Does the Gold Star franchise agreement's non-compete clause apply to shareholders of the franchisee?
Gold_Star Franchise · 2025 FDDAnswer from 2025 FDD Document
- 17.3 Governance Documents. The partnership agreement, articles of incorporation, articles of organization, operating agreement, bylaws and other organization documents of FRANCHISEE shall recite that the issuance and transfer of any interest therein is restricted by the terms of Section 13 of the Agreement. FRANCHISEE shall also submit to the COMPANY, upon the execution of this Agreement, resolutions from the applicable governing body of FRANCHISEE which authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby and states, in form and substance, that no shares or other interest in FRANCHISEE shall be issued, transferred or assigned to any person or legal entity except according to the terms of this Agreement.
- 17.4 Securities Legend. FRANCHISEE, if it is a corporation or limited liability company, shall issue no securities upon the face of which the printed legend in the following form and substance does not legibly and conspicuously appear: "The transfer of these [shares/interests/units] is subject to the terms and conditions of one or more Franchise Agreements with Gold Star Chili, Inc. Reference is hereby made to such Franchise Agreement(s) and to the restrictive provisions of the Articles and Regulations of this [corporation/limited liability company]. Copies of such Agreements and restrictions are available at the offices of the [corporation/limited liability company]."
Source: Item 23 — Receipts (FDD pages 53–163)
What This Means (2025 FDD)
The 2025 Gold Star Franchise Disclosure Document states that if the franchisee is a corporation, the transfer of shares is restricted by Section 13 of the franchise agreement. The governance documents of the franchisee, such as partnership agreements or articles of incorporation, must state that the issuance and transfer of any interest is restricted by the terms of Section 13 of the agreement. Gold Star also requires the franchisee to submit resolutions authorizing the execution, delivery, and performance of the agreement, stating that no shares or other interest in the franchisee shall be issued, transferred, or assigned to any person or legal entity except according to the terms of the agreement.
Furthermore, if the franchisee is a corporation or limited liability company, the franchise agreement dictates that the franchisee must issue no securities without a printed legend on the face of the securities. This legend must state that the transfer of shares or interests is subject to the terms and conditions of the franchise agreement with Gold Star, referencing the restrictive provisions of the articles and regulations of the corporation or limited liability company. Copies of the agreements and restrictions are to be available at the offices of the corporation or limited liability company.
While the FDD excerpts discuss restrictions on the transfer of ownership interests and the requirement for certain legends on securities, the excerpts provided do not explicitly state whether the non-compete clause applies to shareholders. A prospective franchisee should review Section 13 of the franchise agreement, as referenced in the provided excerpts, and seek clarification from Gold Star regarding the applicability of the non-compete clause to shareholders, members, or partners of the franchisee entity.