Are Shareholders of a Corporate Franchisee Considered “Franchisees” Under Ontario’s Franchise Legislation?
The answer is that depends. The Ontario Superior Court of Justice considered the matter in 2313103 Ontario Inc. et al v JM Food Services Ltd. et al. in the context of whether the shareholders of the corporate franchisee can invoke the statutory rights afforded to franchisees under the Arthur Wishart Act (Franchise Disclosure), 2000 (Ontario) (“Act”).
The Court ruled that unless the shareholders of the corporate franchisee can produce evidence to justify that they were treated as one entity for the purposes of franchise obligations, or that the franchise was “granted” to them, then they have no direct rights and remedies, and are restricted to those found in corporate legislation (ie as shareholders of a corporate entity).
The brief facts of the case are as follows: Three individuals (the aggrieved parties) incorporated 2313103 Ontario Inc. (together the “Plaintiffs”). The corporate Plaintiff and JM Food Services Ltd. (“Defendant” and franchisor), as shareholders, equally invested in F.S. Food Services Ontario Inc. (“FS”) to act as master franchisee of the Defendant and to operate the Defendant’s pizza stores in Ontario.
The Defendant’s pizza stores did not fare well, and FS shortly thereafter was unable to continue. The three individuals abandoned their operational roles with FS and the Plaintiffs sought, among other things, rescission of the master franchise agreement between FS and the Defendant. The Defendant argued the Plaintiffs lacked standing on the basis that none of the Plaintiffs were “franchisees” (within the meaning of the Act) under the master franchise agreement and that FS was the franchisee.
The Court refused to recognize the Plaintiffs’ claim based on a number of findings:
the master franchise (the agreement and other documents) was clearly granted to FS as the franchisee;
there was no evidence proffered showing that the Plaintiffs had taken on any obligations under the master franchise agreement (ie such as guaranteeing any of the ongoing obligations of FS); and
the Plaintiffs failed to demonstrate that the franchise was granted to any one of them in the sense of a sale or disposition, and there was no basis to argue multiple instances of such grant.
Ultimately, the Court found that the Plaintiffs were not “franchisees” within the meaning of the Act. Any claim by the Plaintiffs ought to have been brought as a derivative action under corporate legislation. It was inappropriate to characterize the Plaintiffs as “franchisees” under the Act by virtue of their equity ownership in FS. Such characterization would be akin to creating a new class of “franchisee’s associate” under the Act.
Although decided on the circumstances, the above case demonstrates the need to draft a franchise agreement in a manner that makes it clear whether the shareholders of a corporate franchisee are intended to be “franchisees” (and thereby have recourse to the rights under franchise legislation). Additionally, it appears from the reasoning of the case, that if shareholders (of a corporate franchisee) are taking on responsibility and obligations under the agreement, then this will militate in favour of such shareholders potentially being franchisees for the purposes of the Act. Clear drafting can go a long way to protecting franchisors from that presumption.