Underneath the Golden Boy - Robson Hall Faculty of Law

430 Underneath the Golden Boy
Tutor Time Learning Centers, LLC. As a condition of approving this share
transfer, Tutor Time required van Dorp (the sole director, officer and
shareholder of 1518628) and McCoy (her spouse and an employee of 1518628)
to indemnify Tutor Time against a breach of the franchisee's obligations.
Subsequently, the plaintiffs sought to rescind because Tutor Time did not
provide them with a disclosure document. Among other defences, Tutor Time
relied on section 5(7)(a) of the Ontario Act. Regarding this defence, Cumming
J. held that to require van Dorp's indemnity fell within section 5(8)(a), because
pursuant to the franchise agreement, anyone who held a 10% or greater interest
in a corporate transferee had to provide his indemnity. He also held that to
require McCoy's indemnity was not within 5(8)(a), because while Tutor Time
had the power to require McCoy's indemnity, and while it was reasonable to
require that indemnity, a "power" is not the same as a "right", and "right" in
5(8)(a) means a contractual right. 13 Thus the share transfer to 1518628 was
effected through Tutor Time without proper disclosure. 14
We have three concerns about the franchise transfer exemptions in the four
Acts (section references below are to the Ontario Act).
• The exemption should be redrafted so that if it does not apply, then it is the
franchisor who must provide the statutory disclosure document.15
• Section 5(7)(a)(i) covers an affiliate of the franchisor, because the
transferring affiliate obviously approves the grant, and thereby automatically
becomes the franchisor's associate. But it does not cover a director or officer
of a franchisor's affiliate, unless the affiliate is already a franchisor's
associate. Therefore a franchisor wishing to avoid disclosure could simply
incorporate a new affiliate, then grant a franchise (without disclosure) to a
director or officer of that affiliate, and that individual could then transfer his
franchise without disclosure using the 5(7)(a) exemption (unless, of course,
he was also a director or officer of the franchisor or a franchisor's associate).
• Section 5(8)(b) speaks of "an amount set out in the franchise agreement."
There is no principled reason for denying the transfer exemption if the
franchise agreement charges a transfer fee equal to an amount that cannot
be ascertained until a later date (e.g. "You must pay us a transfer fee equal
13
Ibid. at para. 44.
14
It is evident from the judgement that both the litigants and the Court assumed that if the
exemption didn't apply, then it was Tutor Time that had to provide the disclosure document.
We have seen above that the wording of the statute suggests otherwise.
15
The transferee will be acquiring either the franchisee's assets or its shares, and so can
adequately protect himself through suitable representations and warranties in the asset or share
purchase agreement.