What is the Red Wagon Club Franchisee's obligation regarding the restriction on the issuance and transfer of ownership interests?
Red_Wagon_Club Franchise · 2024 FDDAnswer from 2024 FDD Document
16. TRANSFER OF INTEREST.
16.A. BY FRANCHISOR.
Franchisee acknowledges that Franchisor maintains a staff to manage and operate the System and that staff members can change as employees come and go. Franchisee acknowledges that Franchisee did not sign this Agreement in reliance on the continued participation by or employment of any of Franchisor's shareholders, directors, officers, or employees. Franchisor may change its ownership or form of organization and/or assign this Agreement and any other agreement to a third party without restriction. After Franchisor's assignment of this Agreement to a third party who expressly assumes the obligations under this Agreement, Franchisor no longer will have any obligations under this Agreement. This Agreement and any other agreement will inure to the benefit of any transferee or other legal successor to Franchisor's interest in it.
16.B. BY FRANCHISEE.
Franchisee acknowledges that the rights and duties this Agreement creates are personal to Franchisee and Franchisee's owners and that Franchisor has granted Franchisee the Franchise in reliance on Franchisor's perception of Franchisee's and Franchisee's owners' individual or collective character, skill, aptitude, attitude, business ability, and financial capacity. Accordingly, none of the following may be transferred without Franchisor's prior written approval: (i) this Agreement (or any interest in this Agreement); (ii) Franchisee's RWC Business (or any right to receive all or a portion of Franchisee's RWC Business' profits or losses or capital appreciation related to Franchisee's RWC Business); (iii) substantially all of the assets of Franchisee's RWC Business; (iv) any direct or indirect ownership interest in Franchisee's
RWC Business (regardless of its size); or (v) any direct or indirect ownership interest in any of Franchisee's RWC Business' employees or owners (if such owners are legal entities). A transfer of Franchisee's RWC Business' ownership, possession, or control, or substantially all of its assets, may be made only with a transfer of this Agreement. Any transfer without Franchisor's approval is a breach of this Agreement and has no effect. In this Agreement, the term "transfer" includes a voluntary, involuntary, direct, or indirect assignment, sale, gift, or other disposition, including transfer by reason of merger, consolidation, issuance of additional securities, death, disability, divorce, insolvency, foreclosure, surrender or by operation of law.
Franchisee may not pledge or encumber this Agreement, Franchisee's RWC Business or an ownership interest in Franchisee or Franchisee's owners (to someone other than Franchisor) as security for any loan or other financing unless (1) Franchisor grants its prior written consent, and (2) the lender agrees that its claims will be subordinate to all amounts Franchisee owes at any time to Franchisor, Franchisor's affiliates, or lenders.
Franchisee is responsible for marketing the sale of Franchisee's RWC Business and finding a potentially suitable buyer. If Franchisee intends to list Franchisee's RWC Business for sale with any broker or agent, Franchisee shall do so only after obtaining Franchisor's written approval of the broker or agent and of the listing agreement. Franchisee may not use or authorize the use of any Mark in advertising the transfer or other disposition of Franchisee's RWC Business or of any ownership in Franchisee without Franchisor's prior written consent. Franchisee shall not use or authorize the use of, and no third party shall on Franchisee's behalf use, any written materials to advertise or promote the transfer of Franchisee's RWC Business or of any ownership interest in Franchisee without Franchisor's prior written approval of such materials.
Source: Item 22 — CONTRACTS (FDD page 47)
What This Means (2024 FDD)
According to the 2024 Red Wagon Club FDD, a franchisee cannot transfer ownership interests without prior written approval from Red Wagon Club. This restriction applies to the Franchise Agreement itself, the RWC Business, its assets, and any direct or indirect ownership interests. Any transfer conducted without the franchisor's approval constitutes a breach of the Franchise Agreement and is considered invalid. The term "transfer" encompasses various methods, including voluntary or involuntary assignments, sales, gifts, or other dispositions, such as those resulting from mergers, issuance of additional securities, death, disability, divorce, insolvency, foreclosure, or operation of law.
Furthermore, franchisees are prohibited from pledging or encumbering the Franchise Agreement, their RWC Business, or ownership interests as security for loans or financing without the franchisor's prior written consent. Even with consent, any lender's claims must be subordinate to all amounts the franchisee owes to Red Wagon Club, its affiliates, or lenders.
The franchisee is responsible for marketing the sale of their RWC Business and finding a suitable buyer. If the franchisee intends to list the business for sale with a broker or agent, they must first obtain written approval from Red Wagon Club for both the broker/agent and the listing agreement. The franchisee must also obtain Red Wagon Club's prior written consent before using any Marks in advertising the transfer or disposition of the RWC Business or any ownership interests. All written materials used to advertise or promote the transfer must also receive prior written approval from Red Wagon Club.