This article appears in the March/April 2014 issue of Business Franchise Australia & New Zealand
It is not uncommon during the life of a franchise network for there to be a change in the ownership or control of the franchisor.
This can occur as a consequence of planned family succession, a management buyout or one of the existing owners buying out one of the other existing owners. In extreme cases change in control or ownership may arise as a consequence of the insolvency of the franchisor. In most cases, however, it is due to the owners wishing to dispose of their ownership to a third party.
A franchise agreement will usually contain a provision which expressly allows for a change in ownership or control of a franchisor to occur at any time without the need to obtain the consent of that franchisee.
Existing franchisees, as well as parties who are considering buying a franchise, should be aware of the impact that a change of ownership or control of the franchisor can have on the franchise network.
Should franchisees be concerned with a change in ownership or control of the franchisor?
Sometimes a change in ownership or control of a franchise network can cause a degree of concern to franchisees because:
1. they fear and do not understand the consequences to them of the change;
2. the new owners may not have the same reputation or offer the same supporting or nurturing culture and environment that was there when the franchisee originally joined the network;
3. the new owners may already operate another similar business or operate a franchise network which is in direct or indirect competition to the existing franchise network (sometimes in close proximity to existing businesses);
4. the new owners may not have the same level of financial, human or physical resources to support the network as well as the former franchisor did;
5. the new owners may have a totally different strategic vision, direction or future plan for the network to the original franchisor, including expansion plans or wanting to introduce or phase out the involvement of master franchisees in the network;
6. the owners may have a different attitude or way of dealing with franchisees in terms of breaches, credit terms, renewal, transfer, support, etc which can change the relationship;
7. the new owners may want to introduce changes, including changes to procedures, to introduce new fees or charges, or to change the brand or image which may come at a cost to the franchisee; or
8. the new owners may not honour commitments made by the former franchisor if they have not been agreed to in writing as a term of the franchise agreement.
It can be extremely difficult and concerning to a franchisee to be confronted with the news that their franchisor is selling or transferring control of the franchise network, and the parties have to work through these concerns if they want a change to occur and be successful.
Not every change in ownership or control results in a bad outcome. There have been many successful franchise systems that have blossomed under new ownership or control. However there are also examples where new owners have done the exact opposite.
Franchisees should always approach a change of this kind with an open mind and get advice on how it may impact on them.
How does a transfer of ownership or control of a franchise network occur?
Ownership or control of a franchise network can typically occur by virtue of:
(a) a change in the underlying ownership or control of the franchisor entity;
(b) a transfer of the franchise agreements and other assets to another entity by way of a business sale or asset sale;
(c) the appointment of a master franchisee to assume some of the rights or obligations of the franchisor under the franchise agreements; or
(d) the appointment of an external controller such as an administrator if the franchisor becomes insolvent under administration.
What obligations does a franchisor have on a transfer of the franchise network?
The Franchising Code of Conduct (Code) does not really contain a clear process dedicated to transfers by franchisors. It has simply been left to the parties to agree what process will apply under the terms of the franchise agreement. As a consequence, procedures can vary greatly depending on the franchise system.
The Code does however impose an obligation on a franchisor to give notice of a change in materially relevant facts to franchisees and any prospective franchisee within a reasonable time (not exceeding 14 days) after becoming aware of that change (see clause 18(1) of the Code).
These materially relevant facts include a change in majority ownership or control of the franchisor (see clause 18(2)(a) of the Code) as well as a change in the ownership or control of the intellectual property that is material to the franchise system (see clause 18(2)(h) of the Code). The obligation to give a notice also extends to circumstances where the change in control is due to the franchisor becoming an externally administered body corporate (clauses 18(2)(g) and 18(4) require the franchisor to tell the franchisee of the appointment and the name and address of the administrator, controller or liquidator).
Do I have to be consulted or be asked to give my consent?
In most cases the franchise agreement will not impose that obligation on a franchisor, however commercially a purchaser will want to ensure that the entire network is supportive of the change.
The purchaser is making a significant investment and their contractual commitment to buy may be dependent on the existing franchisor ensuring that the franchisees are happy and will agree to the change.
In some cases, transactions are structured to ensure the franchisor must obtain the support of a specified percentage of the network to agree to the sale as a precondition to the sale completing or it may affect the purchase price payable.
Do I have to sign or receive anything?
Usually the franchise agreement will outline if you need to sign or do anything. Most agreements do not impose any requirement for you to sign a document, although a purchaser may impose a condition in the sale contract that the franchisor has to get all (or a specified percentage) of the franchisees to sign documentation to evidence their agreement to the change in ownership. There may also be a clause in the franchise agreement that requires a franchisee to sign a deed of assignment or novation or other document such as a certificate to the purchaser that you have no claims against the franchisor.
In many cases, you will not be asked to sign a document to give effect to the transfer or novation of your franchise agreement and the franchisor will simply enter into an agreement with the purchaser to assign the rights and assume the obligations under the franchise agreement and notify you of the change.
Quite often a franchise agreement will provide that you specifically release the franchisor from ongoing liability for the performance of obligations that occur after a transfer or novation of the franchise agreement. Usually this is coupled with an obligation that the franchisor must obtain a deed or agreement from the purchaser expressed in favour of the franchisee that the purchaser agrees to be bound by the terms of the franchise agreement (by taking over the rights and assuming the obligations) with effect from completion. These deeds are often not required to be signed by you but may be expressed for your benefit.
Does the purchaser have to give me a disclosure document before it buys the network?
The Code does not make it clear if and when a disclosure document has to be given to you before the network is transferred to a purchaser. In a share sale transaction, a disclosure document would not be required to be given before completion as the agreement remains with the current franchisor.
If the transaction requires the transfer or novation of the franchise agreements, then there is a widely accepted view that when the purchaser becomes the assignee or novatee, it is “entering into a franchise agreement” with the franchisee.
If this view is correct, then the purchaser would be required to:
(a) create a disclosure document; and
(b) give to the franchisee the disclosure document, a copy of the Code and a copy of the franchise agreement it required the franchisee to sign at least 14 days before it entered into the franchise agreement (i.e. before it completed the transfer or novation of the franchise agreements).
It would also be required to obtain from you the statements and certificates required under clause 11 of the Code.
Irrespective of that view, clause 19 of the Code imposes an express obligation on a franchisor (which would include the purchaser when it became the franchisor) to give a current disclosure document to you within 14 days if you make that request in writing.
If you are an existing franchisee or are considering buying a franchise, you should be aware that a change in ownership or control can happen. Always check your franchise agreement to see how a franchisor handles this process and whether your consent or cooperation is required. Always seek appropriate legal advice.
Derek Sutherland, Special Counsel, is a well regarded specialist in franchising law. He advises many well-known and successful franchisors, master franchisees, and franchisees in all areas of business.
HWL Ebsworth offers the largest and most experienced team of legal experts in Australia in retailing and franchising. Offices are located in Brisbane, Canberra, Melbourne, Norwest, Perth and Sydney.
Phone: 07 3002 6754
Phone: 03 8644 3542