than an Annual Update

Franchisors should treat the formal requirement in the New Code that franchisors update their Disclosure Document annually within 4 months of the end of their financial year as an absolute minimum requirement.

Before a Disclosure Document is handed out to a prospective franchisee, you should review it to ensure that it is still up to date and does not give a franchisee a false impression about the Franchisor or the system.  For example, a Disclosure Document created on 31 October 2015 might say there have been no franchise terminations in the past 3 completed financial years, but in the period after 31 October 2015 a large number of franchisees may be terminated.  Although it might be factually correct that there were no franchise terminations in the past 3 completed financial years, the failure to disclose a high percentage of franchisees exiting the network after 31 October 2015 would give a prospective franchisee the wrong impression and be potentially misleading and deceptive, exposing the Franchisor to claims by the franchisee.  It is, therefore, critical that Franchisors regularly check the contents of their Disclosure Document.

With the introduction of penalties and infringement notices under the New Code it is more important than ever before to ensure that the Disclosure Document complies with the New Code and the annual update of the Disclosure Document is completed on time. It is equally important that information provided in the Disclosure document is accurate and not misleading in any way.

If you have any queries about the above, please feel free to contact John Sier or Raynia Theodore in our Franchising team by email franchise@mst.com.au or by telephone +61 3 8540 0200.