Commissioner's Opinion No. 73 / 37F

State of California Department of Corporations

Brian R. Van Camp, Commissioner
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Mr. Perry C. Asubrook
Attorney at Law
Brownstein, Zeidman & Schomer
Suite 900
1025 Conneticut Avenue, N.W.
Washington, DC 20036

Dear Mr. Ausbrook:

The request for an interpretive opinion contained in your letter dated June 25, 1973, has been considered by the Commissioner. Your letter raises the question whether the substitution by Terminix International, Inc., a Tennessee corporation ("Tennessee") of a new franchise agreement with an existing franchisee, Terminix of Northern California, Inc. ("Northern"), is subject to the registration requirement of Section 31110 of the California Franchise Investment Law.

You have represented that Northern is the only franchisee of Tennessee in California, that it has operated the franchise for almost 15 years and is thoroughly familiar with Tennessee and the franchised business. Tennessee proposes to put into effect a new franchise agreement with all of its existing franchisees, including Northern. The acceptance of the new agreement is at the franchisee's discretion.

You have further represented that the substitution of the new franchise agreement will occur immediately prior to the automatic renewal provided for in the existing agreement between Tennessee and Northern and ,there will be no interruption in the operation of the franchised, business by Northern without regard to its acceptance or rejection of the new agreement.

Section 31110 of the Franchise Investment Law imposes a registration requirement on any person offering or selling a franchise in this state on or after April 15, 1971. The terms "offer" and "sell" are defined in Section 31018 of the Law. The definition excludes "the renewal or extension of an existing franchise where there is no interruption in the operation of the franchised business by the franchisee.

However, as stated in Comm. Ops. Nos. 72/15F and 73/19F, if a franchise previously granted is to be changed in relation to its material terms with take result that, in effect, a new franchise is created, the registration requirement of Section 31110 is applicable. In that event the exclusionary provision of Section 31018 above quoted dealing with "renewal" or "extension" of an existing franchise, and not with a material change thereof, is inapplicable.

In this connection you have represented that the changes which the new franchise agreement will make in the agreement between Tennessee and Northern are substantial and material. Accordingly, it is our opinion that Tennessee will make an "Offer" to Northern within the meaning of Section 31018. That offer is subject to the registration requirement of Section 31110 of the Franchise Investment Law, unless an exemption is available.

Section 31101 of the Franchise Investment Law provides that there shall be exempted from the provisions of Chapter 2 of Part 2 of the Law, and especially from the registration requirement of Section 31110, the offer and sale of a franchise if the standard as to financial condition set forth in Subdivision (a), and the standard as to scope of operations set forth in Subdivision (b) of the Section are met, and provided further that the franchisor complies with the disclosure requirements specified in Subdivision (c) of the Section.

In this connection, you have represented that Tennessee is engaged in the termite and pest control business and is a wholly-moved subsidiary of Cook, Industries, Inc. ("Cook"), and that Cook on a consolidated basis in the fiscal year 1972, has had total revenues of over $185,000,000 and assets in excess of $204,000,000. Moreover, you have represented that Tennessee owns and operates 58 branches and has 77 franchisees operating 160 offices in the United States. You have acknowledged that the sale of Terminix franchises in California is not exempt from the disclosure requirements.

The exemption from the registration requirement of Section 31110 provided in Section 31101 would be available for the proposed offer and sale of the new franchise to Northern, only if Cook according to its most recent audited financial statement, has a net worth on a consolidated basis of not less than $5,000,000, and Tennessee according to its most recent audited financial statement, has a net worth of not less than $1,000,000, all as set forth in Subdivison (a) of Section 31101, and if either Cook or Tennessee during the 5 year period immediately preceding the proposed offer and sale of the new franchise to Northern, has been engaged in the termite and pest control business or has had at least 25 franchisees engaged in business, all as set forth in Subdivision (b) of the Section and furthermore assuming that the written disclosures required by Subdivision {c) of the Section are made in connection with the proposed offer and sale.

As stated in Policy Letter 45F and Comm. Op. No. 73/12F, the California Law and the rules promulgated thereunder by the Commissioner do not provide an exemption for offers and sales of franchises based on the prior relationship between the franchisor and the franchisee, or the limited number of franchises which a franchisor will offer.

We understand you to suggest also that Tennessee might be granted an exemption from the registration requirement of Section 31110 pursuant to the provision of Section 31100 which authorizes the Commissioner to exempt certain transactions by rule, meaning a published regulation or standard of general application issued by the Commissioner (Section 31017, Corp. Code. No exemptive rule applicable to the facts represented by you, has been adopted by the Commissioner. The Law does not authorize the Commissioner to grant exemptions in individual cases (Comm. Ops. No. 72/29F).

Dated: San Francisco, California
September 20, 1973

By order of
BRIAN R. VAN CAMP
Commissioner of Corporations

By __________________
HANS A. MATTES
Assistant Commissioner
Office of Policy