Franchise Advice
to share in the profi ts (equity shares). The majority, and in some cases all, of the voting shares will be held by the franchisor. The equity shares will be held by the franchisees exclusively in the traditional business format model. Sometimes the voting shares are more evenly distributed, but, generally speaking, the franchisor will retain at the very least a majority percentage, giving it ultimate control over the franchisee company. Each class of shares will be given the right to appoint a certain number of directors to the board of the joint venture company. Again, the franchisor will usually retain the right to appoint more directors than the individual shareholders, giving it control of the board and, therefore, control of the day-to-day running and decision making of the franchisee company. In terms of documents, the traditional franchise relationship is governed by a single franchise agreement between the franchisor and franchisee. The documentation required for a joint venture franchise is more complex. The joint venture agreement will usually contain most, if not all, elements of the traditional franchise agreement, such as the grant of rights, training, operational
regulations and restrictions, accounting, and transfers of shares. It will also usually contain provisions in relation to termination and restrictions of the activities of the individual shareholders after termination. Alongside the joint venture agreement, the franchisee company will also have articles of association. These are the rules and regulations governing matters such as the classes of shares in the company, the appointment of directors and the conduct of their meetings, the calling and conducting of shareholders’ meetings, the procedure for distributing profi ts and other administrative matters.
In addition, franchisors adopting the joint
venture franchise model may take a charge over the assets of the franchisee company (usually by way of a debenture or fi xed or fl oating charge) to secure the payment of all fees and any other debts owed by the franchisee company to the franchisor. To a prospective individual shareholder, unless they have had some prior experience of franchising or shareholder agreements, the documentation produced in relation to a joint venture franchise is quite likely to be almost incomprehensible. The key distinction between the two models that any prospective individual
shareholder should remember is that if they set up a company to be the franchisee in the traditional model, the company will be solely owned and controlled by them. If the company generates profi ts, it will be up to the individual owners to decide when and how much of that profi t should be distributed. In the joint venture model, the franchisor is likely to control the management and operation of the franchisee company to a much greater extent, including as to when distributions of profi t should be made. In summary, a prospective individual
shareholder is well advised to seek independent legal advice on any documents they are asked to sign when entering into a joint venture. Although the franchisor has an interest in the franchisee company, which may be seen as a benefi t, the element of control exercisable by the franchisor may be far greater than the individual shareholder was expecting.
About the author
Jane Masih is director and head of franchising at Owen White Solicitors
October 2017 |
BusinessFranchise.com | 27
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