Material Facts, Material Changes And Franchisor’s Associates: A Disclosure Document Primer

A franchisor doing business in Ontario is required to deliver to a prospective franchisee a fully compliant Disclosure Document under the provisions of the Arthur Wishart Act (Franchise Disclosure), 2000 and its Regulation.

An Ontario Disclosure Document must contain the information and documents as set in this “Disclosure Document Primer” series.

Material Facts

The Disclosure Document must contain all “material facts”, and where necessary, be accompanied by statements of material change.

A “material fact” is defined in the Act as follows:

• “material fact” includes any information about the business, operations, capital or control of the franchisor or franchisor’s associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.

This requires the disclosure of any information about any aspect of the franchisor, franchisor’s associate, the franchise system or the franchised business to be sold to the franchisee that would be reasonably expected to have a significant effect on either (i) the value or price of the franchised business to be sold, or (ii) the prospective franchisee’s decision to buy the franchised business.

The Disclosure Document must contain all material facts that a franchisor knows or ought to know as of the date that it delivers it to a prospective franchisee.

Material Changes

Where material changes occur after the franchisor delivers the Disclosure Document to the prospective franchisee, but before the franchise purchase is finalized and all franchise and other agreements are executed, the franchisor is required to deliver to the prospective franchisee a material change statement.

A “material change” is, in many ways, similar to the definition of a “material fact”.  It is defined in the Act as follows:

• “material change” means a change in the business, operations, capital or control of the franchisor or franchisor’s associate, a change in the franchise system or a prescribed change, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise and includes a decision to implement such a change made by the board of directors of the franchisor or franchisor’s associate or by senior management of the franchisor or franchisor’s associate who believe that confirmation of the decision by the board of directors is probable.

Franchisor’s Associate

A “franchisor’s associate” is defined in the Act as any person (including a company) who:

1. directly or indirectly, (a) controls or is controlled by the franchisor, or (b) is controlled by another person who also controls, directly or indirectly, the franchisor, and
2. is either (a) directly involved in the grant of the franchise (by either being involved in reviewing or approving the grant of the franchise, or by making representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise, or (b) exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise.

To the extent that a person or company is a “franchisor’s associate”, that party may be held liable jointly and severally with the franchisor for rescission damages.  For an overview of the franchise rescission remedy in Ontario under the Act, see the Law Works Franchise Justice Blog Post, dated January 15, 2014, titled, “Franchise Rescission in Ontario: A Primer”.

For more information, please go to Law Works’ Franchise Disclosure Documents Practice Page.