Coming on the heels of the OBA Franchise Section's November 19, 2019 dinner program "If I Could Revise the Franchise Laws in Canada", the Ministry of Government and Consumer Services recently completed a public consultation process for proposed changes to the regulations under the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 (the “AWA”).
The proposed changes are among the first of the Business Law Modernization and Burden Reduction Council’s (the “Council”) recommendations to be taken up by the Ministry. In addition to the proposed changes to the regulations under the AWA, the consultation also sought public feedback on proposed changes to the Ontario Business Corporations Act and the Personal Property Securities Act.
The Ontario government formed the Council as a short-term advisory body comprised of lawyers and a former Justice of the Ontario Superior Court of Justice. The Council is the successor to the earlier Business Law Advisory Council and shares a similar mandate: to make recommendations to the Government on how to modernize Ontario's corporate and commercial statutes to support the Government's commitment to reduce the burden on business and foster a good business climate in Ontario.
The Ministry sought input from stakeholders and the public on the following items:
- the manner of determining the “Total Initial Investment” for the purposes of the minimum and large investment thresholds;
- whether there should be changes to the minimum and large investment threshold amounts for exemptions from disclosure;
- the amount of the deposit payment under which fully refundable and non-binding deposit agreements would be exempt from disclosure;
- the content requirements for a Statement of Material Change; and
- the accounting standards for financial statements that franchisors must include in a disclosure document provided under the AWA.
These items may look familiar, and for good reason. The first four proposals come out of the last set of changes to the AWA. Many will recall the recent amendments to the AWA contained in the Cutting Unnecessary Red Tape Act (“CURT”), which received royal assent in November of 2017. Those changes were largely welcomed at the time but remained ineffective because they were pending the enactment of enabling regulations.
We are now finally on the cusp of seeing those enabling regulations. As a result, we may expect clarity on both the minimum investment exemption (sometimes referred to as the de minimis exemption) and the large investment exemption (sometimes referred to as the substantial investment or sophisticated franchisee exemption).
For instance, we are likely to see regulations that prescribe the manner of determining the total initial investment, which may include an open-ended list of expenditures similar to the required disclosure pertaining to the franchisee's costs of establishing the franchise.
More importantly, many hope that the regulations will clearly provide that the exemption will be based on the total initial investment contemplated by the parties prior to entering into the franchise, and not the amount actually invested. For either the minimum investment exemption or the large investment exemption to be useful, there must be certainty prior to entering into the franchise that the exemption will be available. Moreover, the exemption cannot be "lost" in the event the actual total initial investment turns out differently than the parties contemplated at the time of entering into the franchise. The Ministry is aware of these practical concerns and will hopefully respond to them with the new regulations.
We may also see changes to the minimum investment threshold (currently $5,000) and the large investment threshold (currently $5,000,000). It is also possible that we may see some clarification that the large investment exemption is available for multi-unit or multi-franchise transactions where: (1) a single transaction encompasses multiple locations or territories; and (2) the total purchase price across all locations or territories is in excess of the large investment threshold. As there are few single-unit or territory franchises that trade for valuations in excess of $5,000,000 (or such other threshold as the government may choose to include in the regulations), this clarification will assist parties in confirming their ability to rely upon the exemption in multi-unit transactions.
With respect to Statements of Material Change (“SOMC”) it is uncertain whether the regulations will provide for use of a prescribed form or whether Ontario will simply prescribe content (as done in B.C.). The latter approach would permit the development of multi-jurisdictional forms of SOMC. Either change is likely to be an improvement over the current uncertainty that results from there being no prescribed form, but many will be disappointed if the approach taken by the Ministry results in another prescribed form with only minor differences from the prescribed forms required in other jurisdictions.
The Ministry also sought input from stakeholders with respect to the accounting standards for financial statements that are included in disclosure documents delivered pursuant to the AWA. The regulations under the AWA currently require audited or review engagement financial statements prepared in accordance with Canadian GAAP (and corresponding auditing standards), or those that are "at least equivalent". There is considerable uncertainty whether U.S. GAAP financial statements meet the “at least equivalent” threshold, as there are a number of differences between Canadian GAAP (either IFRS or ASPE) and U.S. GAAP. The Ministry is expected to consider changing the regulations under the AWA to permit the use of financial statements prepared in accordance with U.S. GAAP and the corresponding auditing standards. Such a change would bring clarity and would make it easier for U.S.-based franchisors to enter the Ontario market.
While these changes to the AWA’s regulations may be seen as "mere" housekeeping changes, they will – if implemented – represent real progress and will be welcomed by the franchise bar.