This informal staff advisory opinion addresses the disclosure of affiliate information under the amended Franchise Rule.
In an advisory opinion request letter submitted on behalf of an undisclosed client, Nancy L. Lanard states that she represents a new American franchise company. The American franchisor is owned by a foreign entity that operates a franchise system in another country. The foreign entity is bringing its system to the United States and has applied for an American trademark. Ms. Lanard contends that the foreign entity is not the parent of the American company.1 She adds that while there is common control, there is not identical ownership of both entities.
Ms. Lanard now asks whether the foreign entity is an affiliate of the American company under section 436.1(b)? Further, she asks whether the American company must include audited financial statements of the foreign entity in its franchise disclosure document?
II. Definition of the Term “Affiliate”
The amended Franchise Rule defines the term “affiliate” as “an entity controlled by, controlling, or under common control with, another entity.”2 This general definition of the term “affiliate” should be used throughout a franchise disclosure document, unless a particular disclosure item defines the term differently or limits its use.3
The “affiliate” definition focuses on control, not mere ownership. Accordingly, in determining whether the foreign entity is an affiliate of the American franchisor, we must determine whether the foreign entity either: (1) controls the American franchisor; (2) is controlled by the American franchisor; or (3) is under common control with the American franchisor.
In her letter, Ms. Lanard states that there is common control of the American franchisor and the foreign entity, although there “is not identical ownership of both entities.” Because common control is present, that is sufficient for us to conclude that the foreign entity and the American franchisor are affiliates. As noted above, the fact that ownership of the two entities is not identical is irrelevant in determining whether the two entities maintain an affiliate relationship for Rule purposes.
III. Affiliate Financial Statements
Item 21 of the amended Franchise Rule requires franchisors to include in their franchise disclosure document audited financial statements. There is no requirement, however, that any franchisor include audited financial statements of any affiliate. Item 21, however, permits a franchisor to include the financial statements of an affiliate if the affiliate’s financial statements satisfy the Rule’s substantive requirements for an audited financial statement and:
the affiliate absolutely and unconditionally guarantees to assume the duties and obligations of the franchisor under the franchise agreement. The affiliate’s guarantee must cover all of the franchisor’s obligations to the franchisee, but need not extend to third parties.
If this alternative means of disclosure is selected, the franchisor must attach a copy of the guarantee to the franchise disclosure document.4
For the reasons stated above, we conclude that the foreign entity bringing the franchise concept to the United States and the American franchisor appear to have an affiliate relationship. Nonetheless, Item 21 of the amended Rule does not require a franchisor to disclose audited financial statements of any affiliate.5 Such disclosure is solely a matter of discretion, as discussed in more detail above.
Please be advised that our opinion is based on all the information furnished in your request. This opinion applies only to your client and to the extent that actual company practices conform to the material submitted for review. Please be advised further that the views expressed in this letter are those of the FTC staff. They have not been reviewed, approved, or adopted by the Commission, and they are not binding upon the Commission. However, they do reflect the opinions of the staff members charged with enforcement of the Franchise Rule.
Date: October 3, 2007
1 The request letter presents no facts from which we can determine whether or not the foreign entity is a parent of the American franchisor. Accordingly, we have not verified this assertion. For purposes of this advisory, however, we will accept the representation that the two entities do not maintain a parent-subsidiary relationship.
2 Section 436.1(b).
3 See Statement of Basis and Purpose, 72 Fed. Reg. 15444, at 15454 and n. 77.
4 Section 436.5(u)(1)(iii).
5 Item 21 does require the disclosure of financial statements of any parent “that commits to perform post-sale obligations for the franchisor or guarantees the franchisor’s obligations.” You have not asked us to determine whether the foreign entity is a parent that must make such a disclosure, and we are not opining on the subject here.