Commissioner's Opinion No. 94 / 2F
State of California Department of Corporations
Brian A. Thompson, 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.
Ms. Mary Beth Trice
Bartko, Tarrant and Miller
910 Front Street
San Franisco, CA 95111
Re: Merisel FAB, Inc.
Dear Mr. Trice:
Your request for an interpretive opinion contained in your November 23, 1994 letter, to the Department of Corporations' Office of Policy, has been considered by the Commissioner of Corporations ( "Commissioner" ). Your request asks whether Merisel FAB, Inc. ("MFAB") is exempt from the registration requirements of the Franchise Investment Law (the "Law") because MFAB satisfies the scope of operations test set forth in Corporations Code Section 31101(b).
Under Section. 31110 of the Law, it is unlawful to offer to sell any franchise in this state unless the offer is registered or exempt pursuant to Chapter 1 (commencing with Section 31100) of the Law. However, Section 31101 of the Law provides an exemption for a franchisor that complies with specified minimum net worth, experience, disclosure, and notice filing.
As set forth in Commissioner's Opinion No. 72/28F, the scope of operations test of Section 31101(b) of the Law, may be met by complying with one of two requirements. The first requirement is that the franchisor have at least 25 franchises conducting business at all times during the five year period immediately preceding the proposed offer or sale of franchises. The alternate requirement is that the franchisor have conducted business which is the subject of the franchise continuously for not less than five years preceding the offer and sale of franchises.
In your November 23, 1994 letter, you represent that according to their most recent financial statements, both Merisel, Inc. ("Merisel"), MFAB's parent company, and MFAB satisfy the net worth requirements set forth in Section 31101(a). Further, MFAB will provide disclosure as required under Section 31101(c), and will annually file the requisite notice filing pursuant to Section 31101(d). Thus, we are left to discuss the requirements of subdivision (b) of Section 31101.
You represent that: (1) MFAB purchased the principal assets of ComputerLand Corporation's ("ComputerLand") domestic franchise operation on February 1, 1994, including, among other things, the federal and state service mark registrations of the name "ComputerLand", all ComputerLand franchise agreements within the United States, all operating, training, and marketing manuals, and all advertising related to the franchise business; (2) ComputerLand has ceased all domestic operation and all use of the name "ComputerLand"; (3) MFAB continues ComputerLand's domestic operation at the same locations and with the same management and employees as ComputerLand did prior to the sale; (4) MFAB's parent company, Merisel, has extensive experience in the computer products distribution business; (5) the absence of registration would not place the franchisees at risk; and (6) MFAB is a wholly owned subsidiary of Merisel, a public company.
You further represent that MFAB's predecessor, ComputerLand, satisfied the scope of operations test of Section 31101(b) of the Law because ComputerLand had franchised computer retail businesses since 1977, had well in excess of 25 franchises operating continuously for more than five years prior to the sale to MFAB, and continuously for five years prior to the MFAB acquisition, operated company-owned ComputerLand businesses.
As a result of MFAB's acquisition, you represent that MFAB now has 200 ComputerLand franchises in operation and more than 25 of them have been operating continuously during the past five years. Thus, you believe that conditions currently exist for meeting the scope of operations requirements provided that MFAB may claim the experience it, acquired from ComputerLand.
You also represent that several of the former executives of ComputerLand continue in similar or higher positions with MFAB. These positions include the Chief Executive Officer, President, Chief Financial Officer, Chief Operations Officer, Vice President of Field Operations, Vice President of Franchise Development, Vice President of Marketing and Products and Vice President, Treasurer. Further, you represent that approximately 60 other employees of MFAB were former employees of ComputerLand, including employees responsible for franchise operations, customer service, marketing and systems support for the franchises, and the legal counsel of ComputerLand's Franchise and Distribution Division.
In addition, you suggest we consider that: (1) Merisel will guarantee the performance of the franchisor under the franchise agreement: and (2) the typical franchisee is financially sophisticated, has experience in the business of the franchise, and is represented by attorneys or consultants.
You concede that the corporate identity of the entity which grants ComputerLand franchises has changed, but believe it should not be the deciding factor in this case. You suggest that in addition to the form of the asset sale transaction of February 1, 1994, the substance and effect of the transaction should be considered because the actual experience in the business is not solely a question of corporate form or ownership."
In essence, you request that the totality of the experience of MFAB, MFAB's parent or related company, MFAB's predecessor in interest, and the experience of the former ComputerLand executives and employees retained by MFAB in similar or higher positions, as well as the financial sophistication of the franchisee, be considered when determining whether MFAB meets the experience requirement set forth in Section 31101(b) of the Law.
In Commissioner's Opinion No. 94/1F, the experience of the ultimate parent company was combined with the experience of sister companies to satisfy the duration and continuity requirements of Section 31101(b). It was our view that the definition of "parent" company could be expanded or interpreted to include the remote or "ultimate parent" company, as well as to allow the "tacking" or combining of the experience of sister and ultimate parent companies to meet the experience requirement set forth in Section 31101(b) of the Law, without diminishing the public policy underlying the rationale for the requirement. This was so because of the uniqueness of the situation presented in the context of the facts underlying that particular opinion request.
Commissioner's opinions have also addressed the acquisition of the experience of a predecessor in interest. For example, Commissioner's Opinion No. 79/1F reasoned that the Section 31101(b) test was met by the successor corporation where the successor acquired all of the predecessor corporation's stock, predecessor was liquidated, and the business was operated continuously.
Commissioner's Opinion No. 94/1F stated that 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 the predecessor.
In Commissioner's Opinion No. 6420F, citing Commissioner's Opinion No. 72/28F, "we concluded that a franchisor could meet the standard of experience established by Section 31101 when, by the merger (or in this instance, acquisition), it succeeds to, and incorporates into itself, the experience of its predecessor."
As noted above, you represent that the fact that former executives and employees of ComputerLand continue in similar or higher positions with MFAB further supports a finding that MFAB has sufficient experience to protect potential franchisees. You further represent that it is also significant that the typical franchisee is financially sophisticated, has experience in the business which is the subject of the franchise, and is represented by attorneys or consultants.
As stated in Commissioner's Opinion Nos. 88/1F, 94/1F, 6410F, and 6411F, the policy underlying Section 31101(b) is that a franchisor have significant experience in the business in which it is franchising so that the franchisees are protected. Moreover, this policy consideration is to be made on a case-by-case basis.
In Commissioner's Opinion Nos. 6410F and 6411F, we noted as significant in considering the experience of the franchisor, that several of the current officers and executives of the purchasing company were also involved in the management and operation of the predecessor company. We also noted, as further supporting a representation that prospective franchisees will be protected, that franchise applicants have substantial experience operating or owning the subject of the franchise, are of substantial financial means, and either have personal knowledge and experience in financial and business matters, or are represented by attorneys, other qualified consultants, or both, so as to be capable of evaluating the merits and risks of the franchise.
As you represent in your November 23, 1994 letter, in addition to MFAB's own experience, MFAB has the benefit of the related experience of its parent company, Merisel, the experience acquired from ComputerLand, as well as the experience of the MFAB executives and employees formerly employed by ComputerLand. In addition, the typical MFAB franchisee is financially sophisticated, has experience in the computer related retail business, and is represented and assisted by attorneys and consultants.
In the context of the representations contained in your request, it is our opinion that the policy underlying Section 31101(b) of the Law, that the franchisor demonstrate its relevant and extensive business experience in order to protect potential franchisees, is satisfied by expanding the factors that should be considered in determining that MFAB meets the experience requirement set forth in section 31101(b) of the Law. In this particular asset sale transaction, such factors include the totality of experience of MFAB, Merisel, ComputerLand, former ComputerLand executives and employees that continue in similar or higher positions with MFAB, and the financial sophistication of the franchisees.
Accordingly, it is our opinion that the offer and sale of a franchise by MFAB, under the circumstances described in your letter, is exempt from the registration requirements of Section 31110 of the Law by virtue of Section 31101.
Dated: December 29,1994
By order of
BRIAN A. THOMPSON
Chief Deputy Corporations
Office of Policy