Providing a disclosure document that complies with Ontario franchise law can be an arduous undertaking, and we have written extensively in the past on the importance of meeting those requirements. What can be overlooked by franchisors is that the need to focus on disclosure does not end once the disclosure document has been drafted – a franchisor’s disclosure document is truly an evergreen document. A disclosure document is not analogous to an annual report or a financial statement; it is not reflective of a period of time or updated at one time of year. Disclosure documents must be specific to the moment when the franchisor provides them to prospective franchisees. The consequences of providing outdated disclosure can potentially be as drastic and draconian as providing no disclosure at all.
The purpose of a disclosure document is to set out all regulated and other material facts which might influence a prospective franchisee’s decision to invest or not invest in a specific franchise opportunity. When any of those facts change, or facts exist that are relevant to a particular prospective grant, the disclosure document which the franchisor may have used initially (or which it may even have updated for further disclosure) is no longer compliant and the franchisor must take steps to provide the prospective franchisee with current and compliant disclosure before entering into any formal agreement or accepting funds. Whenever a material fact has changed since the date of the disclosure document, the Act requires a franchisor to provide a “statement of material change” to supplement the disclosure document provided to the prospective franchisees. A statement of material change will inform the prospective franchisee of all changes in the disclosure document since it was provided.
Don’t Fear Change
Material changes are not rare events in the operation of a franchise system. A healthy franchise system will be constantly evolving. As a result, franchisors must keep their eyes focussed on their disclosure document to keep it evergreen. This is true both at the time the disclosure document is provided, and in the interval between the date disclosure is provided and the date funds are received from the disclosed candidate.
The Ontario Superior Court of Justice has recognized that material changes are commonplace, and based upon common sense:
It is exceptionally rare that no material changes occur with respect to the franchise business during the term of an existing franchise agreement…
— MDG v. MDG (2007)
The creation of a disclosure document is not intended to lock the franchisor into certain practices. Change is a welcome and necessary component to a franchise system. But with change comes the responsibility on the part of the franchisor to ensure that its disclosure practices are compliant. As we commonly advise franchisors after the preparation of an initial disclosure package, each person in the organization would be wise to ask themselves at the end of each day whether anything that occurred that day would impact their form of disclosure. If so, these changes must be considered for purposes of keeping their disclosure package evergreen.