Senate Bill No. 538

Introduced by Senator Hill

February 22, 2013

An act to amend Sections 31101, 31107, 31109.1, 31114 and 31119 of the Corporations Code, relating to franchises.

LEGISLATIVE COUNSEL’S DIGEST

SB 538, as introduced, Hill. Franchises.

The Franchise Investment Law generally provides for the regulation of the offer and sale of franchises. The law requires specific written disclosures, including, but not limited to, an offering circular, and authorizes the sale of a franchise to be exempt from specified requirements if the franchisor meets certain disclosure and notice requirements.

This bill, for that exemption to apply, would modify the requirement that certain written disclosures be made by a franchisor at least 10 business days prior to the sale or material modification of a franchise and instead require those disclosures to be made at least 14 days prior to the sale or modification. The bill also would replace the term for a written document called an “offering circular” with the term “franchise disclosure document.”

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 31101 of the Corporations Code is
amended to read:

31101.  

There shall be exempted from the provisions of Chapter
2 (commencing with Section 31110) of this part the offer and sale
of a franchise if the franchisor complies with each of the following
minimum net worth, experience, disclosure, and notice filing
requirements:

(a) Net worth. The franchisor and, when necessary, a corporation
owning at least 80 percent of the franchisor (parent) meet one of
the following net worth requirements, according to financial
statements for the fiscal year just ended. The franchisor and the
parent, when necessary, may rely upon the immediately preceding
fiscal year’s audited financial statement for 15 months from that
fiscal year end date.

(1) The franchisor has a net worth on a consolidated basis of
not less than five million dollars ($5,000,000), according to its
audited financial statement.

(2) The franchisor has a net worth of not less than one million
dollars ($1,000,000) and its parent has a net worth of five million
dollars ($5,000,000), according to the audited financial statements
of the franchisor and its parent, respectively.

(3) The franchisor has a net worth of one million dollars
($1,000,000), according to its unaudited financial statement, and
the parent has a net worth on a consolidated basis of not less than
five million dollars ($5,000,000), according to its audited financial
statement, and the parent absolutely and unconditionally guarantees
to assume the duties and obligations of the franchisor under the
franchise agreement should the franchisor become unable to
perform its duties and obligations.

(b) Experience. The franchisor or a corporation owning at least
80 percent of the franchisor (parent) complies with one or more
of the following conditions throughout the five-year period
immediately preceding the offer and sale of the franchise, or
complies with one of the following conditions during part of the
period and one or more of the following conditions during the
balance of the period:

(1) The franchisor has had at least 25 franchisees conducting
business which is the subject of the franchise.

(2) The franchisor has conducted business which is the subject
of the franchise.

(3) The parent has had at least 25 franchisees conducting
business which is the subject of the franchise.

(4) The parent has conducted business which is the subject of
the franchise.

(c) Disclosure. (1) Except as provided in subparagraph (2), the
franchisor discloses in writing to each prospective franchisee, at
least begin delete 10 business end delete begin insert 14 end insert days prior to the execution by the prospective
franchisee of any binding franchise or other agreement, or at least
begin delete 10 business end delete begin insert 14 end insert days prior to the receipt of any consideration, the
following information:

(A) The name of the franchisor, the name under which the
franchisor is doing or intends to do business, and the name of any
parent or affiliated company that will engage in business
transactions with franchisees.

(B) The franchisor’s principal business address and the name
and address of its agent in the State of California authorized to
receive service of process.

(C) The business form of the franchisor, whether corporate,
partnership, or otherwise.

(D) The business experience of the franchisor, including the
length of time the franchisor (i) has conducted a business of the
type to be operated by the franchisees, (ii) has granted franchises
for such business, and (iii) has granted franchises in other lines of
business.

(E) A copy of the typical franchise contract or agreement
proposed for use or in use in this state.

(F) A statement of the franchise fee charged, the proposed
application of the proceeds of such fee by the franchisor, and the
formula by which the amount of the fee is determined if the fee is
not the same in all cases.

(G) A statement describing any payments or fees other than
franchise fees that the franchisee or subfranchisor is required to
pay to the franchisor, including royalties and payments or fees
which the franchisor collects in whole or in part on behalf of a
third party or parties.

(H) A statement of the conditions under which the franchise
agreement may be terminated or renewal refused, or repurchased
at the option of the franchisor.

(I) A statement as to whether, by the terms of the franchise
agreement or by other device or practice, the franchisee or
subfranchisor is required to purchase from the franchisor or his or
her designee services, supplies, products, fixtures, or other goods
relating to the establishment or operation of the franchise business,
together with a description thereof.

(J) A statement as to whether, by the terms of the franchise
agreement or other device or practice, the franchisee is limited in
the goods or services offered by him or her to his or her customers.

(K) A statement of the terms and conditions of any financing
arrangements when offered directly or indirectly by the franchisor
or his or her agent or affiliate.

(L) A statement of any past or present practice or of any intent
of the franchisor to sell, assign, or discount to a third party any
note, contract, or other obligation of the franchisee or subfranchisor
in whole or in part.

(M) If any statement of estimated or projected franchisee
earnings is used, a statement of such estimation or projection and
the data upon which it is based.

(N) A statement as to whether franchisees or subfranchisors
receive an exclusive area or territory.

(O) A copy of the financial statement or statements required by
subdivision (a).

(P) A copy of the unconditional guaranty, if applicable, required
by paragraph (3) of subdivision (a).

(2) In the case of a material modification of an existing
franchise, the franchisor discloses in writing to each franchisee
information concerning the specific sections of the franchise
agreement proposed to be modified and such additional information
as may be required by rule or order of the commissioner. Any
agreement by such franchisee to such material modifications shall
not be binding upon the franchisee if the franchisee, within begin delete 10
business end delete begin insert 14 end insert days after the receipt of such writing identifying the
material modification, notifies the franchisor in writing that the
agreement to such modification is rescinded. A writing identifying
the material modification is received when delivered to the
franchisee. A written notice by the franchisee rescinding an
agreement to a material modification is effective when delivered
to the franchisor or when deposited in the mail, postage prepaid,
and addressed to the franchisor in accordance with any notice
provisions in the franchise agreement, or when delivered or mailed
to the person designated in the franchise agreement for the receipt
of notices on behalf of the franchisor.

(d) Notice filing. The franchisor has filed with the commissioner
a notice of exemption and paid the fee required by subdivision (f)
of Section 31500 prior to an offer or sale of a franchise in this state
during any calendar year in which one or more franchises are sold,
excluding any material modification.

SEC. 2.  

Section 31107 of the Corporations Code is amended
to read:

31107.  

There shall be exempted from the provisions of Chapter
2 (commencing with Section 31110) of this part, any offer (but
not the sale) by a franchisor of a franchise while an application
for renewal or amendment is pending if the prospective franchisee
receives all of the following:

(a) The begin delete offering circular end delete begin insert franchise disclosure document end insert and its
exhibits as filed with the commissioner with the application for
renewal or amendment.

(b) A written statement from the franchisor that (1) the filing
has been made but is not effective, (2) the information in the
begin delete offering circular end delete begin insert franchise disclosure document end insert and exhibits has
not been reviewed by the commissioner, and (3) the franchisor
will deliver to the prospective franchisee an effective begin delete offering
circular end delete begin insert end insert begin insert franchise disclosure document end insert and exhibits at least begin delete 10
business end delete begin insert 14 end insert days prior to execution by the prospective franchisee
of a binding agreement or payment of any consideration to the
franchisor, or any person affiliated with the franchisor, whichever
occurs first, showing all material changes from the begin delete offering circular end delete begin insert end insert
begin insert franchise disclosure document end insert and exhibits received by the
prospective franchisee under subdivision (a) of this section.

(c) The begin delete offering circular end delete begin insert end insert begin insert franchise disclosure document end insert and
exhibits in accordance with paragraph (3) of subdivision (b) of
this section.

SEC. 3.  

Section 31109.1 of the Corporations Code is amended
to read:

31109.1.  

(a) There shall be exempted from the provisions of
Chapter 2 (commencing with Section 31110) the offer and sale of
a franchise registered under Section 31111, 31121, or 31123 on
terms different from the terms of the offer registered thereunder
if all of the following requirements are met:

(1) The initial offer is the offer registered under Section 31111,
31121, or 31123.

(2) The prospective franchisee receives all of the following in
a separate written appendix to the begin delete offering circular: end delete begin insert franchise
disclosure document: end insert

(A) A summary description of each material negotiated term
that was negotiated by the franchisor for a California franchise
during the 12-month period ending in the calendar month
immediately preceding the month in which the negotiated offer or
sale is made under this section.

(B) A statement indicating that copies of the negotiated terms
are available upon written request.

(C) The name, telephone number, and address of the
representative of the franchisor to whom requests for a copy of
the negotiated terms may be obtained.

(3) The franchisor certifies or declares in an appendix to its
application for renewal that it has complied with all of the
requirements of this section, in the event this exemption is claimed.

(4) The negotiated terms, on the whole, confer additional
benefits on the franchisee.

(b) The franchisor shall provide a copy of the negotiated terms
described in subdivision (a) to the prospective franchisee within
five business days following the request of the franchisee.

(c) The franchisor shall maintain copies of all material
negotiated terms for which this exemption is claimed for a period
of five years from the effective date of the first agreement
containing the relevant negotiated term. Upon the request of the
commissioner, the franchisor shall make the copies available to
the commissioner for review. For purposes of this section, the
commissioner may prescribe by rule or order the format and content
of the summary description of the negotiated terms required by
subparagraph (A) of paragraph (2) of subdivision (a).

(d) For purposes of this section, “material” means that a
reasonable franchisee would view the terms as important in
negotiating the franchise.

SEC. 4.  

Section 31114 of the Corporations Code is amended
to read:

31114.  

The application for registration shall be accompanied
by a proposed begin delete offering circular end delete begin insert end insert begin insert franchise disclosure document end insert ,
which shall contain the material information set forth in the
application for registration, as specified by rule of the
commissioner, and such additional disclosures as the commissioner
may require. The begin delete offering circular end delete begin insert end insert begin insert franchise disclosure document end insert
shall recite in bold type of not less than 10-point type that
registration does not constitute approval, recommendation, or
endorsement by the commissioner.

SEC. 5.  

Section 31119 of the Corporations Code is amended
to read:

31119.  

(a) It is unlawful to sell any franchise in this state that
is subject to registration under this law without first providing to
the prospective franchisee, at least 14 days prior to the execution
by the prospective franchisee of any binding franchise or other
agreement, or at least 14 days prior to the receipt of any
consideration, whichever occurs first, a copy of the begin delete offering circular end delete begin insert end insert
begin insert franchise disclosure document end insert , together with a copy of all proposed
agreements relating to the sale of the franchise.

(b) Nothing in this division shall be construed to prevent a
franchisor from providing copies of the begin delete offering circular end delete begin insert end insert begin insert franchise
disclosure end insert documents to prospective franchisees through electronic
means pursuant to any requirements or conditions that may be
imposed by rule or order of the commissioner.