Is the issuance of additional securities representing ownership interests in the Hyper Kidz franchise considered a 'transfer' requiring approval?
Hyper_Kidz Franchise · 2024 FDDAnswer from 2024 FDD Document
- 16.2.2 As used in this Agreement, the term "transfer" shall mean and include the voluntary, involuntary, conditional, direct or indirect assignment, sale, gift or other transfer by you or any of your Principals of any interest in or grant of any security interest in (a) this Agreement; (b) the Franchise; (c) you; (d) the Hyper Kidz Business; or (e) some or all of the assets of the Hyper Kidz Business, other than inventory items in the ordinary course of business.
- 16.2.3 As used above, an assignment, sale or other transfer shall include the following events:
- (a) the transfer of ownership of shares, partnership interest, or other Ownership Interests;
- (b) merger or consolidation or issuance of additional securities representing Ownership Interests;
Source: Item 22 — CONTRACTS (FDD page 52)
What This Means (2024 FDD)
According to Hyper Kidz's 2024 Franchise Disclosure Document, the issuance of additional securities representing ownership interests is considered a 'transfer' that requires franchisor approval. The FDD specifies that 'transfer' includes the transfer of ownership of shares, partnership interests, or other ownership interests, as well as the merger, consolidation, or issuance of additional securities representing ownership interests. This means that franchisees must obtain Hyper Kidz's prior written approval before undertaking such actions.
This requirement is in place because Hyper Kidz wants to ensure that any changes in ownership or control meet their standards. The franchisor states that the rights and duties created by the franchise agreement are personal to the franchisee and their principals, and they have granted the rights in reliance on the individual or collective character, skill, aptitude, attitude, business ability, and financial capacity of the franchisee and their principals. Therefore, any transfer of ownership interests, including the issuance of additional securities, is subject to their approval.
Before a transfer can be approved, several conditions must be met. These include ensuring that the franchisee is in full compliance with the agreement, the proposed transferee meets Hyper Kidz's standards for franchisees, and a general release of claims against Hyper Kidz is executed. Additionally, Hyper Kidz has a right of first refusal, meaning they have the option to purchase the interest themselves under the same terms offered to a third party. A transfer fee of $15,000 is required to cover Hyper Kidz's costs in effecting the transfer and providing assistance to the transferee.
For a prospective Hyper Kidz franchisee, this means that any plans to issue additional securities or transfer ownership interests will require careful planning and adherence to the franchisor's requirements. Failure to obtain prior written approval can result in a breach of the franchise agreement and convey no rights to the transferred interests. Franchisees should be prepared to pay the transfer fee and comply with all conditions set forth by Hyper Kidz to ensure a smooth transfer process.