What is a prohibited action for a Chatime franchisee regarding changes in ownership, directors, officers, constitution, disposal of ownership interests, or capital without the franchisor's consent?
Chatime Franchise · 2025 FDDAnswer from 2025 FDD Document
19.4 No Changes Without Franchisor's Consent
- (1) Franchisee must not allow any of the following to occur without first obtaining Franchisor's written consent:
- (a) Any change in the composition of Franchisee's Owners, directors, and officers;
- (b) Any alteration to Franchisee's constitution;
- (c) Any Disposal of Ownership Interests in Franchisee; or
- (d) Any reduction or alteration of Franchisee's capital.
- (2) Franchisor must not withhold consent unreasonably if:
- (a) In the case of a Disposal of Ownership Interests, the requirements of clause 19.5 are met;
- (b) Franchisee executes and delivers to Franchisor a Release in substantially the form attached as Exhibit 1;
- (c) All new Owners must execute and deliver to Franchisor a signed personal guarantee in the form attached as Exhibit 3;
- (d) All new Owners executed and delivered to Franchisor a signed Confidentiality and Non-Competition Agreement in the form attached as Exhibit 4; and
- (e) In any case, the change does not adversely affect Franchisee's ability to perform its obligations under this Agreement.
Source: Item 23 — Receipts (FDD pages 58–262)
What This Means (2025 FDD)
According to Chatime's 2025 Franchise Disclosure Document, a franchisee is prohibited from making certain changes to their business structure without first obtaining written consent from Chatime. Specifically, a franchisee cannot proceed with any change in the composition of the franchise's owners, directors, and officers, any alteration to the franchise's constitution, any disposal of ownership interests in the franchise, or any reduction or alteration of the franchise's capital without Chatime's prior approval.
This requirement ensures that Chatime maintains control over who is involved in operating a franchise and protects the brand's integrity. It allows Chatime to vet potential new owners, directors, or officers to ensure they meet the company's standards and have the necessary qualifications. This is a fairly standard practice in franchising, as franchisors need to maintain consistent brand standards across all locations.
However, Chatime cannot unreasonably withhold consent if certain conditions are met. These conditions include meeting the requirements outlined in clause 19.5 regarding the disposal of ownership interests, executing and delivering a release to Chatime, ensuring all new owners execute and deliver a signed personal guarantee and a confidentiality and non-competition agreement, and ensuring that the change does not adversely affect the franchisee's ability to perform its obligations under the franchise agreement. Clause 13 outlines the requirements for disposal of ownership interests.
This provision balances Chatime's need to control its brand with the franchisee's right to manage their business. Franchisees should be aware of these restrictions and plan accordingly when considering changes to their business structure. It is important to maintain open communication with Chatime and provide all necessary documentation to facilitate the approval process.