By Peter Snell
Changes happen in life. The dynamic business environment of franchising is no exception. Sometimes changes are calculated, and other times they are completely out of one’s control. In any event, whether planned or unplanned, changes that occur within a franchise system may require the franchisor to stop and determine whether the change is ‘material’ to any prospects currently considering purchasing a franchise. This may lead to a document called a statement of material change.
While the following information serves as a general overview, as always, one should seek their own legal advice when reviewing any franchise document. Only then can specific information and advice be obtained that is relevant to the particular circumstances.
What is a statement of material change?
All provinces with franchise legislation require a statement of material change in certain instances. This document is part of the franchise disclosure process. There is often no need for a franchisor to give a prospective franchisee a statement of material change; however, it is very common for a franchisor to provide one. If one is provided, a prospective franchisee should not be concerned.
The document is a notice to potential franchisees that a “material change” has occurred since the delivery of the franchise disclosure document (FDD) to the prospective franchisee. It provides new or changed information from what was included in the original document. It effectively supplements the disclosure that is in the original FDD.
When should a statement of material change be provided?
A written statement of any material change should be provided to a prospective franchisee as soon as is practicable after the change has occurred and before the earlier of:
(a) the signing of the franchise agreement, and
(b) the payment of any consideration in relation to the franchise.
The phrase, “as soon as is practicable,” is generally understood to mean as soon as possible. The timing of the document’s delivery is important. If it is provided after the prescribed events, it may amount to deficient disclosure or no disclosure at all.
The statement of material change is treated as an extension of the FDD. If a material change has occurred within a franchise and a franchisee signs the agreement without seeing any documentation, then the disclosure to the franchisee will be deemed deficient. Franchisors do not want to find themselves in a position where there has been a failure to adequately disclose to a franchisee.
If the material change was not brought to the attention through a statement of material change before the earlier of signing the franchise agreement or paying any consideration in relation to the franchise, then the franchisee will be able to take advantage of the provincial franchise legislation and the remedies afforded under those regulations.
This document, unlike the FDD, will not be needed in the signing of every franchise agreement. The trigger for the production of a statement of material change, as stated in the label of the document, is the occurrence of a “material change.”
Although there is a mandatory requirement when there is a modification that meets the threshold of a “material change,” often times these documents are provided to franchisees even when there are changes which may not be material. The franchisor may not necessarily believe all of the information contained in the statement of material change should be viewed as a material change, because at least some of the information may not meet the threshold established at law. Accordingly, the franchisor may provide this document to a franchisee on a voluntary basis, simply to pass along information which is supplemental to the information provided in the FDD.
The law does not impose a form for the statement of material change, but the attentive care that is put into the creation of a FDD by a franchisor should also be put into the statement of material change. The law does state the information in this document, just like a FDD, must be set out “accurately, clearly, and concisely.” If a statement of material change contains any misrepresentations, the franchisee is deemed to have relied on the misrepresentation. Failure to take proper care and attention can result in damages being owed by a franchisor to a franchisee under provincial franchise legislation or the whole franchise agreement being rescinded.