Justice Osborne's Endorsement in Re: TBS Canada1 grants novel relief to the mandatory franchise disclosure requirements under the Arthur Wishart Act (Franchise Disclosure), 2000 (Arthur Wishart Act) in the context of the Companies' Creditors Arrangement Act (the CCAA).
Background
On March 1, 2024, The Body Shop Canada Limited (the Company) filed a notice of intention to make a proposal pursuant to Section 50.4(1) of the Bankruptcy and Insolvency Act (Canada), R.S.C. 1985, c. B-3 (the BIA) (the NOI Proceedings). Prior to commencing the NOI Proceedings, the Company was a cosmetics, perfume and skin care retailer with 105 store locations across Canada, operating under "The Body Shop" brand, which was recognized globally for its natural and ethically sourced beauty products. The Company was the wholly owned subsidiary of The Body Shop International Limited (the UK Parent), who itself had filed for administration in the United Kingdom on February 13, 2024.
The NOI Proceedings were converted to an application pursuant to the CCAA on July 5, 2024. On the same date, the Court granted a Sale Process Order approving the sale and investor solicitation process in respect of the Company (the Sale Process).
The Sale Process was designed with two key considerations in mind. First, the Company did not own "The Body Shop" trademark or its intellectual property, but rather held a license through a distribution and franchise agreement with the UK Parent. Second, there was an ongoing simultaneous process to find potential buyers of the UK Parent. Therefore, in order to fully transition "The Body Shop" business to a new entity, a purchaser had to enter into both an asset purchase agreement with TBS Canada and a franchise agreement with the UK Parent.
Shortly after the approval of the Sale Process, the UK Parent was sold to The Body Shop International Limited (the UK Purchaser).
The UK Purchaser engaged with the Company and the Court-appointed Monitor, Alvarez & Marsal Canada Inc. (the Monitor) throughout the Sale Process. After engaging with over 55 parties to solicit interest in acquiring the business or assets of the Company, Body and Lotion Inc. (the Purchaser), an affiliate of a global private equity firm with significant experience in operating brands in Canada, was identified as the successful bidder through the Sale Process and by the UK Purchaser as the preferred franchise partner. Dentons represented the UK Purchaser throughout the Sale Process negotiations.
On December 6, 2024, the Company entered into an asset purchase agreement with the Purchaser (the APA). The transaction contemplated within the APA was subject to, among other conditions, the approval of the Court. The issue of whether Court should approve the APA was heard and decided by the Honourable Justice Osborne on December 14, 2024.
The proposed APA provided a very favourable outcome for stakeholders of the Company, including the continuation of employment of over 500 employees through the upcoming holiday season. However, the closing of the transaction could not be delayed from December 16, 2024, without triggering significant negative economic risk for the transaction, in particular because:
- the highest revenues for the Company are generated during the holiday season;
- a number of the Company's retail leases were scheduled to expire at the end of 2024 and in Q1 of 2025 and there was a risk that landlords may look to replace the Company if the transaction did not close promptly;
- the Company would lose access to certain shared services historically provided by the UK Parent, including IT services and point-of-sale systems on December 31, 2024; and
- the Company had insufficient inventory for the 2025 calendar year.
Declaratory relief from franchise disclosure requirements
Franchise laws in six Canadian provinces where The Body Shop stores are located require a franchisor to provide a franchisee with a franchise disclosure document at least 14 days before entering into the franchise agreement. The franchise disclosure document required pursuant to section 5 of the Arthur Wishart Act must include all material facts, financial statements and all copies of the proposed franchise agreements. Providing the franchise disclosure document is a mandatory obligation and the failure to do so triggers a statutory right for the franchisee to rescind the franchise agreement.
The Court found that this document would take several weeks or months to prepare and deliver to the Purchaser, which created an irreconcilable conflict with the commercial need for the transaction to close by December 16, 2024. Indeed, the execution of a master franchise agreement between the UK Purchaser and the Purchaser was conditional on the Court granting relief from the franchise disclosure requirements.
The Court took into consideration the economics of the transaction, the potential recovery for creditors and stakeholders, as well the objective of the relevant statutes in coming to the decision to grant the declaratory relief. Critical to the Court's consideration were the following factors:
- The Purchaser was an affiliate of a global private equity firm, the principal of which had been advised by experienced in-house and external counsel, was familiar with franchise laws and was led by retail industry veterans in founding or acquiring franchises, including Yogen Früz, Pinkberry, Swensen's Ice Cream, and St. Louis Bar and Grill, among others. Put differently, the Purchaser was a highly sophisticated entity within the realm of Canadian franchise operations.
- The Purchaser received a significant amount of information regarding the proposed franchise agreement, including the template master franchise agreement, business planning model from the UK Purchaser and regularly engaging with the franchise team of the UK Purchaser to conduct extensive due diligence and negotiate several key aspects of the deal, including licensing and intellectual property rights.
- Failing to grant the declaratory relief, the APA Transaction would not close, putting in jeopardy over 500 jobs, numerous commercial leases with landlord counterparties and the recoveries for the Company's stakeholders.
Order granted
Justice Osborne succinctly described the challenge of the proposed transaction in paragraphs 52-56 of his Endorsement:
[52] The complicating factor is that under franchise laws in six Canadian provinces in which retail stores of [the Company] are located, a franchisor (i.e., the UK Purchaser) must provide to a franchisee (i.e., the Purchaser), a franchise disclosure document at least 14 days before the earlier of the franchise agreement being signed, and the payment of any consideration to the franchise or relating to the franchise.
[55] To require the UK Purchaser to prepare and deliver the franchise disclosure document would delay the closing of the Transaction by at least several months, and perhaps indefinitely, if [the Company] cannot main operation of the Canadian business in the interim.
[56] Absent an exemption from application of the governing statute, or an exemption from the requirement to deliver the franchise disclosure document, if the UK Purchaser fails to provide the franchise disclosure document or provides a franchise disclosure document that is deficient, the Purchaser may have the right to rescind the Franchise Agreement and claim damages: in this case against the UK Purchaser, [the Company] and the Monitor.
Justice Osborne correctly observed that the circumstances before the Court were "somewhat unusual". Nevertheless, the Court was satisfied that the relief sought should be granted for the following reasons:
- It was consistent with the purpose of the requirement for franchise disclosure and with the legislative intent behind the relevant statutory provisions, being the protection of franchisees and addressing the typical imbalance of power that favours sophisticated franchisors (para 61);
- In this case, the Purchaser was a highly sophisticated commercial party with extensive experience with franchises. Further, the Purchaser confirmed that it was equipped to and had made an informed decision with the benefit of independent legal advice, to dispose with the statutory right of disclosure and had agreed to provide a release with respect to any possible claims related to deficient franchise disclosure (para 62);
- The closing date of the transaction could not be deferred without a significant impact to the economics. Declining to grant the relief sought would negatively impact recoveries for the Company's stakeholders and put over 500 jobs and numerous commercial leases into jeopardy (paras 64-65); and,
- The Court had the jurisdiction under section 11 of the CCAA to grant the requested relief.
In addition to granting the declaratory relief, the Court made certain corollary orders including approving the underlying asset purchase agreement, granting a sealing order to certain commercially sensitive information, granting an assignment order of certain material agreements, expanding the Monitor's powers and making a declaration enabling former employees to receive benefits under WEPPA.
Key takeaways
This decision reflects the Court's understanding of the unique commercial circumstances affecting the proposed transaction and the application of significant flexibility required to address the negative impacts of rigid adherence to statutory requirements. By granting relief from the disclosure requirements of the Arthur Wishart Act and other comparable provincial legislation, the Court facilitated a transaction that preserved over 500 jobs, maintained numerous commercial leases and maximized creditor recovery. This case underscores the importance of judicial flexibility in the insolvency and restructuring context to support outcomes that benefit all stakeholders involved.
While the Court provided guidance around the limited circumstances in which it is prepared to dispense with compliance with the mandatory provisions of provincial legislation designed with remedial intent, the decision of Justice Osborne should not be taken as a license to seek dispensation with mandatory statutory requirements. Rather, it was the combination of a high-level of commercial sophistication, the alignment in interest of all stakeholders in the closing of the transaction and the serious economic consequences that would be triggered by a delay in closing, that justified this unique decision.
Footnote
1 Re: The Body Shop Canada Limited (CV-24-00723586-00CL, Endorsement dated December 14, 2024.
About Dentons
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.
