During the Restraint Period, can a Chatime franchisee hold shares in any entity engaging in a Restrained Business?
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, a franchisee is restricted from holding shares in a business that is similar to Chatime during the Restraint Period. Specifically, a franchisee cannot directly or indirectly hold shares or securities in any entity engaging in a Restrained Business. A "Restrained Business" is defined as a business that is the same as or substantially similar to the Franchised Business, or one that is involved in the retailing or supplying of products or services similar to those offered by Chatime. The "Restraint Period" is defined as a continuous, uninterrupted period of two years starting from the date of expiration or termination of the Franchise Agreement.
However, there is an exception to this restriction. A Chatime franchisee is permitted to own less than 5% of the securities in a listed corporation, even if that corporation engages in a Restrained Business. This exception allows franchisees to invest in publicly traded companies without violating the non-compete agreement, provided their ownership stake remains below the 5% threshold.
The restrictions extend beyond just the franchisee. Chatime requires the franchisee to ensure that their directors (who are not party to the agreement), any Interested Party, managers, and key employees enter into confidentiality and non-competition agreements. These agreements must contain similar reasonable restraints as imposed on the franchisee. This ensures that multiple parties connected to the franchisee are also bound by non-compete obligations, further protecting Chatime's business interests. The franchisor can also require that any Interested Party specified by Chatime enters into a noncompete and confidentiality agreement with Chatime.