Recent changes to the Franchising Code of Conduct (Code) mean that all franchisors, irrespective of when their financial year ends, must ensure that all disclosure documents they issue on after 1 November 2021 have been updated to reflect the changes made to the Code.
As all franchisors would be aware, a number of significant changes were made to the Code in June 2021. However, not all of the changes commenced on the same date. Relevantly, most of the changes relating to disclosure documents apply to disclosure documents issued on or after 1 November 2021. Accordingly, franchisors need to ensure that they update their disclosure documents to address these changes, so as to ensure that all disclosure documents issued on or after 1 November 2021 are Code compliant.
What if I don’t act now?
Potentially significant financial penalties may apply.
Relevantly, on 14 September 2021, the Treasury Laws Amendment (2021 Measures No. 6) Act 2021 (Cth) was passed which allowed for an increase in potential maximum penalties for breaches of the Code by corporations up to the greater of $10 million; three times the value of the benefit obtained from the offence; or 10 percent of the annual turnover of the body corporate during the 12 month period in which the offence occurred. Whilst the Code has yet to be amended to specify the precise sections which will be subject to the new penalties, those changes are expected any day.
Other penalties may also apply for non-compliance with the Code.
What are the changes?
Unfortunately, the Code updates cannot be addressed by simply inserting one new catch all clause. Instead, the changes are sprinkled throughout the document.
Some of the changes are simple to action, such as changes to formatting or wording (eg changes to the statement that needs to be included on the front page).
Other changes are more comprehensive and will require more consideration. For instance:
- There have been a number of changes to item 10 of the disclosure document which relates to the supply of good or services to a franchisee. Generally, these changes have necessitated additional disclosures on matters such as supplier rebates. Accordingly, the changes need to be carefully considered and may also require some consideration of the supply arrangements that a Franchisor currently has in place.
- There are a number of entirely new items – item 17A requires certain details about arbitration and 17B requires details about how the franchise agreement may be ended early.
There are also a number of “sleepers” – items which are not specifically included in the disclosure document at Annexure 1 of the Code, but still need to be addressed. For instance, information about capital expenditure (as referred to in clause 30A of the Code) needs to be addressed in the disclosure document.
Given the above, it is important to carefully review the Code (including the updated template in Annexure 1) to ensure that all changes are addressed.
What can I do to get started?
The disclosure document needs to be updated for Code compliance and also to ensure that it reflects the franchise business as at the date of the disclosure document.
To assist you with updating your disclosure document, we have put together a list of questions for you to consider. This is a good starting point, but given the significant changes to the disclosure document, we do recommend working through the entire document:
- Items 2 and 3: Are there any changes to body corporate or non-body corporate associates or officers? Does the business experience of existing entities need to be updated?
- Item 4: Is there any litigation that needs to be disclosed? Take note of the new item 4.4 which asks the percentage of franchisees that were party to a mediation, conciliation or arbitration that was conducted or pending in the previous financial year.
- Item 6.1: As at the date of the disclosure document, the number of franchisees, franchised business, and businesses owned or operated by the franchisor or its associate, business contact details and year when they commenced. Details about the existing franchises/franchised businesses will also need to be included/updated;
- Item 6.4: How many franchised businesses were transferred, ceased to operate, terminated by franchisor or franchisee, not extended, bought back or terminated and acquired in the last three financial years? Appropriate contact details must be provided unless the franchisee has requested such details not be included. Note that the ACCC has indicated that mobile numbers, email addresses are preferred where possible. Former business addresses will not be sufficient disclosure.
- Item 8: Have there been any changes to the intellectual property used in the system?
- Item 10: Consider whether additional detail is required about restrictions on goods or services and suppliers. If the franchisor receives a rebate or other financial benefit (“rebate“) from a supplier of goods or services to a franchisee, the following information:
- The nature of the rebate and the name of the supplier;
- The total amount of rebates in the financial year, received form each supplier, expressed as a single aggregate percentage of total group purchases from that supplier (excluding purchases by franchisor owned units);
- Whether the rebate is shared directly or indirectly and if so the method of working out the proportions shared between the franchisor and franchisee and a description of the each benefit received by the franchisee.
- Item 12: What is the current practice in relation to online sales? This may need to be updated if the system has changed in order to deal with COVID and lockdowns.
- Item 13: Have policies relating to sites and territories changed? There is also a new question on whether the franchisor or its associate have an interest in the lease, such as landlord or head lessee.
- Item 14: Review and update the payments that must be made before entering into the franchise agreement, and the costs and expenses that must be paid to the franchisor or to others to establish or to continue the franchised business. Also consider what significant capital expenditure may be required during the term and ensure that as much information as practicable is included in relation to this expenditure.
- Item 15: Ensure the marketing fund financial statements have been completed and provide meaningful information about the fund’s income and expenditure. Unless 75% of franchisees who contribute to the fund voted against an audit, ensure the audit report is completed. Ensure the financial statements and audit are provided to the franchisee within 1 month of being prepared (in the case of financial statements) or them being received (in the case of the audit).
- Item 17: Have any unilateral changes been made to existing franchise agreements in the last three financial years?
- Item 17A: Does the franchise agreement provide for arbitration in accordance with the Code?
- Item 17.B: Can the franchise agreement be ended early by the franchisee or the franchisor?
- Item 18.1: What arrangements apply at the end of the term of the franchise agreement, including right to payments for goodwill and restraints of trade?
- Item 20: All earnings information provided to a prospective franchisee must now be included in the disclosure document or an attachment to it. Provision of earnings information can place franchisors at risk of claims of misleading and deceptive conduct or misrepresentation, if the earnings information is not accurate and complete. It is important that appropriate disclaimers and qualifications accompany any such earnings information, to try to clarify the information being given and minimise the risk of such claims.
Anything else I need to be aware of?
A number of other changes to the Code require process changes by a franchisor. In particular, be mindful of the Key Facts Sheet, which is a new document that must be provided with the disclosure document to prospective franchisees. It contains some of the information in the disclosure document and must also be updated, so as to remain consistent with the disclosure document.
Also remember that the new form Information Statement must be given out to prospective franchisees as soon as reasonably practicable after they apply/show interest in the franchise (and prior to formal disclosure documentation).
We appreciate that updating your disclosure document is quite the task this year. If you do need any assistance, please contact a member of our Franchising Team.
This article was written by Allison McLeod, Partner and Louise Wolf, Special Counsel.