Why is knowing who an officer is important to a corporate franchisor?

Transcription

1 Who is an officer for the purposes of preparing a Franchise Disclosure Document ( FDD ) under the Arthur Wishart Act (Franchise Disclosure), 2000 ( Act ) 1 and Regulations ( Regulations ) 2 The role of an officer under the Act A franchisor is required to provide a prospective franchisee with an FDD before any agreement is signed or any money is paid under a franchise arrangement (Section 5(1) of the Act). The Act and the Regulations prescribe a number of requirements for the contents of the FDD. In particular, Section 7(1) of the Regulations requires every FDD to include a certificate that certifies the veracity and completeness of the FDD. The certificate must be signed and dated by, in the case of a corporate franchisor: (a) the sole director/officer (if those are the circumstances), or (b) at least two persons who are directors or officers (Section 7(2) of the Regulations). This seems straightforward enough, but is often the source of much mischief in the franchise disclosure regime. The potential consequences for an officer under the Act It stands to reason that where an officer has certified the veracity and completeness of the FDD, that officer will be held liable for misrepresentation or incompleteness that is discovered. Section 7(1)(e) of the Act grants a statutory right of action for damages on that basis. Why is knowing who an officer is important to a corporate franchisor? First, the FDD must set out particular information for each of the franchisor s officers including the name, position, relevant business experience and background of each of them. Franchisors will need to have a solid understanding of who comes within the realms of being an officer for the purposes of accurately completing that portion of the FDD. Second, and arguably more important, the franchisor will need to know who its officers are for the purposes of providing the signed certificate in support of the FDD (as discussed above). By way of example, a franchisor will want to ensure that the certificate is not signed by an individual who is not an officer. In the alternative, a franchisor will not want to have only one signatory (on the mistaken belief of having only one director/officer) when it should have included a second. So what if the franchisor makes an error in either of the above cases? In such circumstances, a franchisee s remedy of choice is the rescission right under Section 6 of the Act. This remedy is bifurcated into the following: (a) a 60-day right of rescission where the FDD fails to meet the disclosure requirements of the Act, giving the franchisee the right to rescind the franchise agreement, without penalty or obligation, within 60 days after receipt of the FDD; and 1 S.O. 2000, c. 3 2 O. Reg. 581/00

2 (b) a 2-year right of rescission where the franchisor never provided an FDD, giving the franchisee the right to rescind the franchise agreement, without penalty or obligation, at any time up to 2 years after the date of signing the agreement. How is the latter rescission right relevant to this discussion given that it is premised on the franchisor never having provided an FDD? Jurisprudence has developed and espoused an approach to FDD compliance such that certain fatal flaws in the FDD (and in providing the FDD to the prospective franchisee) will be deemed to - on their own - amount to no disclosure being provided at all. One example of such fatal flaw is where a certificate is not provided, or where it is mistakenly signed by only one officer/director but should have included a second signatory. The result in such cases is to provide the franchisee with a two-year right of rescission where, if exercised, allows the franchisee to walk away from the arrangement restored on a significantly franchisee-friendly basis. All this drama over a lousy certificate, in part hinges on knowing who the franchisor s officers are. In Sovereignty Investment Holdings Inc. v Quebec Inc., 3 the Ontario Superior Court of Justice held that where the FDD delivered to a franchisee does not include a certificate as required by Section 7 of the Regulations, it is on its own fatal to a franchisor s assertion that it complied with the requirement of the Act to deliver a disclosure document. 4 The policy rationale behind the judicial approach is explained in two seminal cases. In Hi Hotel Ltd. Partnership v Holiday Hospitality Franchising Inc., 5 the Alberta Court of Appeal affirmed the decision of the Queen s Bench and elaborated on the policy reasoning by stating that the franchisor certificate is the linchpin of the substance of the disclosure. It is the opposite of mere form. Without a certificate, the franchisee has just some random statements and pieces of paper, but nothing to tie them together or even to say that they are true. 6 It governs who has monetary liability, and who has the duty of investigation and disclosure. 7 In Alberta Inc. v Asian Concepts Franchising Corporation, 8 the Alberta Court of Queen s Bench held that the lack of signatures on the franchisor s certificate was a deficiency in the disclosure so plain and obvious that the disclosure document could not be considered substantially complete. 9 By depriving a franchisee of one of two required signatures, a franchisor is depriving a franchisee of having two parties, rather than one party, motivated by potential CarswellOnt 6547, [2008] O.J. No. 4450, 171 A.C.W.S. (3d) 597, 303 D.L.R. (4th) 515, 54 B.L.R. (4th) Ibid at paras 15, CarswellAlta 2030, 2008 ABCA 276, [2008] A.J. No. 892, [2009] 3 W.W.R. 219, [2009] A.W.L.D. 498, 168 A.C.W.S. (3d) 304, 296 D.L.R. (4th) 335, 433 W.A.C. 225, 437 A.R. 225, 53 B.L.R. (4th) 163, 99 Alta. L.R. (4th) 1 aff g 2007 CarswellAlta 1793, 2007 ABQB 686, [2008] 4 W.W.R. 316, [2008] A.W.L.D. 1070, 165 A.C.W.S. (3d) 70, 436 A.R. 185, 85 Alta. L.R. (4th) 93 6 Ibid at paras 59, 61 7 Ibid at para CarswellAlta 494, 2013 ABQB 221, [2013] A.W.L.D. 2182, 16 B.L.R. (5th) 145, 228 A.C.W.S. (3d) Ibid at para 17

3 liability to make full disclosure. It also deprives a franchisee of the potential to sue two parties for misrepresentation, rather than one. 10 It is also worth noting that there has been no jurisprudence to date dealing with the incompleteness or inaccuracy of officer information included in the FDD. It would be interesting to see how a court would deal with such noncompliance. Moreover, would it give rise to a 60- day or two-year rescission right, or none at all? It is submitted that it would be unlikely to give rise to a two-year rescission right. Having established the role of an officer and the importance for the franchisor to know who its officers are, we now explore the scope and definition of the term officer. Who is an officer? Neither the Act nor the Regulations define the terms director or officer. Moreover, while the term officer is defined in the Alberta Franchises Act and The Franchises Act of Manitoba, jurisprudence in the franchise sphere has not turned its mind to the question. So who is an officer for the purposes of the franchise regime? Danforth-Woodbine Theatre Ltd. v Loblaws Inc. Somewhat analogous to our circumstances, in Danforth-Woodbine Theatre Ltd. v Loblaws Inc. 11 the court looked at the definition of officer in the context of an obligation to provide a signed certificate under a commercial contract, namely, a lease. Under the lease, the lessee was required to furnish the lessor with a statement showing the gross sales for the preceding year certified by one of its officers. Initially, certificates were provided by the lessee, but as time went on the lessee became more casual in its approach; some were not signed or dated, and some were signed by the controller. On these facts, the landlord claimed the lessee had failed to provide the certified statements as required by the lease and was thereby denied the right to the assurance that the statement was properly certified. In addition to many other grounds, the landlord sought a declaration that there had been substantial breaches of the lease which should result in termination of the lease. The lease did not indicate or include a definition of the term officer. The landlord argued that the term officer should be given the meaning under the Ontario Business Corporations Act ( OBCA ), 12 while the lessee argued that the term officer should be given its plain and ordinary dictionary meaning. Moreover, the lessee submitted that an officer is merely one who holds an office, post, or place or one to whom a charge is committed or who performs a duty, service or function. Interestingly, the Ontario Court of Justice (General Division) decided the issues as follows: I see nothing in the language of the lease that indicates an intent to incorporate by reference the definitions in the Business Corporations Act. I accept the landlord s submissions that it is entitled to an assurance that a person with 10 Ibid at para CarswellOnt 1783, [1999] O.J. No. 2059, 25 R.P.R. (3d) 137, 97 O.T.C. 241 at paras 24, R.S.O. 1990, c. B.16

4 responsibility has turned his or her mind to the accuracy of the statement of gross sales, but I fail to understand why the signature of an officer in the dictionary sense, such as the controller of the tenant, does not provide that assurance. While the tenant may have breached the lease by providing statements that were unsigned, in my view the tenant is not in breach by providing statements certified by a responsible officer in the dictionary sense. Ordinary dictionary meaning In light of the reasoning in Danforth-Woodbine, and for the purposes of gaining a broader appreciation of the scope of the term officer, set out below are further examples of meanings taken from ordinary dictionaries: 1. A person holding office and taking part in the management or direction of a society or institution, esp. one holding the office of president, treasurer, or secretary; 13 and 2. One who holds an office of trust, authority, or command 14 Dictionary of Canadian Law and commentary Taking the approach one step further and closer to the world of legal analysis, what is the meaning ascribed to the term officer by legal dictionaries? According to the Dictionary of Canadian Law, 15 the term officer includes the following definitions: 1. A person employed in connection with the administration and management of a department; 2. The chairman and any vice-chairman of the board of directors, the president, any vicepresident, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the general manager and any other person designated an officer by by-law or by resolution of the directors, and any other individual who performs functions for a company similar to those normally performed by an individual occupying any of those offices; and 3. The chairperson of the board of directors, the president, a vice-president, the secretary, the treasurer, the comptroller, the general counsel, the general manager, a managing director, of an entity, or any other individual who performs functions for an entity similar to those normally performed by an individual occupying any of those offices. A number of themes emerge from the above dictionary definitions of the term officer that provide guidance on the scope of the concept. Commentary reviewed augments the above themes 13 Lesley Brown, The New Shorter Oxford English Dictionary on Historical Principles, volume 2 (New York: Oxford Press 1993) sub verbo officer 14 Merriam-Webster, online: Merriam-Webster < 15 Daphne Dukelow, Dictionary of Canadian Law, 4 th ed (Toronto: Carswell 2011) sub verbo officer

5 with the concept of individuals who typically carry out day-to-day management of a corporation. 16 OBCA perspective Subsection 1(1) of the OBCA defines officer as follows: An officer designated under section 133 and includes the chair of the board of directors, a vice-chair of the board of directors, the president, a vice-president, the secretary, an assistant secretary, the treasurer, an assistant treasurer and the general manager of a corporation, and any other individual designated an officer of a corporation by by-law or by resolution of the directors or any other individual who performs functions for a corporation similar to those normally performed by an individual occupying any such office. In Toronto Dominion Bank v Leigh Instruments Ltd (Trustee), 17 the Ontario Court of Justice (General Division) considered whether an individual was an officer for the purposes of an examination for discovery thereby rendering a notice of intention to call the individual as a witness valid. The Ontario Court of Justice turned to the definition of officer in the OBCA and highlighted that it is open-ended and does not purport to contain an exhaustive list and that it clearly contemplates that any individual may be designated an officer by by-law or by resolution of the directors, even if the officer does not hold one of the enumerated titles. The individual in this case performed an advisory role, and while he did not receive a salary, the corporation provided him with the resources to assist in this function. He visited his office daily, and was available to provide advice to the company when needed. The company enjoyed the benefit of his considerable knowledge and experience. For this reason, the Ontario Court of Justice held that he was an officer. Considerations in light of the Securities Act Similar to the Act, under the Securities Act, a disclosure document called a prospectus must contain a certificate in the prescribed form, signed by the chief executive officer, the chief financial officer, and, on behalf of the board of directors, any two directors of the issuer, other than the foregoing, duly authorized to sign, and any person or company who is a promoter of the issuer. However, unlike the Act, the Securities Act defines the term officer, and does so in a similar manner to corporate statutes. Under Section 1(1) of the Securities Act, an officer, with respect to an issuer or registrant, means: (a) a chair or vice-chair of the board of directors, a chief executive officer, a chief operating officer, a chief financial officer, a president, a vice-president, a secretary, an assistant secretary, a treasurer, an assistant treasurer and a general manager, 16 Dr. Ronald Davis, Director s Liability in Canada, loose-leaf (consulted on February 25, 2015), (Canada: Special Technical Publishers) at Intro CarswellOnt 3399, [1997] O.J. No. 3714, 14 C.P.C. (4th) 353, 35 O.R. (3d) 369, 40 O.T.C. 143, 73 A.C.W.S. (3d) 933 at paras 15, 23

6 Conclusion (b) every individual who is designated as an officer under a by-law or similar authority of the registrant or issuer, and (c) every individual who performs functions similar to those normally performed by an individual referred to in clause (a) or (b). In summary, while the definition and scope of the term officer is open-ended, the above analysis provides the following descriptions: 1. An individual in a senior position or a position of responsibility or authority within a corporation; 2. An individual who is part of the management team that oversees the management and administration of the corporation s affairs; 3. An individual appointed or designated by the board of directors or the bylaws; and 4. Chairman or vice-chairman of the board, president, vice-president, chief executive officer, secretary, treasurer, general manager, managing director, controller, general counsel. Best practice approach Franchisors should ensure that if an officer signs the certificate to the FDD, such officer fits squarely within the categories and descriptions of an officer that are common to all of the sources of guidance reviewed (as reflected in the Conclusion above). If a corporate franchisor believes that it is in a situation where it has a single director/officer, then it should carefully consider whether there are any other senior individuals in the organization that might come within the definition of officer as per the Conclusion above. If there are, then it is incumbent on the franchisor to consider whether such individual should sign in addition to the individual that has been formally appointed as the sole director/officer of the corporation. However, in light of the legal implications of signing the certificate, franchisors should always consult their legal counsel in considering and applying these best practice strategies. This paper is based on the presentation by Andrae Marrocco at the Ontario Bar Association Franchise Law Dinner Program on March 25, 2015 Andrae Marrocco Of Counsel Dickinson Wright LLP amarrocco@dickinsonwright.com