The Manitoba legislature recently announced that Manitoba's Franchises Act (the Manitoba Act), which received Royal Assent on June 17, 2010, and the recently finalized regulations thereunder (the Manitoba Regulations) will come into force on October 1, 2012, thereby joining Ontario, Alberta, New Brunswick and Prince Edward Island (the Other Jurisdictions). This will make Manitoba the fifth Canadian jurisdiction to implement franchise legislation. The announcement comes after the Manitoba legislature released draft regulations for public consultation in November 2011, and the final version of these regulations are substantially similar to such draft.
The Manitoba Act and Regulations are based, in large part, on the Uniform Law Conference of Canada’s Model Franchises Act and are substantially in line with existing franchise legislation and regulations in the Other Jurisdictions. Despite the similarities, it is important to note that a few key differences exist between the Manitoba Act and Regulations and the franchise legislation currently in effect in the Other Jurisdictions. The salient features of the Manitoba Act and Regulations are as follows.
The Manitoba Regulations contain a wraparound provision which allows a franchisor to use disclosure documents prepared and used in another jurisdiction as long as it is supplemented to comply with any additional requirements under the Manitoba Act and Manitoba Regulations. The same concept applies to the financial statements of the franchisor to be included in the disclosure document. According to section 7(2) of the Manitoba Regulations, financial statements may be prepared in accordance with generally accepted accounting principles (GAAP) of the jurisdiction in which the franchisor is based. However, these statements need to be supplemented by information that sets out any changes necessary to make the presentation and content of such statements equivalent to financial statements prepared in accordance with Canadian GAAP, as set out in The Canadian Institute of Chartered Accountants Handbook – Accounting. The financial statements may be audited or reviewed in accordance with the standards of the jurisdiction in which the franchisor is based, as long as those standards are at least equivalent to the auditing or review standards set out in The Canadian Institute of Chartered Accountants Handbook – Assurance.
Documents in Sequential Parts
Perhaps the most important difference under the Manitoba Act is the ability for a franchisor to deliver a disclosure document to a prospective franchisee in multiple parts. Although it is anticipated that the normal practice would be to deliver the disclosure document as a single document at one time as required by the Other Jurisdictions, the Manitoba Act allows for multiple disclosure documents to be delivered at different times. This does not mean, however, that a franchisor is given free rein on the delivery of the disclosure document. Should a franchisor opt for this “in parts” approach to disclosure and not deliver the entire disclosure document to the prospective franchisee as a single document at one time, they must comply with the following specific requirements delineated in the Manitoba Regulations:
- provide the risk warning statements required under section 3 of the Manitoba Regulations in the first part of the disclosure materials delivered to the prospective franchisee;
- deliver certain clusters of required information together, to comply with the requirement that all of the information required in each part of Schedule A (being the detailed list of disclosure document information requirements divided into the following three parts: Required Information about the Franchisor; Required Information about the Franchise; and Lists of Franchisees and Businesses) must be provided together;
- at the beginning of any document containing information that forms part of the disclosure document, the following statement must be prominently printed: “THE FOLLOWING INFORMATION FORMS PART OF THE DISCLOSURE DOCUMENT REQUIRED TO BE PROVIDED UNDER THE FRANCHISES ACT”; and
- the certificate of the franchisor certifying the accuracy and completeness of the disclosure document (the Certificate) must be included with the last part of the disclosure document provided by the franchisor and must identify each part of the disclosure document that was provided to the franchisee and the date that each part was provided.
Note, however, that although the disclosure document may be delivered in phases, the obligation to disclose has not been met until the date on which the last part of the disclosure is delivered to the prospective franchisee. In the result, the 14-day disclosure review period necessary before the franchise agreement is signed or any payment of consideration relating to the franchise is made by or on behalf of the prospective franchisee to the franchisor or franchisor’s associate only begins on the date that the final piece of disclosure is delivered to the prospective franchisee.
Prior to the expiry of the 14-day “cooling off” period, franchisors will be permitted to accept a fully refundable deposit that is given under an agreement that in no way binds the prospective franchisee to enter into the franchise agreement. The Manitoba Regulations state that this amount may be up to 20% of the franchisor’s initial franchise fee to a maximum of C$100,000. Further, the Manitoba Act provides that the franchisor and prospective franchisee may enter into confidentiality agreements and location selection agreements during this period (but entry into any other agreement relating to the franchise would also be subject to the 14-day disclosure review period described above).
The Manitoba Regulations allow a disclosure document to be delivered by electronic means. However, should a franchisor choose to deliver a disclosure document in this manner, they must ensure that: the document is delivered in a form that enables the recipient to retrieve and process the disclosure document; the disclosure document does not contain any links to or from external documents or content; and a written acknowledgement of receipt is received from the prospective franchisee. Notice of rescission by a franchisee may not, however, be delivered by electronic means; instead, notice of rescission must be in writing and must be delivered to the franchisor personally, by registered mail, prepaid courier or fax at the franchisor’s address for service or to any other person designated for that purpose in the franchise agreement.
The Manitoba Act provides that a “substantially complete” disclosure document satisfies the requirement for delivery of a disclosure document under the Manitoba Act, even if the disclosure document contains a technical irregularity or mistake not affecting the substance of the document.
SELECT CONTENT OF THE DISCLOSURE DOCUMENT
Under the Manitoba Regulations, the disclosure document must contain risk warnings at the beginning of the document advising a prospective franchisee to seek information on the franchisor (including the franchisor’s business background, banking affairs and credit history), obtain expert independent legal and financial advice and to contact previous and current owners regarding the prospective business.
Information About the Franchisor
The Manitoba Regulations indicate that the disclosure document must contain information regarding the business background of the franchisor and its directors, general partners and officers. Moreover, the franchisor must disclose any previous convictions and pending charges. Specifically, the franchisor must disclose any criminal, civil or administrative judgments or orders against the franchisor or its associates, directors, general partners and officers within the past 10 years. For bankruptcy proceedings, the required disclosure period is for the past six years.
Negative Disclosure, Earnings Projections and Annual Operating Costs
The Manitoba Regulations provide a number of instances where the franchisor must provide a statement that no information is being provided relating to specific disclosure items. For example, if a franchisor is not providing training to the franchisee, the disclosure document must include a statement to that effect. This is also the case if manuals are not being provided or if no exclusive territory is being granted. The same is true for earnings projections, however, where earnings projections are provided, either directly or indirectly, a statement must be provided specifying:
- the assumptions and bases underlying the projection, its preparation and its presentation;
- whether the projection is based on actual results of existing franchises or existing businesses of the franchisor or franchisor’s associates of the same type as the franchise being offered and, if so, the locations, areas, territories or markets of such franchises and businesses;
- if the projection is based on a business operated by the franchisor or the franchisor’s associate, that the information may differ in respect of a franchise operated by a franchisee; and
- where information that substantiates the projection is available for inspection.
Finally, if a franchisor is not providing an estimate of annual operating costs for the franchise, then they must make a statement to that effect. However, should they choose to provide such an estimate, either directly or indirectly, they must provide a statement specifying the assumptions and bases underlying the estimate and where information that substantiates the estimate is available for inspection.
Licences and Registrations
The franchisor is required to provide a description of every licence, registration, authorization or other permission that the franchisee will be required to obtain under federal or provincial laws in order to operate the franchise. Moreover, the franchisor must provide a statement to the franchisee indicating that they may be required under other federal or provincial laws or under the bylaws of a municipal or other local authority to obtain additional licences, registrations, authorizations or other permissions to operate the franchise and that the prospective franchisee should make inquiries to determine whether such licences, registrations, authorizations or other permissions are required.
Lists of Current and Former Franchisees
- With respect to current franchisees, the Manitoba Regulations outline a requirement to list all of the current franchisees in Manitoba (with augmentation by additional franchisees from Saskatchewan, Alberta or franchises that are geographically closest to Manitoba, in that order, until a total of 20 franchisees have been disclosed, or if the system has fewer than 20 total franchises, all existing franchises).
- With respect to former franchisees, the Manitoba Regulations require franchisors to provide contact information for all recent franchise closures in Manitoba and any other jurisdiction covered by its list of current franchisees.
- The franchisor must also provide a list of all businesses of the same type as the franchise being offered that the franchisor or the franchisor’s associates currently operate in Manitoba.
Should the franchisor provide and require that their franchisee operate in accordance with operations manuals, then, as part of the disclosure document, the franchisor must provide the manual’s table of contents or a statement specifying where manuals are available for inspection.
Internet, Telephone and Catalogue Sales
The franchisor must provide a description of any reservation of rights by the franchisor for Internet sales, telephone sales, catalogue sales or sales by other means.
SELECT DISCLOSURE EXEMPTIONS
Financial Statement Disclosure Exemption
Large, sophisticated franchisors with a net worth of (i) at least C$5-million, or (ii) at least C$1-million if the franchisor is controlled by a corporation whose net worth is at least C$5-million, will be exempt from the requirement to include their financial statements in the disclosure document if the franchisor has had at least 25 franchisees engaged in business in Canada or a single jurisdiction other than Canada at all times during the five-year period immediately preceding the date of the disclosure document (or if the franchisor is controlled by a corporation that meets such requirements). A franchisor relying on this exemption must include a statement in the Certificate indicating that the franchisor meets the requirements of the financial statement exemption. This is similar to the requirement under New Brunswick’s franchise legislation, but there is no analogous requirement in any other Canadian jurisdiction. It should be noted that the availability of this financial statement disclosure exemption does not in any way reduce or eliminate the franchisor’s obligation to disclose the balance of the information required under the Manitoba Act and Regulations.
“Small Business” Disclosure Exemption
Section 5(11)(g) of the Manitoba Act provides a small business exemption from providing a disclosure document to a prospective franchisee. The section states that a franchisor is exempt from providing a disclosure document where the franchisee’s total annual investment to acquire and operate the franchise does not exceed a prescribed amount, being C$5,000. This amount is consistent with other provinces that provide this exemption from disclosure requirements. Unlike the limited financial statement disclosure exemption referenced above, this disclosure exemption operates as a complete exemption from the requirement to deliver any disclosure at all.
Although the Manitoba Act and Regulations are substantially similar to those in the Other Jurisdictions, it is important for current and future franchisors interested in selling franchises in Manitoba to be aware of the differences from the franchise legislation currently in effect in the Other Jurisdictions so that they may amend their disclosure documents to comply with the requirements of the Manitoba Regulations.