Can American Franchisors Use "Wrap Around" Disclosure Documents in Canada?

Superior Disclosure in the U.S.

First, franchise prospects in the United States get better disclosure than do franchise prospects in Ontario. UFOC disclosure in the United States is generally far more comprehensive and meaningful than the current level of disclosure found in a sampling of disclosure documents produced by Ontario franchisors. The UFOC is far superior to the Ontario regulations in terms of format, clarity, and specificity; the UFOC includes "Instructions and Guidelines" for its preparation; interpretive opinions are available in the U.S. on a number of issues, both from the FTC and from state regulators; franchise offerings in the U.S. are reviewed by state examiners, who both demand additional disclosure on meaningful issues and provide considerable guidance; the U.S. has a significantly more experienced bench, bar, and franchise community; U.S. state and federal authorities dedicate the resources necessary to monitor the industry and insure that regulations and guidelines are kept current; and the existence of enormous resources on the subject of disclosure, including the ABA Forum on Franchising and public access to state filings, now available online through Cal-EASI.

Ontario's Act: Flawed and Ambiguous Second, the Ontario Act and Regulations are flawed and ambiguous. The numbering system used in General Regulation 581/00 should be a tip off to the substance of the Regulation: some subsections are bracketed, others are not; section 6 of the Regulation itself contains 18 subsections; the number styles used are not consistent with the Act, nor are they internally consistent for the Regulation. How many items of disclosure are required? The UFOC fairly clearly divides disclosure into 23 categories, including the receipt. Its consistency of form permits users (both prospective franchisees and practitioners) to compare one disclosure document against another. Disclosure documents produced for Ontario generally do not have anything approaching a consistency of form (let alone content) because the Regulation does not require or encourage it. Substantive provisions of the Regulation are interspersed with the mandated disclosure format. Terminology within the Regulation is inconsistent and ambiguous. For instance, in s.2, the word “address” is used in 3 different ways, presumably to mean the same thing: “address,” “principal business address,” and “principal address.” The Item 1C Instruction in the UFOC clarifies the issue: “Principal business address means 'home office' in the United States, not in the state for which the offering circular was prepared. If appropriate, also disclose the location of an international 'home office.'” The Instruction also specifies that the business address can not be a post office box. Certain parts of the Act and Regulation lack the necessary statutory underpinning or basis in reality. For example, the Act requires delivery of disclosure documents personally, by registered mail, or by any other prescribed method (Act s. 5(2)). No other means of delivery have been prescribed in the Regulations. However, Canada Post's weight restrictions for Registered Mail do not permit delivery of any substantial disclosure document. And how are U.S. franchise systems supposed to deliver their documents to Canadians from the U.S.? Reg. S.2 contains another example: it requests the name and address of an agent for service if the franchisor’s “principal address” is outside of Ontario, however there is no statutory requirement that a franchisor appoint or maintain such an agent for service (this is likely an example of simply copying the wording from Item 1C of the UFOC, whereas an Application for registration under the UFOC format contains a mandatory consent for the relevant state’s attorney general to accept service on behalf of any franchisor registered in that state).

Giving Practical Advice Third, it is the job of legal practitioners to provide practical, effective advice. Bear in mind that there are less than a handful of lower court decisions on the subject of disclosure in Ontario. There has not been a higher court decision on the subject, nor has there been any judicial consideration of compliance by U.S. franchisors with Ontario's disclosure requirements. Although it is always easy to counsel perfection, it is seldom appreciated by clients. Nor is it in the best interests of franchising -- whether a franchisor or franchisee or one of their advisors. For franchisees to prosper, they require, among other things, strong franchisors. For franchisors to prosper, they require, among other things, a responsible and predictable legal environment within which to operate. Given that franchising is by its nature multijurisdictional, it also requires as much harmonization between jurisdictions as possible. When lawyers are asked to comment or give advice on emerging legal issues, they should always attempt to promote harmonization (simplicity) and certainty.

Participating in NASAA Fourth, and on a related note, the economies of Canada and the United States are extensively and inextricably linked. This includes an extremely high rate of cross-border franchising. The existence of a body like the North American Securities Administrators Association makes plain the need for ongoing efforts toward legislative convergence in multijurisdictional matters. Alberta's legislation is considerably more harmonious with U.S. legislation as a direct result of the long-standing involvement by the Alberta Securities Commission on the Franchise and Business Opportunities Project Group of NASAA. Unfortunately, when responsibility for administering the Alberta Act passed from the Alberta Securities Commission to the Ministry of Government Services, franchise legislation became just another piece of orphaned legislation. Ontario never had any involvement with NASAA's Franchise and Business Opportunities Project Group, nor has it shown an interest in doing so. Ontario's Act and Regulation are not administered by the provincial securities commission, and are likewise legislative orphans.

Disclosure Must Be Relevant Fifth, disclosure must be relevant to the marketplace in which it is made. U.S. franchisors should not sell franchises in Canada by merely photocopying and distributing their U.S. offering circular. All the information contained in a Canadian disclosure document must be relevant to the Canadian marketplace. Any franchisor that neglects or refuses to modify its disclosure to reflect differences in climate, currency, geography, demographics, suppliers, and costs will at best encounter difficulty, and at worst expose itself to claims of misrepresentation. There are also a variety of other likely modifications that must be made to a U.S. offering circular, such as the identity of the corporate entity used to franchise in Canada and its officers and directors, the cost of establishing an outlet, the currency in which payments are to be made, provisions relating to the Income Tax Act, the Goods And Services Tax, interest rate re-statements in order to comply with the Interest Act, withholding tax considerations, choice of law and forum provisions and changes in terminology to reflect the Canadian legal landscape. The question is not whether -- but how -- disclosure to Canadian prospects should be made.

UFOC Completeness Sixth and finally, there somehow has developed the notion that the disclosure required by Ontario's Regulation is more complex or complete than that required under the UFOC. It is true that Ontario (and Alberta) have a requirement for the inclusion of mandatory statements, the requirement for certification of the disclosure document, and some other differences. Certainly, a practitioner must be mindful of these. However, a direct comparison of the Ontario Regulation with the 23 enumerated UFOC Items and Instructions discloses that not only is virtually every disclosure item from the Ontario Regulation covered under the UFOC, but it is generally covered in more detail and there are numerous additional matters required under the UFOC that are overlooked in the Regulation. A line-by-line comparison of the disclosure requirements between the Ontario Regulation in the UFOC is set out as an addendum to this article.

Means to Comply There are three possible ways for a U.S. franchisor to provide disclosure in accordance with the Ontario Act and Regulations. First, the franchisor can work through the Regulation (bearing in mind section 5 of the Act). Dissecting the information contained in a UFOC and reordering it in the manner specified by the Regulation is a laborious process. For Canadian franchisors hoping to expand into the U.S., the process is just as laborious (and expensive) in reverse. Second, the franchisor can take the UFOC and "Canadianize" its content -- while maintaining its form. Third, it can keep the form and content of the UFOC, and add ("wrap") an addendum setting out all information relative to the proposed franchise as it relates to Canada. A wrap is directly analogous to a state rider, which is often employed along with the UFOC format to set out state-specific content to an offering circular. It is this third alternative that this article considers.

Wrapping in Alberta Administrative Policy 3.1 to the former Alberta Act expressly permitted use of a wraparound document, and specified the contents of the wraparound as follows: a face page; Alberta statutory rights of withdrawal and rescission; currency and exchange information; financial statement disclosure; name and address of an agent for service in Alberta; a statement that the franchise agreement would be construed in accordance with Alberta law and the agreement by the franchisor to attorn to the jurisdiction of Alberta courts; a requirement that the wraparound be bound to the UFOC; and a manually signed certificate of full, plain and true disclosure as required by section 9 of the former Alberta Act. Section 2(2) of Alberta's General Regulation continues its express recognition of the ability to utilize a wraparound form of disclosure in Alberta. So much for Alberta, what about Ontario?

…and in Ontario In Ontario, certain impediments to the use of a wrap have been raised. These include the following: Ontario's Act and Regulation do not expressly provide for the use of a wrap document; section 5 (2) of the Act requires disclosure of "all material facts, including material facts as prescribed"; section 6 of the Regulation requires certain items of disclosure to be "presented together in one part of the document"; section 5(3) of the Act requires that "a disclosure document must be one document, delivered...as one document at one time"; and section 5(6) of the Act requires that "all information in a disclosure document… be accurately, clearly and concisely set out."

Considering the Impediments: a) No Express Right It certainly is true that neither the Act nor the Regulation expressly provide for use of a wrap document. However, it is a general matter of public policy that, Canadians do not require the express permission of our government authorities before taking or omitting to take action. The absence of an express right in the Act or Regulation to use a wrap in Ontario cannot by itself be held up as any form of prohibition against doing so. In fact, the policy paper published by the relevant Ministry in June 1998 had the following to say on this precise issue:

The contents of the proposed disclosure document would be specified by regulation. The Regulations would not specify what form the disclosure information must take.1 Generally, where Ontario has statutory disclosure requirements for businesses -- for example, cost of credit disclosure, direct selling cancellation rights -- it is the content of disclosure that is specified rather than the format of the information. This approach would provide franchisors with the flexibility to use document templates prepared by a business association or under the franchise law of jurisdictions outside Ontario, such as Uniform Franchise Disclosure Circular [sic] or the U.S. Federal Trade Commission format. As long as the specific information requirements of Ontario are met, any document format may be used.2"

When the issue of the use of a wrap to comply with Ontario's new Act was initially raised in a discussion on the Listserv in 2000, the author contacted Bonnie Harton, a senior member of the Ministry staff responsible for preparation of the Act. She confirmed to the author that the Ministry had no intention of proscribing the use of a UFOC with an Ontario wrap, and in fact expressed surprise that the debate had arisen.

b) Requirement for All Material Facts The Ontario Act contains a requirement that a disclosure document contain "all material facts, including material facts as prescribed." This requirement is contained in the General Regulation to the Alberta Act, which may raise issues as to its enforceability. The practical impact of the requirement to disclose all material facts on the ability of a U.S. franchisor to wrap a Canadian addendum to its UFOC is, I suggest, minimal for at least two reasons. First, UFOCs tend to be far more detailed and comprehensive than their Canadian counterparts. This arises primarily because of the detail required by the Guidelines and Instructions, and as a result of the active participation in the preparation of the UFOC by inquisitive state examiners. Second, the use of a wrap presupposes some consideration by the franchisor of matters relevant (i.e. material) to the Canadian marketplace. As a result, this objection is easily overcome by the mere act of creating the wrap in the first place.

c) Requirement for Togetherness The suggestion that the requirement in section 6 of the Regulation that certain portions of the mandated disclosure be “presented together in one part of the document” is an impediment to use of a wrap is likewise phantasmagorical. The items of disclosure itemized in Reg. s.6 are no more important than, say, the material required by Reg. s.2. But what is “together”? What is “in one part”? Reg. s. 6 includes all or part of the disclosure required by the following Items of the UFOC, in this order: Item 5, 7, 6, 19, 10, 11, 8, 16, 13, 9, 15, 12, 20 and 17; i.e., every Item from 5 to 20 both inclusive except Items 19 (public figures) and 14 (patents). So in order to satisfy this formatting requirment, a U.S. franchisor need only delete its Items 14 and 19 disclosure, or cut and paste them to appear after Item 20 (there is no requirement that the order of information be maintained). Does having additional information included in the s.6 disclosure offends the “togetherness” requirement in the first place? The Act itself requires inclusion of any additional material facts; does the formatting requirement of s.6 require that this information appear “elsewhere” in the document? The word "together" is modified by the phrase "one part." Any kind of purposive approach to legislative interpretation would have to conclude that the mere ordering of the disclosure items as established by the UFOC would not offend or detract from the spirit and purpose of the Act. In fact, one might go further and say that, if everyone were to adopt the UFOC format, the comparison of disclosure documents as between different franchise systems would be made easier and disclosure made more meaningful. Maybe that's something we need to pursue.

Clearly, the addendum itself will not be together in the same part with the UFOC disclosure. This would require the franchisor to include a reference to the addendum, and for the prospect to make reference to the addendum. The use of addenda is not so foreign to a Canadian of average intelligence that he or she should be somehow flummoxed or misled by the use of this device. In fact, courts in Ontario have recently considered the responsibility of the recipients of disclosure documents in the context of condominium disclosure. There is no requirement in Canada to spoon feed disclosure. While there is not yet a franchise case on point, consider what the Court of Appeal had to say in the recent case of Peel Condominium Corp. No. 505 v. Cam-Valley Homes Ltd3. about a condo purchaser's complaints about the complexity of the developer's disclosure statement:

"I am sure that developers of condominiums are just as frustrated at having to produce these mountains of documents as the prospective purchasers are with having to read them. However, these documents are required of developers by the Condominium Act and non-compliance with the Act usually redounds to the prejudice of the developer. The detail required in the disclosure documents is a statutory burden, not a matter of choice. As for the purchasers, they were not buying paper plates: they were making a substantial investment in residential housing units that most intended to be their homes. If they proceeded without professional advice, that was their decision.4"

d) Requirement to be Clear and Concise There are at least three factors that result in offering circulars used in the U.S. being substantially wordier than their current Canadian counterparts. First, the UFOC format is published with Guidelines that enumerate a number of issues to be addressed as part of the discussion of each enumerated Item. Second, a UFOC will typically be reviewed and commented upon by numerous state examiners. These comments typically lead to additional disclosure. Third, Canadian lawyers simply have not yet developed the standard lexicon and phraseology with which to "flesh out" a disclosure document. As a result, a typical UFOC contains considerably more substantive information than its Canadian counterpart. This additional disclosure is good from the perspective of a prospect considering the purchase of a franchise. Conversely, explaining in the context of a solicitor’s negligence claim why certain material from a client’s UFOC was deleted might be difficult. In Ontario's open-ended disclosure (i.e. “all material facts”) regime, it can be argued that any information set out in a UFOC would be "material" for Ontario disclosure purposes. Surely it is not open for a disgruntled party to argue that a UFOC, with its clear headings and standardized format is somehow not clear and concise? When one considers the General Instruction against use of legal antiques, and California's recent activism in this regard, it seems that the general state of UFOC drafting is clearer and more precise than is the case with Canadian disclosure documents.

Judicial Input We all learned in law school that bad facts make bad law. We are seeing some of that in Ontario with the Mr. Submarine5 and 3-for-1 Pizza6 decisions. The courts in those cases have been served up a menu of unsavory facts, and have come down hard and fast on those franchisors. Unfortunately, the cases demonstrate very little thoughtful analysis – because very little was required. In Shelanu v. Print Three7, the somewhat shallow protectionist (pro-franchisee?) analysis of the trial judge was almost entirely rejected by a more thoughtful, back to first principles analysis on the part of the panel of appeal justices. The same thing happened in the Kentucky Fried Chicken Canada v. Scott's Food Service8s case and the Peel Condominium9 decision. When a well reasoned franchise decision makes its way up, as with Majdpour v. M & B Acquisition Corp10., the appeals court has had no difficulty affirming the decision from below. While it's fun and interesting to consider what-if and doomsday scenarios, and while some of these do play out at the trial level, courts of appeal demonstrate a remarkable ability to maintain sound judicial and the business principles.

Other Risks We also need to bear in mind that the decision not to employ a wrap, and to instead rebuild a Canadian disclosure document from the ground up carries its own risks. Anyone who has had to manage the disclosure compliance on behalf of a franchise system is aware of those risks. The difficulty in developing and maintaining consistency between two forms of disclosure documents is considerable. Sooner or later, something is going to get missed or messed up. On the other hand, if state or provincially-specific data is maintained in an addendum, it is much easier to review and update. Once again, this should impel practitioners strongly toward the choice that promotes simplicity over the one that develops complexity.

We need to keep this debate in perspective. The debate over the use of an Ontario addendum to a UFOC is no more significant than the issue of how to deliver a document when you don't comply with Canada Post's requirements for the use of registered mail, or you're making delivery of your disclosure document from outside of Canada. You come to a decision based upon your understanding of the basis, purpose and intent of the legislation. You consider the relevant facts and business imperatives. You move forward, doing the best you can.

Conclusion The Ontario Act and Regulation have a lot of ambiguity and we are without guidelines, instructions or any source or administrative body from which to obtain an interpretive opinion on the subject. In these circumstances, franchisors and their advisers must do the best they can to conform their practice with the spirit of the legislation. No one so far has forwarded the argument that use of an Ontario addendum to a UFOC is not consistent with the spirit of the Act. The opinion of the Ministry responsible for administering the Act is quoted above as supporting use of UFOC formatted disclosure together with an addendum. I suggest that the arguments against doing so, although real, are sophistic. Certainly, they do nothing to advance simplicity and harmonization, let alone cross-border franchising.

More information.

For more information on franchising in Canada, the United States and internationally, please contact Peter Macrae Dillon, head of Siskinds Franchise Law Group. Peter is recognized expert in franchising. He is the author of the annotated Ontario Franchise Disclosure Act and the annotated Alberta Franchises Act and over 40 other publications on the subjects of franchising, licensing and distribution. He is licensed in Ontario and New York. Peter can be contacted at 800-816-9596 ext. 389 or by email at peter.dillon@siskinds.com. The information contained in this note is for general reference only, and should not be relied upon as constituting legal advice.

Can American Franchisors Use "Wrap Around" Disclosure Documents in Canada? - To learn more about this author, visit Peter Macrae Dillon's Website.

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