Commissioner's Opinion No. 73 / 42F
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. Irving Fidler
Attorney at Law
Duskin, Rosky & Fidler
Suite 760, Wilshire
San Vicente Plaza
8383 Wilshire Boulevard
Beverly Hills, CA 90211
Dear Mr. Fidler:
The request for an interpretive opinion, contained in your letter dated August 20, 1973, has been considered by the Commissioner. Your letter raises the question whether the limited partnership agreements ("agreement") proposed to be entered into between California corporations ("Corporation") and persons referred to therein and hereinbelow as "limited partners", constitute franchises within the definition of Section 31005 so as to be subject to the provisions of the Franchise Investment Law. This question is answered in the negative.
You have represented that Cyrano Franchising Corporation ("CFC") proposes to build, participate in the ownership of and management of Cyrano restaurants. CFC will select locations and negotiate leases for the restaurants and, after a lease has been negotiated, will form Corporation,. which corporation will be the lessee. Corporation will have the name Cyrano followed by a designation of its location. The lease will provide for assignment of the lease by Corporation to a limited partnership ("partnership") to be formed.
The agreement provides that Corporation will be the general partner and the investors will be the limited partners of the partnership. Corporation will contribute as its initial capital contribution for a 33-1/3% interest the use of the name, menu, logo and format of Cyrano Restaurant; all services necessary to select and lease a location for the restaurant and to design, construct, equip and staff the restaurant; and deliver a turn-key restaurant ready for operation together with all interim financing required to plan, construct and equip the restaurant. The limited partners will contribute for their 66-2/3% interest cash in an amount not to exceed $180,000 for the construction, equipment and fixtures of the restaurant and the working capital required to operate it.
The agreement provides further that the actual operation of the restaurant will be conducted by Cyrano Management Company, a wholly owned subsidiary of CFC. Corporation shall have the duty to supervise the management of the business of the partnership having exclusive control including the right to assign duties, hire personnel and execute all contracts. The profit and lasses and tax benefits shall be allocated 33-1/3% to Corporation, as general partner, and 66-2/3% to the limited partners.
Section 31005 of the Franchise Investment Law defines "franchise" to include an agreement, either oral or written, between two or more persons by which a franchisee is granted the right to engage in the business of offering, selling, or distributing goods far services under a marketing plan or system prescribed in substantial part by a franchisor, the operation of the franchisee's business pursuant to such plan or system. is substantially associated with the franchisor's commercial symbol, such as its tradename or trademark, and the franchisee is required to pay a franchise fee.
Under this provision, for an agreement to be a franchise the franchisee must be granted the right to engage in the business of offering, selling, or distributing goods or services. An agreement which does not grant such right is not a franchise. Thus, an agreement by which a person, for a fee or other consideration, is given the right to participate in the proceeds of a business, but given no right to operate or participate in the operation of the business, is not a franchise (Department of Corporations Release No. 3-F, page 2).
In the instant case, the agreement specifies that Corporation, acting as general partner, shall have the exclusive control of the business of the partnership, including the right to assign duties, hire personnel and execute all contracts. Further, the agreement provides that the limited partners shall not be called upon to render any service or services to the partnership. Corporation shall devote such time as necessary for the proper handling of the affairs of the partnership and for such services Corporation shall make no charge for its time, but its sole compensation shall be the share of the profits to which it is entitled. Corporation shall be entitled to reimbursement for its actual cash outlay by way of expenses incurred in the operation and management of the partnership.
From these provisions of the agreement; it is evident that the agreement, as outlined above, is not a "franchise" within the definition of Section 31005 and is not subject to the provisions of the Franchise Investment Law.
Your letter does not request our opinion as to whether the offer and sale of limited partnership interests are subject to the qualification requirements of the Corporate Securities Law of 1968. However, since the agreement, as outlined above, is not a "franchise", the exclusion from the definition of "security" for a franchise contained in Section 25019, Corp. Code, would not be available. "Security" is defined in Section 25019 to include any certificate of interest or participation in any profit-sharing agreement, transferable share, investment contract, or any interest or instrument commonly known as a "security". Since the agreement contemplates participation of the investors in the profits from the management of the restaurant by Cyrano Management Corporation, such an arrangement is a "profit participation" or "investment contract" and a "security" within the definition of Section 25019 (Dept. of Corps. Rel. No. 3F, p. 2).
Dated: San Francisco, California
November 12, 1973
By order of
BRIAN R. VAN CAMP
Commissioner of Corporations
J. DOMINIQUE OLCOMENDY
Supervising Corporations Counsel
Office of Policy