Franchisor Obligations for Disclosure of Materially Relevant Facts

Introduction

As a franchisor, one of your most significant obligations is to provide relevant, accurate and up-to-date information to your franchisees and prospective franchisees. An important part of that obligation is creating a disclosure document containing materially relevant information about your franchise system. A disclosure document needs to be updated every year you intend to start or maintain a franchise business.

However, your disclosure obligations as a franchisor do not end with the disclosure document. Franchisors have ongoing obligations to disclose relevant information to franchisees and potential franchisees beyond the obligation to keep their disclosure document updated. Further obligations related to disclosure of materially relevant facts are largely governed by section 34 of the Franchising Code of Conduct ("the Code").  

There are two main classes of materially relevant facts under s 34. Materially relevant facts relating to financial details regarding the franchisor or its franchise system are required to be disclosed under s 34(1) and materially relevant facts concerning other matters are required to be disclosed under s 34(2).

Financial Details

The financial details that must be disclosed under s 34(1) are the same details that must be included in Item 21 of a franchisor's disclosure document.

If a statement, declaration or document regarding the financial position of the franchisor or its franchise system comes into existence, the franchisor must give a copy of that statement, declaration or document to a franchisee or prospective franchisee as soon as practicable. If there is a prospective franchisee to which the franchisor is required to give a statement, declaration or document, the franchisor must do so before the prospective franchisee enters into a franchise agreement with the franchisor.

Notably, this obligation does not require the franchisor to create any new documents but it does require them to disclose any relevant documents which are created.

Some examples of materially relevant financial statements, declarations or documents include a statement of a franchisor's solvency or a financial report.

This is particularly important for financial reports that are prepared soon after the end of a financial year. Disclosure documents are generally required to be updated within 4 months of the end of a financial year (on or before 31 October). If you receive financial reports before that deadline then they may need to be provided to a franchisee or prospective franchisee before the disclosure document is updated because of the requirement to provide financial details as soon as reasonably practicable.

Other Matters

The second category of facts is referred to in s 34 as "other matters". This section penalises franchisors for failing to notify a franchisee or prospective franchisee of certain matters within 14 days of the franchisor becoming aware of it if that matter is not mentioned in their disclosure document.

These matters are listed in section 34(3) and include:

• Changes in the majority ownership or control of the franchisor, an associate of the franchisor, or the franchise system,

• Proceedings by a public agency (such as the ACCC), a judgment in a court case, or an award in an arbitration against the franchisor or an associate, or a director of the franchisor or associate, alleging:
  • breach of a franchise agreement,
  • contravention of the Competition and Consumer Act 2010,
  • contravention of the Corporations Act 2001,
  • unconscionable conduct,
  • misconduct,
  • an offence of dishonesty, or
  • contravention of a civil remedy provision as detailed in sub-s 558B(1) or (2) of the Fair Work Act 2009,
    
• Civil proceedings in Australia against the franchisor or an associate, or a director of the franchisor or associate, by at least 10% or 10 of the franchisor's franchisees in Australia, whichever is lower,
• Any judgment entered against the franchisor or an associate that is not discharged within 28 days for at least:
  • $100,000 for a small proprietary company (defined under the Corporations Act), or
  • $1,000,000 for any other company,
• Any judgment entered against the franchisor or an associate of the franchisor in a litigation matter mentioned in Item 4 of the franchisor's disclosure document,
• The franchisor or an associate of the franchisor enters external administration or becomes insolvent (under Chapter 5 of the Corporations Act),
• Changes in the intellectual property or ownership or control of the intellectual property that is material to the franchise system,
• The existence and content of:
  • Any undertaking given by the franchisor or an associate of the franchisor to the ACCC under s 87B of the Competition and Consumer Act 2010,
  • Any order made by the Federal Court of Australia in relation to such an undertaking.

Section 34(3) replicates the matters listed in clause 17 of the old Franchising Code. The only new matters included are proceedings by a public agency or judgments entered against a responsible franchisor entity where there is an alleged contravention of subsection 558B(1) or (2) of the Fair Work Act 2009. These were not explicitly included in regulations in the past, but they were added when the Code was rewritten in 2024 because they were considered to be matters of relevance to somebody seeking to enter into a franchise agreement.

Section 34(4) explains that where there are proceedings of some kind, the franchisor must tell the franchisee:

• The names of the parties to the proceedings,
• The name of the court or tribunal where the proceedings are occurring,
• The case number,
• The general nature of the proceedings.

Section 35(5) explains that when the franchisor or associate of the franchisor goes into voluntary administration or becomes insolvent, the franchisor must tell the franchisee the name and address of the administrator, controller, liquidator or restructuring practitioner.

A note

Item 22 of the disclosure document provides a place to insert any information that has changed between the disclosure document being prepared and the date the disclosure document is given to a franchisee or prospective franchisee under the Code.

Penalties

 The penalties for failure to comply with the obligations to disclose materially relevant facts can be extremely severe. 

For a person who is not a body corporate, the maximum penalty is $500,000.

For a body corporate, the maximum penalty is prescribed under section 17 of the Code. It is the greatest of:

• $10,000,000; or
• 3x the value of the benefit of the contravention to the franchisor, if the court can determine that value; or
• If the court cannot determine the value of the contravention, 10% of the adjusted turnover of the body corporate during the period of 12 months ending at the end of the month during which the contravention occurred.

These penalties, added to the Franchising Code of Conduct in 2022, mark a huge increase from the standard maximum penalty of 600 penalty units (currently $198,000). This increase was designed to emphasise the importance that the ACCC places on complying with s 34 and to strongly deter breaches. This is because the matters covered by s 34 are considered to be critical to enable a franchisee or prospective franchisee to make informed decisions about a franchise agreement.

Failure on the part of the franchisor to provide information on these matters can have significant impacts on a franchisee or prospective franchisee. For example, if new financial documents indicated a significant downturn in the franchisor's financial position that was not reflected in the franchisor's disclosure document, a prospective franchisee who entered into a franchise agreement with that franchisor without knowing about that downturn might find themselves in a significantly worse financial situation than they expected.

Takeaways

• One of your most significant obligations as a franchisor is to provide relevant, accurate and up-to-date information to your franchisees and prospective franchisees
• Beyond keeping an updated disclosure document, you must disclose materially relevant facts to franchisees and prospective franchisees
• Materially relevant financial details, including solvency statements or financial reports, must be provided to franchisees and prospective franchisees as soon as reasonably practicable
• Materially relevant details regarding other matters such as changes in franchise ownership or proceedings against a franchisor or franchise associate must be provided within 14 days of those details becoming known to the franchisor
• Penalties for failing to disclose these materially relevant details can be extremely severe
  • For a person who is not a body corporate, the maximum penalty is $500,000

  • For a body corporate, the maximum penalty is the greatest of:

    • $10,000,000; or
    • 3x the value of the benefit of the contravention to the franchisor, if the court can determine that value; or
    • If the court cannot determine the value of the contravention, 10% of the adjusted turnover of the body corporate during the period of 12 months ending at the end of the month during which the contravention occurred