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Q&A with Frank Zaid: Changes to Ontario’s franchise legislation

Disclosure documents may now be delivered by e-mail in Ontario, rather than solely by registered mail or personal delivery.

Recommendations for modernization
Ontario’s ministry of government and consumer services established a new business law advisory council in March 2016 for the purpose of making recommendations for modernizing the province’s corporate and commercial statutes.

The council made its first recommendations the following fall, with a report posted by the ministry that also solicited input and feedback from the general public and business and legal stakeholders. Among other statutes, the report puts forward amendments for Ontario’s franchise legislation and general regulations made under it.

Definitions of terms
For one, the council recommends amending the act’s definition of the term ‘franchise’ to (a) clarify which types of intellectual property may form the basis of a franchise and how such intellectual property may be licensed to or owned by a franchisor and (b) ensure franchisors that have the right to exert significant control over—or provide significant assistance in—the franchisee’s methods of operation are not exempted from the act’s legal protections simply because they may fail to exercise that right.

The council also recommends narrowing the definition of ‘franchise agreement’ to clarify only the agreement by which the franchise is actually granted to the franchisee (which is usually, but not always, the franchise agreement) can trigger the franchisor’s disclosure obligations and potential rescission claims by the franchisee and not for example, a deposit, confidentiality agreement or other ancillary agreements that tend to be entered into with a prospective franchisee before signing the actual franchise granting agreement.

Non-application of the act
Agreements between a licensor and a single licensee for use of a specific trademark, trade name or other commercial symbol, where such licence is the only one of its general nature or type to be granted by the licensor, are currently exempt from the act. The council recommends amending this provision to specify the relevant geographic scope of such a licence grant includes all of Canada. (There has been confusion to date as to whether the territory could be all or part of Canada.)

Financial information
In relation to disclosure obligations under the act, the council recommends deeming the generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS) of the U.S., the International Financial Reporting Standards (IFRS) and the International Auditing and Assurance Standards Board’s (IAASB’s) standards for auditing and review engagement, as adopted by other countries, acceptable as the basis for preparing, auditing or reviewing a franchisor’s financial statements that are required to be attached to the disclosure document.

This amendment is intended to reduce the regulatory burden for foreign franchisors that are considering entering Ontario, as they currently must determine whether or not their financial statements are prepared using accounting principles that are “at least equivalent to” Canada’s GAAP. Some foreign franchisors have felt it necessary to acquire—at considerable expense—a statement or opinion from their auditors confirming equivalency. The new change would eliminate any doubt.

Material change statement
Franchisors must disclose material changes, including any changes to their business, capital, control, operations and/or franchise system that could be reasonably expected to have a significant, negative impact on the value of their franchise. This type of disclosure is called a ‘material change statement.’

To ensure consistency in the information provided in a material change statement and certainty of compliance with the disclosure obligations under the act, the council recommends prescribing either (a) the content of the statement of material change or (b) the form itself to correspond to the prescribed content in the disclosure document certificate.

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