Capital requirement in a competition law perspective

In practice, it often happens that, like any company, a franchisor or a franchisee needs additional financing for his company. Now that bank financing has become more difficult to obtain in the light of the financial crisis, alternative means are often resorted to in that context. In a franchise organization, one of those means can be that parties make money available to each other. If a franchisee needs capital, it happens that a wealthy franchisor provides the franchisee concerned with a loan, whether or not under attractive or less attractive conditions. Conversely, it also happens that franchisors need a capital injection and for various reasons choose or have to choose not to get it from the bank. A method that is sometimes followed is that the franchisor issues shares and offers them for sale to its franchisees. In itself, this construction only seems to offer advantages: the franchisees who have the opportunity to acquire shares in their franchisor thus create an investment opportunity in itself in which they are directly involved and which is in their direct interest. create a capital injection with short lines of communication and often on reasonably favorable conditions.

However, both scenarios have drawbacks. First of all, the situation in which a franchisor lends money to its franchisee. As long as the conditions of the loan are met and the franchisee concerned is doing well in the sense that he can continue to meet his interest and repayment obligations on time, there need not be much going on. However, as soon as that changes, the franchisor immediately gains enormous influence over the business operations of the franchisee in question. Sometimes such influence is even stipulated when entering into the loan agreement. This significantly jeopardizes the franchisee’s independence. In general, this is not good for the business operations of the franchisee concerned, but it can also lead to unexpected effects with regard to the independence of the franchisee in a legal sense. Excessive influence of the franchisor on the affairs of the franchisee can create a so-called notional employment risk. In addition, there is the risk that, if the franchisor grants several of these types of loans to its franchisees, the continuity of the franchisor itself could be jeopardized if those loans were not repaid en masse, which would be the case, for example, in the case of a collective conflict between the parties could prove to be the case.

Too much influence in each other’s business activities can also lead to a competition law problem, which bridges the gap to the situation where a franchisor issues shares to its franchisees. In that case, there is de facto no longer a purely vertical relationship between the parties, but it tends strongly towards a so-called horizontal cooperation construction, a construction in which the parties are no longer, as it were, no longer under each other in the supply chain, but next to each other. This implies a clear influence of the franchisees on the franchisor’s business, which could be reflected, among other things, in the determination of selling prices and the like, and in general a restriction of the opportunities for competition. Now that is a situation for which the European Block Exemption Regulation is not written. Under certain circumstances, such a situation could therefore lead to the franchise construction no longer being able to benefit from the exemptions contained in that regulation. In concrete terms, for example, non-compete clauses, exclusive purchase clauses and exclusive territories should no longer be applied. What therefore appears at first sight as a sympathetic way of assisting in difficult times can in practice have unexpected and serious consequences. It is important to keep a close eye on this at all times and to consult an expert in this area if in doubt.

Ludwig & Van Dam franchise attorneys, franchise legal advice