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What is a statement of material change?

If a material change has occurred within the franchise and a franchisee signs the agreement without seeing any documentation, then the disclosure to the franchisee will be deemed deficient. This is a position franchisors do not want to find themselves in due to potential legal consequences.

“Material Change”

Not all changes trigger an obligation to notify prospective franchisees. In provinces with disclosure legislation, the “material change” that will require the production of a statement of material change is when:

There has been a change in the business, operations, capital, or control of the franchisor or its associate, or a change in the franchise system, which would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or the decision to purchase the franchise, including a decision to implement the change made by the board of directors of the franchisor, or its associate, or by senior management of the franchisor or its associate who believe that confirmation of the decision by the board of directors is probable.

The legislative definition of “material change” (above), is drafted to be extremely broad. For any franchise that is going through changes, it is the best practice to release a statement of material change to prospective franchisees in most circumstances, even if it is likely the change is not necessarily meeting the definition.

Often, a franchisor will find a franchisee, but not have a location in mind to put the new franchise. A location will then be found after the FDD has already been provided. At this point, the franchisor provides information within a statement of material change to the franchisee that includes items such as the site selection, offer to lease, demographic information of the area, where competition is located, and maybe even traffic flow information. All this location specific information, which was impossible to give to the franchisee when the FDD was first provided, would be released in the statement of material change. Taking a broad approach is a practical way to avoid any claims for issues with the disclosure once the franchise agreement is signed.

Failure to adequately disclose a material change

The failure to properly disclose information through a statement of material change can open the door for a franchisee to take advantage of different rights set out in the franchise legislation. If a franchisee finds oneself in any of these situations it is extremely important to seek legal advice.

If the franchise is located in a province with franchise legislation, a franchisee, depending on the information provided and the individual circumstances faced, may have the right to rescind a franchise agreement, without penalty or obligation, within 60 days after receiving a FDD.

  • If a franchisor failed to provide a statement of material change before the earlier of the signing of the franchise agreement and the payment of any consideration in relation to the franchise, or
  • If the contents of the document did not appropriately set out the material change.

The franchisee may also be able to sue for damages if the franchisee suffers a loss because of a misrepresentation contained in a statement of material change or failing to comply with the regulations governing such. The franchisee will potentially have a right of action against every person who signed the document.

A franchisee will have to choose whether to rescind or sue for damages based on their particular situation, again, legal advice is critically important.

Whether planned or unplanned, changes occurring within a franchise system may require the franchisor to determine whether the change is ‘material’ to any prospects currently considering purchasing a franchise.

Dealing with the statement of material change

All franchisors need to understand this document is potentially a vital part of the disclosure process. Disclosure obligations do not necessarily end once a FDD is handed to a prospective franchisee. In many cases, more than 14 days elapse before the signing of the franchise agreement. If there have been any material changes during this interim period they must be disclosed.

Potential franchisees must be aware of anything that appears to be different than what is listed in the distributed FDD. If a statement of material change is not produced, or is deficiently produced, then the franchisee may potentially have access to the remedies set out in provincial franchise legislation. The remedies sought will depend on the franchisee’s particular situation.

The remedies available for a deficient statement of material change are time sensitive. Any franchisee should contact their lawyer right away to have their situation assessed by a professional if they feel there is a case where this document was not produced when it should have been or if it was produced deficiently.

Peter Snell is a partner and franchise lawyer at the Vancouver office of Gowling WLG (Canada) LLP.  For more information, contact him via email at peter.snell@gowlingwlg.com.

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