If you are planning to review your disclosure document for its once-a-year refresh, think again. The commonly held belief that the disclosure document was only required to be updated annually within four months of the end of each financial year has been challenged by a court case.

Although the annual update is still a mandatory requirement under the Franchising Code of Conduct the decision in SPAR Licensing v MIS QLD Pty Ltd (No 2) (“SPAR case”) has highlighted the need for on-going updating of the disclosure document.

In the SPAR case, the court made it clear that a franchisor:

• is likely to be under a continuing disclosure obligation in relation to prospective franchisees where the negotiations are prolonged and will need to ensure that no material change has occurred from the start of negotiations which would render the previously provided disclosure document misleading or outdated;
   
• may be unable to satisfy the disclosure requirements under the Code by producing a disclosure document which has only been updated annually; and
   
• may be required to produce supplementary disclosure documents for prospective franchisees.

The Spar case was appealed and heard on 1 May 2014, further highlighting the importance of providing a ‘current’ disclosure document to the potential franchisees but the appeal did not shed any more light as to how long the disclosure document can be relied upon as current.

NEW AGREEMENT, NEW UPDATE

Therefore, it is recommended that a disclosure document is updated every time a franchisor enters into a new franchise agreement, including in the case of a transfer, renewal or extension of a franchise agreement. 

Most importantly, in addition to any other changes or material changes, section 6 of the disclosure document should be up to date at all times.  Furthermore, a franchisor must disclose to its franchisees and prospective franchisees in writing if any materially relevant matter not mentioned in the disclosure document occurs (such as if there is a change in ownership of the franchisor, or proceedings are commenced against the franchisor).

Currently the Code requires that a potential franchisee be provided with a copy of the current disclosure document by the franchisor (together with a final form franchise agreement and a copy of the Code) at least 14 days before they enter into the franchise agreement, or at least 14 days before a prospective franchisee makes a non-refundable payment in connection with the franchise agreement. There is also a requirement for a franchisor to provide a copy of their current disclosure document upon request by a franchisee (limit of one per franchisee per year).

The main point for franchisors to remember is that the disclosure document is intended to inform potential (and current) franchisees as to the current state of affairs of the franchisor and the franchisor’s system and its contents must not mislead in any way.

WHAT TO UPDATE

As for the annual update, those franchisors whose financial year ended on 30 June 2014 should be busily collating information in order to update their disclosure documents, which must be done as soon as possible but not later than by 31 October 2014.

The following must be updated:

• Marketing fund’s expenses for the last financial year, including break down of expenses into categories of production, advertising, administration and other;
   
• Financial accounts of the franchisor for the last financial year and the year prior to that OR an independent audit report in relation to the financial year ending 30 June 2014;
   
• Full review and update of section 6 of the disclosure document, including:
   
• Numbers of franchisees in the franchisor’s system by state and territory;
   
• Updated list with all franchisees’ contact details; and
   
• Updated table of past events for the last there financial years, including 2013-2014 financial year and contact details of past franchisees mentioned in that list.
   
• Review and update of section 13, which contains estimated costs to be expended by the franchisee;
   
• Updated section 20 in relation to the solvency statement made by the directors of the franchisor; and
   
• Any other changes that have occurred in the franchise system since the last annual or most recent updzate.

We recommend that all franchisors review their process of updating disclosure document and implement a continuous updating process to ensure that their disclosure documents are always up to date and reflect the true picture of the franchise system at the time each disclosure is provided and not a picture of the system as it existed 12 months prior.

Ilya Furman is the founder of Franchise Legal_; Jane Garber-Rosenzweig is Special Counsel