Is a Chatime franchisee allowed to hold shares or securities in an entity engaging in a Restrained Business, either directly or indirectly?
Chatime Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
Source: Item 23 — Receipts (FDD pages 58–262)
What This Means (2025 FDD)
According to Chatime's 2025 Franchise Disclosure Document, franchisees are generally restricted from holding shares or securities in entities involved in a Restrained Business, which is defined as a business similar to the Chatime franchise. Specifically, franchisees are prohibited from holding shares or securities, directly or indirectly, in any entity engaging in a Restrained Business. This restriction applies during the term of the franchise agreement and extends for a certain period after the agreement's expiration or termination.
However, there is an exception to this restriction. Franchisees are permitted to own less than 5%, by value, of securities in a listed corporation, even if that corporation is involved in a Restrained Business. This exception allows franchisees to invest in publicly traded companies without violating the non-compete clause, provided their ownership stake remains below the 5% threshold.
This clause aims to prevent franchisees from having a financial interest in competing businesses that could potentially conflict with their obligations to Chatime. The definition of "Restrained Business" is broad, covering businesses that are substantially similar to the Chatime franchise, including those retailing or supplying similar products or services. Prospective franchisees should carefully consider these restrictions and seek clarification from Chatime regarding any specific investments they may have or plan to make to ensure compliance with the franchise agreement.