In April 2019, we informed you that the Dutch draft Franchise bill was presented to the sector for the purposes of consultation. After completion of the consultation stage a reviewed draft bill was sent on Tuesday 11 February 2020 to the Dutch Parliament.
In the accompanying press-release it is communicated that the bill as filed has the purpose of creating a healthy balance of power in the franchise sector. According to the press release, there will be more transparency and control for franchisees aiming at a well-balanced relationship without obstructing innovation.
The amendments of the new text of the draft bill are numerous. They resulted into some easing of the duties for franchisors. At the same time, the amendments call for a compulsory form of consultation and recording.
The most striking duties and amendments
In the draft bill, several new duties are introduced. Furthermore, it involves important substantial changes in comparison with the consultation version. The most striking topics are discussed below.
Pre-contractual information and research
The bill lists topics about which the franchisor must inform its franchisees at least four weeks before execution of the franchise agreement. The information duty regards inter alia the draft franchise agreement, the remuneration system (including also “surcharges and other financial contributions”) and investments, information about the consultation structure and the way in which franchisees are informed about turnover-related data (such as benchmarks). The franchisor also has to give information about its financial status.
In this “standstill” period, the franchisee has to carry out its own research. During this term, the draft franchise agreement shall not be amended to the disadvantage of the franchisee. Nor is it allowed to ask the franchisee for investments or payment during such period. A new aspect is that – to counterbalance – a research duty has been included for franchisees. Candidate franchisees must also take some measures themselves to prevent them from entering into franchise agreements under the influence of a misrepresentation.
In the consultation version a duty had already been included for franchisees to provide historic financial data on the outlet/location. A new aspect is that currently franchisors must provide, as alternative, the financial data of similar places of business whereat the franchisor must clarify on what ground he finds them similar. In particular, the latter duty is already cause for discussions afterwards, because in practice it is hard to assess and forecast beforehand whether specific places of business are similar at all.
The Explanatory Memorandum specifies in particular that providing a prognosis is not compulsory. Upon request of many parties, during the consultation phase, well established case law is followed in this respect.
Transparency of cost coverage
The draftbill also includes several general information duties for franchisors which apply during the life of the cooperation. It concerns information about interim changes of the franchise agreement, demanded investments and decisions on a derived formula.
A new aspect is that a specific provision has been included on the basis of which franchisors must inform the franchisees each year to what extent “the surcharges or other financial contributions” which were paid by franchisees in the preceding year, cover the costs or investments the franchisor intended to cover with such contributions. It is said that franchisees must be able to verify whether the contributions asked are not unreasonably high. For example, it states providing price-quotes of market surveys for which franchisees have made a substantial financial contribution as basis of specific investments within the chain.
This new provision reaches far and could put disproportionate pressure on franchise organizations. This provision should at least be specified and explained in more detail to avoid any abuse.
The franchise agreement should include whether there is any goodwill in Franchisee’s undertaking of franchisee, what its level is, and to what degree it can be attributed to the franchisee. Furthermore, the parties must agree beforehand in what manner goodwill which can be attributed in reasonableness to the franchisee will be compensated upon termination of the franchise agreement to the franchisee.
A new aspect is that goodwill compensation only has to be paid by the franchisor if the business is taken over by the franchisor himself for continuation by himself, or for transfer to a new franchisee. No goodwill compensation upon termination of the cooperation is compulsory beforehand and in all circumstances anymore. If there is a direct sale/transfer between franchisees mutually, the goodwill provision does not apply. In the Explanatory Memorandum, it is noted that in that case goodwill usually has already been accounted for in the selling price.
Threshold values and consent
If franchisors wish to implement a change to the franchise formula or wish to operate under a derived formula, franchisees will have the right of consent. This only applies in cases in which the franchisees are faced with specific financial effects described in the draft bill. The former 2/3 majority of votes for approval has been reduced to a simple majority.
A new aspect is the implementation of the notion threshold level. Consent of the franchisees is only required, if such decisions of the franchisor concern a specific investment or financial contribution which exceeds a specific predetermined threshold level. Said threshold level should be included in the franchise agreement. In the Explanatory Memorandum it is noted that the threshold values should not be as high as making the right of consent illusory.
The regulation induces franchisors to lay down threshold values contractually. If no threshold values have been included in the franchise agreement, franchisees will have to be asked for consent at a majority of votes for every change.
Review of franchise agreements and transitional law
The bill will apply immediately after it has become effective. The current bill, however, requires that the existing franchise agreements will be reviewed. Franchisors will have to implement at least provisions on goodwill, non-competition and threshold values for decisions or changes having a financial impact. This implies that prior to the future Franchise Act’s becoming effective the topics above must have been negotiated. Seeing that in practice this is not feasible, a transition term of two years has been included for review of the franchise agreements.
Current agreements which still have a remaining life of less than two years do not have to be reviewed. Any new (or renewed) franchise agreements have to be in conformity with the new law upon signing, once the law has become effective. Existing franchise agreements having a life of more than two years have to be reviewed within a period of two years.
Upon acceptance of the bill, franchisors and franchisees are forced to reach clear understandings together and to specify their rights and duties. Franchise organizations will also have to carry out an interim review of their franchise agreements in respect of numerous topics. For each organization it will also have to be checked whether its actual method of operation and consultation structure needs any adjustments, or not.
The question arises whether such compulsory consultations and reviews under the pressure of time will benefit franchise cooperation and the sector. In particular, in major organizations having many and/or powerful franchisees, it will not be easy to reach actual agreement among all the parties involved within the imposed time-lines. The risk exists that implementation of the act in its current form will have a controversial effect: power disputes instead of power balance and stagnation instead of innovation.
The draft Franchise Act is currently before the Dutch Parliament. On Tuesday 18 February 2020, the Commissie EZK (Commission for Economic Affairs and Climate) has decided to put the draft Franchise Act on the agenda for 12th of March 2020. After the Parliament has passed the act (with or without further amendments), it will go to the Dutch Senate for approval. Usually this is a mere formality. There is a lot of pressure on the Ministry of Economic Affairs to expedite the process. It is generally expected that the draft Franchise Act will become definitive within this year (2020).
Although the draft Franchise Act has not yet become final and its content may still change, it is important to verify for each company active with franchising whether and in what manner anticipation is recommended. We would like to exchange ideas with you and invite you to contact your existing contact at Parker Advocaten.