Commissioner's Opinion No. 73 / 4F
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. Gordon C. Phillips
Attorney at Law
Suite 840 Union Bank Tower
Del Amo Finacial Center
21515 Hawthorne Boulevard
Torrance, CA 90503
Dear Mr. Phillips:
The request for an interpretive opinion contained in your letters dated October 27, 1972 and January 17, 1973 have been considered by the Commissioner. Your letters raise the question whether the limited partnership agreements ("agreements") proposed to be entered into between Dino-Dyno, a California corporation ("Dino"), 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. The question also raised in your letters whether the agreements are securities within the meaning of Section 25019, and subject to the qualification requirements of the Corporate Securities Law of 1968, is answered in a separate opinion under that Law issued contemporaneously herewith.
The form of agreement submitted to us with your letters states that Dino will be the general partner. We therefore disregard as inadvertent the representation in your letter dated October 21, 1972 that members of the general public will be offered the position of general partners, and will assume for purposes of this opinion that limited partnership interests will be offered to the general public.
We understand that each limited partner will enter into an agreement with Dino as general partner pursuant to the Uniform Limited Partnership Act, and that each limited partnership will be formed for the sole purpose of engaging in the business of automotive tune-ups and such activities as are related and incidental thereto, and will be known as Dino-Dyno, No. xx. Each agreement will provide that Dino has granted the Limited Partnership the right to use the name Dino-Dyno at the location specified therein. Upon termination of the partnership, the limited partners shall have no right to use that name. The agreement will provide that the profits and losses of the partnership shall be allocated 51% to the general partner and 49% to the limited partner.
The agreement will further provide that Dino is not obligated to contribute cash to the partnership but has the right to do so and to the extent that Dino contributes money or property shall be considered a limited partner. The limited partner will contribute $15,000, this being the extent of his personal liability. Dino and the limited partner also may make loans to the partnership at 10% interest per annum or as otherwise agreed.
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 or 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 trade name 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's not a franchise (Dept. of Corps. Release No. 3-F, P. 2).
In the instant case the agreement specifies that the partnership will be managed solely by Dino and that the limited partner is to take no part in the conduct or control of the partnership business and has no right or authority to act for or bind the partnership. Dina on behalf of the partnership is to employ accountants, attorneys, and employees far the operation of the business on such terms and for such compensation as it determines. The limited partner has the power to vote on matters affecting the basic structure 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.
Dated: San Francisco, California
February 1, 1973
By order of
BRIAN R. VAN CAMP
Commissioner of Corporations
HANS A. MATTES
Office of Policy