In many cases, a franchisor may wish to purchase a business branch (ie, the point of sale) that was previously managed by a franchisee under a franchise agreement.
Franchise agreements often provide for a pre-emption right or a right of first refusal in the franchisor's favour. Alternatively, an agreement may give the franchisor an option right, to be exercised on expiry of the agreement. A provision of this kind must stipulate in detail the terms and conditions on which the option may be exercised, including the purchase price. It is advisable for franchisors to insert the relevant provisions into their franchise agreements when they are executed, as this will give them the opportunity to purchase the franchisee's business and preserve the goodwill in, and the integrity of, the franchise network.
For a franchisor, acquiring a business that was previously managed by its franchisee may be a particularly advantageous move. The franchisor is effectively the successor to an established business and can exploit the reputation that has accrued to its trademark as a result of the franchisee's activity in the territory previously assigned to it.
However, franchisors and franchisees alike should be aware of a Competition Authority decision on this issue. The authority ruled that a franchisor's acquisition of a branch of the business that was previously managed by a franchisee did not constitute a concentration. It considered that a franchisor already manages such a branch by means of the franchise agreement; therefore, the operation does not entail a change in the entity's control structure, but rather a change in the legal form of the relationship through which the franchisor manages the business.
However, this decision is inconsistent with earlier rulings in similar cases. Previously, the authority deemed that a franchisor's acquisition of a branch that was formerly managed by a franchisee under a franchise agreement entails acquisition of control under Article 5(1)(b) of the Competition Act (287/1990) and therefore constitutes a concentration.
It is well established that in the context of a franchise agreement, the imbalance between the relative positions of the parties may result in abuse of economic dependence. In some cases, the franchisor may have considerable power to influence the franchisee's management of its activities. Nonetheless, the European Commission has stated that a franchise agreement is not normally sufficient to give a franchisor control over its franchisee's activities. Therefore, franchisor and franchisee must be considered separate and autonomous. On this basis, the execution of a franchise agreement is held to constitute a vertical agreement, not a concentration. Only if the franchisor subsequently acquires the franchisee is it subject to the prior notification requirement in Article 16 of the act relating to the relevant thresholds. This is at odds with the recent decision, which seems to imply that in a franchise relationship, the franchisor already controls the franchisee's business; therefore, the acquisition of the business does not constitute a concentration. This may happen in certain circumstances, in which case the execution of the franchise agreement should be notified to the authority.
Franchisors should not discount the authority's decision; however, if planning to acquire part of a business that was previously managed by its franchisee, a franchisor should notify the authority if the relevant thresholds are exceeded.
For further information on this topic please contact Marco De Leo or Beatrice Masi at Rinaldi e Associati by telephone (+39 02 7600 8860), fax (+39 02 7600 6944) or email ([email protected] or [email protected]).