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Reminder to Franchisors that Disclosure Update Window Opens

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By Raynia Theodore, Principal, MST Lawyers

If your financial year ends on 30 June, the Franchising Code of Conduct (Code) allows you until 31 October 2014 to update your Disclosure Document.

Updates You Can Make

Because many of your changes 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 existing franchisees and franchised businesses, including their address, telephone numbers and start up years (Items 6.1 to 6.3);
  • details of the following key events for each of the last three completed financial years (2012, 2013 and 2014) (Item 6.4):
    • Franchises transferred;
    • Franchised businesses that stopped operating;
    • Franchise agreements that either the franchisor or franchisee ended;
    • Franchise agreements that expired and were not renewed;
    • 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;
  • details of any unilateral variations made to existing franchise agreements within 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 17C);
  • any changes to your intellectual property (Item 7);
  • marketing fund expenditure for the 2014 financial year (Item 12);
  • payments (Item 13), including payments to third parties (Item 13.6A).

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

MST Lawyers’ Role in Your Update

If you have made any changes to your Franchise Agreement in the last financial year, or have changed your policies or procedures or you wish to make changes to your Franchise Agreement, corresponding changes may need to be made to your Disclosure Document.

Further, the following sections of the Disclosure Document involve legal rather than factual updates, so we recommend you have us make them (or check any amendments you make):

  • Items 8 and 11 (franchise sites or territories);
  • Item 9 (supply of goods and services to franchisees);
  • Item 10 (franchisee’s supply of goods or services);
  • Item 14 (finance);
  • Items 15, 16 and 17 (which cross reference provisions in your Franchise Agreement); and
  • Item 18 (only if since your last Disclosure Document update you require franchisees to sign certain agreements).

Importantly, if you provide earnings information or intend to do so, you need to update Item 19.  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 can also conduct trademark searches and company searches of the franchisor and its related entities, including bankruptcy searches of all directors, to ensure all trademark information and information about 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 2014 financial year.

Before 31 October, you must also prepare a statement that shows your marketing fund’s receipts and expenses for the 2014 financial year.  You must provide the statement to each of your franchisees within 30 days of its preparation.

You must also have your 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 2014 and is then valid for three 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 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, the franchisor 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 2014 might say there have been no franchise terminations in the past 3 completed financial years, but in the period from 31 October 2014 a large number of franchisees may have exited the network.  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 2014 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.

Your Franchise Agreement

If it has been a while since you last looked at your Franchise Agreement, the Disclosure Document update time is also a good opportunity to review your Franchise Agreement to ensure it still reflects what occurs in your system and to speak to your lawyer about changes to reflect best practice and developments in the franchise industry.

Code Changes

As reported in previous articles the Code is due to be amended. The Government is still indicating that the changes will come into effect in January 2015. The process of change has commenced with the introduction into parliament of the Competition and Consumer Amendment (Industry Code Penalties) Bill 2014 (Bill). This follows the release of a draft of a new Franchising Code of Conduct. It remains to be seen whether further changes will be made to the draft Franchising Code of Conduct.

We will keep you abreast of developments in this area and planned workshops to take you through the changes to the Code and what franchisors will need to do in order to comply with the new laws.

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.