September 29, 2016

It’s that time of the year again – Disclosure Document updates

IT’S THAT TIME OF THE YEAR AGAIN – DISCLOSURE DOCUMENT UPDATES

Well, it’s that time of year again! If you’re a franchisor, it’s time to update your disclosure documents. You’ll need to have finished this within 4 months of the end of your financial year. This includes preparation of financial reports for the financial year. For franchisors whose financial year ends on 30 June, you have until 31 October to finalise your reports and disclosure documents.

Updating your documents is an important part of running a franchise system and is mandatory under the Franchising Code of Conduct (the Code).

What does the annual update entail?

When carrying out their annual update, franchisors should consider the following details:

1. Financial details

These must be prepared either in accordance with sections 295 to 297 of the Corporations Act 2001 or by an independent auditor. Your disclosure document must include financial reports for the last 2 financial years. The franchisor must also sign a statement confirming their solvency and ability to pay its debts.

2. A list of current franchisees.

Have there been any new franchisees, sales of existing businesses, terminations of franchise agreements, or franchisees whose operations have ceased?

3. Financial information and payments required under Franchise Agreements.

Have there been any fee increases? For example, in some franchise systems fees increase annually in line with CPI increases.

4. Changes to the intellectual property

Has the franchisor rebranded, introduced a new logo or registered any new trade marks?

5. Major capital expenditure required by franchisee.

Does the Disclosure Document sufficiently cover everything, for example the expenses involved in a store upgrade? An upgrade can include a lot of different things including new software and point of sale systems, signage, furniture and store lay out.

Once updated, the Disclosure Document must be signed by a director or officer of the franchisor.

Failure to update

Failure to comply with disclosure obligations under the Code can result in an infringement notice ($9,000 per breach) or a penalty (up to $54,000 per breach) from the ACCC.

However, exceptions may be granted if no

Franchise Agreements were entered into during the previous financial year (which includes new franchise grants, renewals, transfers or variations to existing Franchise Agreements), and in

the franchisor’s reasonable opinion, they will not be entering into any new Franchise Agreements, renewals, transfers or variations within the next 12 months.

What to do after you update

Updated disclosure documents don’t sit in a draw untouched. They need to be provided:

  1. To a prospective franchisee on the grant of a new franchise.
  1. To a buyer on the sale of an existing franchisee’s business.
  1. To an existing franchisee during the renewal of their Franchise Agreement.
  1. To an existing franchisee varying, extending or extending the scope of their Franchise Agreement (for example, extending the term, changing the territory or any other material provision of the Franchise Agreement).

Existing franchisees also have the continuing right to request a copy of the current Disclosure Document (once every 12 months). The franchisor must provide a copy within 14 days of the request. However, if the franchisor has utilised the exception above and not undertaken an annual update, the franchisor must update their disclosure document. Franchisors have 2 months from receiving the request to update their document and provide it to the franchisee.

When is the update required?

Although an update is only required once per year, a franchisor must notify all of its current franchisees within 14 days if any ‘materially relevant’ facts arise. These can be found under clause 17 of the Code and include:

  1. Investigations by a public agency (e.g. ASIC) or judgments against the franchisor.
  1. Legal proceedings instituted against the franchisor by at least 10% or 10 franchisees (whichever is lower).
  1. Change of ownership or control of the franchisor, its intellectual property or the franchise system.
  1. The franchisor becoming externally administered.

If any of the above arise, franchisors don’t need to provide an updated disclosure document – they only need to let franchisees know about the ‘materially relevant facts’.

If any ‘materially relevant’ facts happen between annual disclosure document updates, and a franchisor needs to provide a current Disclosure Document to a franchisee, then details of those facts must be provided to the franchisee in a separate annexure to the Disclosure Document.

Disclosure of ‘materially relevant’ facts is essential if you want to keep your franchise agreements. The Courts have set aside franchise agreements, as well as awarding damages, in situations where franchisors have failed to provide adequate and up-to-date information on materially relevant facts.

Marketing funds

If a franchisor operates a marketing fund, it must be audited unless 75% of franchisees who contributed to the fund vote otherwise. A marketing fund must also be audited within 4 months of the end of the franchisor’s financial year. This audit will cover the fund’s receipts and expenses for that financial year. The audited statement and audit report must be provided to franchisees within 30 days of its preparation.

If you need help with a franchise agreement or disclosure document, Speak to the team at Rouse Lawyers. Contact us today!