Commissioner's Opinion No. 94 / 1F

State of California Department of Corporations

Gary A. Mendoza, 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.

Rochelle Buchsmaum Spandorf
Shapiro, Posell, Rosenfeld & Close
One Century Plaza, Suite 2600
2029 Century Park East
Los Angeles, California 90067-2901

Re: Holiday Inns Franchising, Inc.

Dear Mr. Spandorf:

Your request for an interpretive opinion contained in your March 30, 1994 letter, to the Department of Corporations' Office of Policy, has been considered by the Commissioner of Corporations. The request asks whether the offer and sale of franchises in this state by Holiday Inns Franchising, Inc. ("HIFI"), represented to be a remote, wholly-owned subsidiary of Bass PLC, is exempt from the registration requirements of the Franchise Investment Law (the "Law") by virtue of Section 31101 of the Corporations Code. Specifically, the request deals with whether HIFI meets the "scope of operations" test set forth in Section 31101(b).

You represent the complex corporate structure of Bass PLC, to be as follows:

(1) HIFI is a wholly-owned subsidiary of Bass (U.S.A.) Franchising, Inc. ("Bass Inc."). Bass Inc. is a wholly-owned subsidiary of Bass (U.S.) Incorporated ("Bass U.S.A.").

(2) Bass U.S.A. is a wholly-owned subsidiary of Bass International Holdings N.V. ("Bass International"), a Netherlands Corporation, which in turn is a wholly-owned subsidiary of Bass PLC, a United Kingdom corporation.

(3) Holiday Inns, Inc. ( "Holiday" ) is a wholly-owned subsidiary of Holiday Corporation ("Holiday Corp."). Holiday Corp. is a wholly owned subsidiary of Bass U.S.A., which is also a wholly-owned subsidiary of Bass International, the wholly-owned subsidiary of Bass PLC.

As a result of this corporate structure, Bass PLC ultimately controls the corporate policies and management of the entire group of companies noted above ("Bass Group").

You represent that in 1987, Bass PLC acquired from Holiday, the franchise rights to operate Holiday Inn hotels in the United Kingdom and Continental Europe. Further, in May 1, 1988, Bass PLC acquired from Holiday, the remainder of Holiday's international business and exclusive rights to develop and franchise Holiday Inn hotels outside of North America. In February, 1990, Bass PLC, acquired Holiday, the franchisor of Holiday Inns in North America. As a result of the February, 1990 acquisition, all Holiday Inns have been consolidated within the Bass Group, which is ultimately controlled by Bass PLC. Thus, since 1987 Bass PLC or one of its wholly-owned subsidiaries, has controlled and operated at least 25 Holiday Inn hotel franchises.

You represent that for mainly corporate-structure and tax reasons, Bass PLC established HIFI to continue Holiday Inn franchise activities in the United states. On February 1, 1990, HIFI and Holiday entered into a Master License Agreement to memorialize the continuity and consistency of operations of the franchised businesses. As a result, all Holiday Inns, including HIFI Holiday Inns, are franchised, developed, and operated identical to the Holiday Inns operated and formerly franchised by Holiday. You further represent that all Holiday Inn hotels have common trademarks, centralized services and are marketed as a single world-wide chain operating in accordance with the same policies, standards and executive management. In addition, you suggest that through acquisition of Holiday, Bass PLC succeeded to Holiday's experience in operating and selling Holiday Inns since 1953.

Under Section 31110 of the Law, it is unlawful to offer to sell any franchise in this state unless the offer is registered or exempted pursuant to Chapter 1 (commencing with Section 31100) of the Law. Section 31101 of the Law provides an exemption for a franchisor which complies with specified minimum net worth, experience, disclosure, and notice filing requirements.

Based on your representations, HIFI's net worth, as of fiscal year ending September 24, 1993, exceeds $5 million and therefore satisfies the net worth requirement set forth in Section 31101(a). Further, you represent that HIFI will provide disclosure as required under Section 31101(c), and will make the requisite notice filing under Section 31101(d). Thus, we are left to discuss the requirements of subdivision (b) of Section 31101.

Section 31101(b) of the Law provides:

(b) Experience. The franchisor or a corporation owning at least 80 percent of the franchise (parent) complies with one or more of the following conditions throughout the five-year period immediately preceding the offer and Sale Of the franchise, or complies with one of the following conditions during part of the period and one or more of the following conditions during the balance of the period;

(1) The franchisor has at least 25 franchisees conducting business which is the subject of the franchise.

(2) The franchisor has conducted business which is the subject of the franchise.

(3) The parent has had at least 25 franchisees conducting the business which is the subject of the franchise.

(4) The parent had conducted business which is the subject of the franchise.

Admittedly, independent of each other, neither HIFI nor its immediate parent company meet the experience test based on their respective activities. Nevertheless, you argue that the experience requirement can be satisfied by combining, or "tacking," the activities of: (1) HIFI and Holiday (a "sister" or related company of HIFI); (2) HIFI and Bass PLC (the remote or "ultimate" parent company of HIFI); or (3) combining the experience of HIFI, Holiday, and Bass PLC.

You represent that both the durational and continuity elements of experience under Section 31101(b) are present in this case. To support the proposition that the combined activities of HIFI, Holiday, and Bass PLC should satisfy the experience requirement of the Law, you submit the following:

(1) Holiday has operated and sold Holiday Inn franchise hotels continuously since 1953.

(2) since February 7, 1990, HIFI has engaged in the same activities as Holiday, which is essentially the same activities that Bass PLC has conducted internationally since 1988.

(3) Throughout the last five years, Holiday has had at least 1,350 Holiday Inn hotel franchises.

{4) Bass PLC has controlled the operation of at least 25 Holiday 'Inn franchises since 1987.

(5) The same executive officers and management personnel comprise both HIFI's and Holiday's franchise management.

(6) Under the Master License Agreement, all Holiday Inn franchisees appear and operate identically.

Based on the length and type of experience set forth above, you believe that HIFI, Holiday, and Bass PLC, in combination, meet the scope of operations test set forth in Section 31101(b). In essence, you request that the definition of ''parent" company be expanded to include the remote or "ultimate parent" company. Further, you suggest that the experience requirement set forth in Section 3110l(b) of the Law, be interpreted to include the tacking or combining of the experience of sister and ultimate parent companies.

We agree with this conclusion. It is our view that the definition of "parent" could be interpreted to include an ultimate parent, as well as to allow the combining of the experience of sister and ultimate parent companies to meet the experience requirement of Section 31101(b) of the Law, without diminishing the public policy underlying the rationale for the requirement. This is so because of the uniqueness of the situation presented in the context of the facts underlying this opinion request.

Commissioner's Opinion No. 88/1F, states that the policy underlying Section 31101(b) is that the franchisor has significant experience in the business in which it is franchising so that the franchisees are protected. Moreover, this policy consideration must be made on a case-by-case basis. Furthermore, Commissioner's Opinion No. 72/28F, sets forth that it must appear that the franchisor has had at least 25 franchises conducting business at all times during the five year period immediately preceding the proposed offer or sale of franchises, or has continuously for that span of time conducted business of the type which is the subject of the franchise prepared to be offered and sold. Further, a franchisor could meet the standard of experience established by Section 31101 when, by the merger it succeeds to, and incorporates into itself, the experience of a predecessor.

As you represent in your March 30, 1994 letter, HIFI, in addition to its own experience, has the benefit of the experience in the subject of the franchise of its predecessor and sister corporation, Holiday, as well as the related experience of its ultimate parent corporation, Bass PLC. In the context of the facts represented in your request, it is our opinion that the policy underlying Section 31101(b), that a franchisor demonstrate its relevant and extensive business experience, has been satisfied by combining or tacking through acquisition or merger, the cumulative experience of HIFI, Holiday, and Bass PLC. Therefore, it is our opinion that the offer and sale of a Holiday Inn franchise in this state by HIFI, under the circumstances described in your letter, and assuming all provisions of Section 31101 are satisfied, is exempt from the registration requirements of Section 31110 of the Law by virtue of Section 31101(b).

Dated: June 9, 1994
Sacramento, California

By order of
GARY S. MENDOZA
Commissioner of Corporations

By __________________
WILLIAM KENEFICK
Assistant Commissioner
Office of Policy
(916)322-3553