Reminder To Franchisors: The Disclosure Update Window Is Now Open
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 2017.
The Franchising Code of Conduct (“the Code”) requires Franchisors to update their Disclosure Documents within four months of the end of their financial year. For most Franchisors, this will mean their Disclosure Documents must be updated by 31 October 2017.
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 Code.
Pursuant to the Code, the ACCC has audit and investigative powers and can issue infringement notices in the sum of $9,000 for a corporation. Further, pecuniary penalties of up to $63,000 can be ordered by the Federal Court for non-compliance with the Code. In 2017 the ACCC issued two infringement notices (totalling $18,000) to Domino’s Pizza Enterprises Ltd for failures by Domino’s to provide franchisees with an annual marketing fund financial statement and an auditor’s report within the allowed time limit under the Code. The ACCC has also issued Federal Court proceedings against Ultra Tune Australia Pty Ltd and Geowash Pty Ltd alleging Code breaches.
Provisions of the 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 four 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));
- 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));
- within four months after the end of the last financial year, prepare a statement showing the receipts and expenses of any marketing or other co-operative fund for the last financial year and provide a copy of the statement to each franchisee of the network within 30 days of its preparation (clause 15(1)); and
- within 4 months after the end of the financial year, have the statement of receipts and expenses of the marketing fund or the co-operative fund audited by a registered company auditor and provide a copy of the auditor’s report to each franchisee of the network within 30 days of its preparation (clause 15(4)).
Updates You Can Make
Because many of the changes required for 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 (2015, 2016 and 2017) (Item 6.4):
- 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 Code);
- Franchised businesses that the franchisor bought back;
- Franchise agreements that ended when the franchisor acquired the franchised business.
- the name, location and contact details for franchisees involved in any of the above key events, unless the franchisees have specifically asked that their details remain undisclosed (Item 6.5);
- changes to your intellectual property (Item 8);
- payments (Item 14), including payments to third parties (Item 14.7).
- marketing or other co-operative fund expenditure for the 2017 financial year (Item 15.1(g));
- details of any unilateral variations made to existing franchise agreements in the last three financial years (Item 17); and
- details of whether, in the last three 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).
You can make all these changes yourself. However, we do recommend that you ask us to check your changes against the Code requirements.
MST Lawyers’ Role in Your Update
MST Lawyers can assist you in the annual update of your Disclosure Document.
The following sections of the Disclosure Document involve legal rather than factual updates, and given franchise networks evolve and change over time; we recommend you review these sections and advise whether they accurately 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 (financing);
- Item 18 (arrangements to apply at the end of the franchise agreement).
If your policies and practices have changed, we recommend that you have us amend your Disclosure Document.
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.
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 2017 financial year.
As stated above, if you operate a marketing fund or other co-operative fund, before 31 October, you must also prepare a statement that shows the fund’s receipts and expenses for the 2017 financial year. You must provide the statement to each of your franchisees within 30 days of its preparation. Further, the statement must be audited before 31 October, unless 75% of your Australian franchisees who contribute to the fund vote to agree that an audit is not required. Please note that the vote must be held before 30 September 2017 and by virtue of the Code, the vote must be conducted annually. If your franchisees vote that your fund does not need an audit, there is no requirement 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 four 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 2016 might say there have been no franchise terminations in the past three financial years, but in the period after 31 October 2016 and before the next update is required to be completed on 31 October 2017 a large number of franchisees may have been terminated. Although it might be factually correct that there were no franchise terminations in the past three financial years, the failure to disclose a high percentage of franchisees exiting the network after 31 October 2016 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 Code in 2015, and the ACCC now actively exercising its powers to impose infringement notices and to seek civil penalties in the Federal Court for breaches of the Code, it is more important than ever to ensure that your Disclosure Document and processes comply with the Code. In particular, franchisors need to make sure that 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.