Does the Chatime franchise agreement restrict a franchisee from being a shareholder in another company?
Chatime Franchise · 2025 FDDAnswer from 2025 FDD Document
2. NON-COMPETITION DURING AND AFTER THE RELATIONSHIP WITH FRANCHISEE
I agree that I shall not, and I will ensure that any person or entity which I control shall not:
- (a) be concerned or interested in any Restrained Business (directly or indirectly, or through any interposed corporate entity, trust, partnership, or entity as trustee, principal, agent, shareholder, beneficiary, or as an independent contractor, consultant, adviser or in any other capacity);
- (b) advise, assist, consult with or for or in connection with any Restrained Business or any person associated with or in any manner whatsoever connected to or engaged by or in connection with any Restrained Business;
- (c) hold or own (beneficially or non-beneficially) whether directly or indirectly and whether absolutely or contingently or hold options over shares or any other securities or units of any entity engaging in a Restrained Business; and
- (d) procure, employ, seek to employ or engage, or appoint in any capacity (whether as a consultant, director or otherwise), any person who is or has been in the 12 months prior to such action an employee or independent contractor of the Franchisor or any Chatime Store Business
during the Restraint Period in the Restraint Area.
Nothing in this Agreement, including this Section 3, prevents the Covenantor (or any of its affiliates) from:
- (a) owning less than 5%, by value, of securities in a listed corporation; or
- (b) engaging or being concerned or interested in the Franchised Business in accordance with this Agreement.
4. RESTRICTIONS ARE REASONABLE AND SEVERABLE
(a) The covenants in this Agreement will have the effect as if they were several covenants consisting of:
(i) each separate covenant set out in Section 3, combined with;
(ii) each Restrained Business, combined with;
(iii) each Restraint Period, combined with;
(iv) each Restraint Area.
Source: Item 23 — Receipts (FDD pages 58–262)
What This Means (2025 FDD)
According to the 2025 Chatime Franchise Disclosure Document, the franchise agreement places restrictions on a franchisee's involvement with other businesses, including shareholding. Specifically, a franchisee is prohibited from being "concerned or interested in any Restrained Business" either directly or indirectly. This restriction extends to various roles, including being a shareholder.
The agreement explicitly states that franchisees cannot "hold or own (beneficially or non-beneficially) whether directly or indirectly and whether absolutely or contingently or hold options over shares or any other securities or units of any entity engaging in a Restrained Business." A "Restrained Business" is not defined in the provided excerpts, but it is likely defined elsewhere in the FDD and refers to businesses that compete with Chatime. This restriction applies during the "Restraint Period" and within the "Restraint Area," which are also likely defined elsewhere in the FDD.
However, there is an exception: the franchisee (or its affiliates) is allowed to own less than 5% of the securities in a listed corporation. This implies that owning 5% or more of a publicly listed competitor, or any stake in a private competitor, would violate the agreement. These non-compete obligations are also structured to be severable, meaning that if any specific part of the restriction is deemed unenforceable, the remaining parts still apply. Therefore, a prospective Chatime franchisee needs to carefully evaluate the full scope of these restrictions to ensure they do not conflict with any existing or planned business interests.