Commissioner's Opinion No. 87 / 1F

State of California Department of Corporations

Christine W. Bender, 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. Don Weaver
Mayer, Brown & Platt
355 South Grand Avenue
Los Angeles, CA 90071

Dear Mr. Weaver:

The request for an interpretive opinion, contained in your letter dated January 14, 1987, has been considered by the Commissioner. Your letter raises the question whether the offer and sale of franchises by Winchell's Donut Houses Operating Company, L.P. ("Operating Partnership") of which WDH Service, Inc. will be the general partner ("General Partner") will be exempt from the registration requirements of Section 31110 of the Franchise Investment Law ( "Law") by virtue of Section 31101.

The focus of your question is whether the "scope of operations test" of Section 31101(b) will be met at the commencement a of the offer and sale of the franchises.

You have represented that the General Partner is a wholly-owned subsidiary of Denny's, Inc. {"Denny's"). Since 1968, Denny's has operated and franchised donut shops through its Winchell's Donut House division ("Winchell's"). Winchell's had 720 company operated units and 22 operating franchises as of October 31, 1986. The Winchell's business has been continuously operating under its tradenames "Winchell's" and "Winchell's Donut" since 1948. For many years, Winchell's has also used "Winchell's Donut House" and the identifiable triangle-shaped logo. In recent years, all Winchell's Donut Houses were developed and operated as company stores. In January 1986, Denny's established a franchise program under which selected existing company-operated donut houses, and rights to develop new Winchell's Donut Houses, were offered for sale. Under the franchise agreements, the franchisees are required to use Winchell's trademarks, to prepare and carry the Winchell's product line and to adhere to the Winchell's standards of preparation and cleanliness.

You have further represented that the Operating Partnership was organized to succeed and conduct the business and operations of the Winchell's division. Denny's has contributed to the Operating Partnership (through a publicly traded limited partnership, Winchell's Donut Houses, L.P. [the "Partnership"]), substantially all of the operating assets and business associated with Winchell's, including its real property, formulae, trademarks, and contract, franchise and other rights, subject to certain liabilities. Denny's holds approximately a 42% interest in the Partnership. The Operating Partnership was formed to comply with various state requirements for qualification to do business as a foreign entity. If the Partnership, whose interests will be traded on the New York Stock Exchange, operated directly in some foreign states, the Partnership would have to amend its filing each time a limited partnership interest traded. WDH Service, Inc. is the general partner of both limited partners.

The Partnership owns ninety-nine percent interest in the Operating Partnership and the General Partner owns a one percent interest in both the Operating Partnership and Partnership. Both the Operating Partnership and the General Partner each have a net worth in excess of $5 million. Before commencing the offer and sale of franchises, you have represented, the entity acting as the franchisor will cause audited financial statements to be prepared reflecting this net worth.

Section 31110 of the Law imposes a registration requirement on the offer and sale of any franchise in this state, unless an exemption is available. Section 31101 of the Law provides an exemption from the registration requirement if the franchisor; (a) has a net worth according to its most recent audited financial statement on a consolidated basis of five million dollars or, in the alternative, one million dollars and is at least 80% owned by a corporation with a five million dollar net worth; (b) among other things, has conducted business which is the subject of the franchise for not less than five years immediately preceding the offer and sale of the franchise, or is at least 80% owned by a corporation with such business experience; (c) makes required disclosures to prospective franchisees; (d) makes required disclosures in the case of a material modification of existing franchises and (e) files with the Commissioner a notice of exemption and pays the specified fee.

Section 31007 of the Law provides that a "franchisor" is a person who grants a franchise. You have suggested that in some situations, such as that detailed in your letter, both the general partner and the limited partnership should be viewed as the "franchisor" for purposes of determining compliance with the scope of operations test of Section 31101(b) of the Law, since both entities are responsible for granting a franchise.

We reject this general proposition. However, it is our opinion that, under certain circumstance's, a general partner should be considered the "franchisor". We emphasize that the determination of whether the general partner or a limited partnership should be considered the "franchisor" must be made on a case-by-case basis.

In the instant case, for the reasons set forth below, it is our opinion that the General Partner should be considered the "franchisor" not only for purposes of the scope of operations test of subdivision (b) of Section 31101 of the Law, but for all purposes of that exemptive provision. In reaching this conclusion, we note the following representations with respect to the offer and sale of franchises described in your letter.

First, the General Partner is responsible for the management and administration of the Partnership; will conduct all sales activities, prepare and distribute disclosure materials and execute franchise agreements on behalf of the Operating Partnership; and, is authorized to perform all acts deemed necessary to conduct the business.

Second, the General Partner will have complete discretion and authority to grant a franchise on behalf of the Operating Partnership. The activities which will be conducted by the General Partner on behalf of the Operating Partnership are the same as those which were conducted by Winchell's as a division of Denny's.

Third, as provided in the agreements of limited partnership and as required under the California Revised Limited Partnership Act, the limited partners have no authority or power to direct or participate in the management or control of the business of the Partnership. Furthermore, the General Partner will be directly and fully responsible for the liabilities of the Operating Partnership if it is found liable to any franchisee.

Fourth, the General Partner has agreed not to withdraw as general partner of either partnership prior to December 31, 1993. Moreover, as a result of Denny's ownership of limited partnership interests, the General Partner cannot be removed without the consent of Denny's. Also, pursuant to the terms of the agreement, no voluntary action may be taken to liquidate either partnership, unless the action is initiated by the General Partner.

Fifth, the executive officers and management personnel of Winchell's will continue as the executive officers and management personnel of the General Partner. The directors of the General Partner, with two exceptions, are also directors or officers of Denny's. All present employees of Winchell's Division of Denny's now will be employed by the partnerships under the supervision of the General Partner.

Denny's has conducted business which is the subject of the franchise continuously for five years immediately preceding the commencement of the offer and sale of franchises. The General Partner is a wholly-owned subsidiary of Denny's. Accordingly, assuming that the General Partner, as the "franchisor" , complies with the other requirements of Section 31101 of the Law, it is our opinion that the offer and sale of franchises, under the circumstances described in your letter, will be exempt from the registration requirements of Section 31110 by virtue of Section 31101.

Dated: April 2, 1987
Sacramento Office

By order of
Chief Deputy Commissioner of Corporations

By __________________
Assistant Commissioner
Office of Policy