Article De Nationale Franchise Gids: “Changing the franchise formula is possible” – mr. T. Meijer – dated February 8, 2022

Many franchise formulas are constantly evolving. The adage ‘to stand still is to go backwards’ often applies to this development. It is important for these formulas to be able to keep up with the market and respond to the wishes of the customers. Sometimes this requires (major) changes to the formula and the way in which the franchisor and franchisees work together. To this end, some franchise agreements contain amendment clauses that enable the franchisor to make the necessary changes. However, these changes can have adverse consequences for franchisees who sometimes even see their revenue model deteriorate. In those cases, they will want to oppose the franchisor’s wish to implement these changes in order to make the formula future-proof.

If the parties cannot reach mutual agreement about compensation for possible adverse consequences of the changes, they will go to court to ask for an opinion on whether the desired changes may be implemented. The court will assess on the basis of the text of the franchising agreement whether the franchisor has the right to implement changes. If that is the case, a weighing of interests usually takes place to assess whether the expected positive effects of the changes outweigh the negative effects for the individual franchisees. The degree of participation for the franchisees and the method of compensation are important elements in this respect.

Section 7:921 of the Franchise Act stipulates that for the changes referred to in that section, the franchisor is obliged to obtain the consent of either the majority of all franchisees or all franchisees affected by the changes. Due to transitional law, this provision will come into force from 1 January 2023.

The District Court of Central Netherlands recently assessed a formula change. The Franchise Act has not (yet) applied to this. On January 5, 2022, it was ruled that changing the collaboration was allowed in specific circumstances [1] . De Volksbank has changed the way of working with its advisers to a ‘full franchise’ formula. A number of the consultants have claimed that such a change is not permitted as it must be considered to be contrary to their independence and the associated revenue model would be unacceptable. They have demanded that the cooperation should be continued as before. The court rejected these claims and therefore allowed Volksbank to implement the changes.

An important factor in this was that the text of the old agreement already explicitly stipulated that the Volksbank formula was being developed and could therefore possibly lead to changes in the future. The franchisees were therefore aware of possible changes in advance and have already agreed to this by signing the old agreement. In addition, in the opinion of the court, Volksbank carefully went through the amendment process and gave the advisers sufficient opportunity to participate. The advisers have been involved in the further development of the formula. During this process, 483 of the 500 advisors ultimately indicated that they wanted to continue as franchisees in the new formula.

According to the court, the advisers have not sufficiently demonstrated that they would be disproportionately affected by the proposed changes. According to the court, Volksbank was able to demonstrate sufficiently that the scenarios of the advisers were too pessimistic and did not sufficiently take into account the growth that the changes would entail. Volksbank had therefore done its homework very well in this respect and the necessary calculations were ready. In its assessment, the court took into account that Volksbank offered its advisers various options to either go along with the changes or (in due course) to stop acting as advisers. These alternatives were, according to the court, reasonable. So there was no question of ‘swallow or choke’.

All in all, the court ruled that Volksbank was allowed to change its formula. One of the main reasons for arriving at this opinion was that Volksbank undertook the change process in consultation with its advisers. It has reasonably weighed the interests of its advisers against the need to change and has offered the advisers sufficient alternatives. Because it has thoroughly investigated all aspects of the amendment and has been able to offer sufficient alternatives, the court has ruled that the interests of the amendment take precedence over individual interests, which, in the opinion of the court, have not been made sufficiently transparent.

Interim changes to a franchise formula are and will therefore remain possible, but the judgment of the District Court of Central Netherlands once again confirms that thorough preparation and careful supervision of the process are of the utmost importance.

[1] Central Netherlands Court, 05-01-2022 ECLI:NL:RBMNE:2022:1

mr. T. Meijer
Ludwig & Van Dam lawyers, franchise legal advice.
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