An increase in the number of points of sale, better territorial coverage, more favorable supply conditions, improved visibility, the opportunity to integrate a rival network… there are many reasons why a franchisor might decide to take over another franchise network.
This type of operation is all about integrating the franchisees of the target network while respecting the terms of their franchise agreements.
There are several possible scenarios:
- The acquiring network may offer the franchisees of the target network the opportunity to switch to its brand while remaining a franchisee.
- The acquiring network may decide to perpetuate the target network by maintaining the existing organizational structure.
- The acquiring network may opt to buy out the franchisees of the target network.
In order to clarify the situation upstream, it is advisable to anticipate and provide for the consequences of the network being bought out by a third party in the franchise agreements, as soon as they are signed.
For example, it is possible to sign a unilateral promise of sale with the network’s franchisees, alongside the franchise agreement, allowing the franchisor to buy their business at a price whose calculation method is fixed in advance.
Franchisees thus have the opportunity to increase the value of their business when the network is taken over, and to move on to a new adventure.
If such a unilateral promise of sale is not provided for, or if such a takeover is not desired, the acquiring network will in principle have to obtain the agreement of the franchisees of the target network for them to convert their points of sale under its tradename.
Otherwise, the acquiring network will have to maintain the acquired network, while complying with the franchisor’s obligations (assistance, occasional training, communication campaigns, updating of know-how, etc.).
The legal saga surrounding the takeover of the PIZZA SPRINT network by DOMINO’S PIZZA in January 2016 is a particularly interesting example of this theme.
In this case, which was marked by several court rulings, several clauses of the PIZZA SPRINT franchise agreement were deemed to be tainted by a significant imbalance following action by the Minister for the Economy.
The franchisees of the PIZZA SPRINT network initially tried to rely on the nullity of these clauses to obtain the cancellation of their franchise agreement. However, they were unsuccessful (Paris Court of Appeal, 8 February 2023, no. 20/04558, 20/04557, 20/01712, 20/04561, 20/01748, 20/01691, 20/01706, 20/01756, 20/06545).
However, the franchisor was condemned for having abandoned the PIZZA SPRINT network after it was bought by DOMINO’S PIZZA. In particular, the franchisor was accused of failing to keep its know-how up to date, of failing to meet its obligation to provide training and assistance on new product sales and marketing methods, and of damaging the reputation of the network.
The judgment was extended in part to DOMINO’S PIZZA FRANCE, which became the network’s holding company after acquiring the shares of the franchisor of the PIZZA SPRINT network in January 2016. DOMINO’S PIZZA FRANCE was accused of having ‘contributed’ to the failings of the PIZZA SPRINT franchisor.
In a ruling handed down by the Commercial Chamber of the French Cour de cassation on 14 November 2024, the Court of Cassation confirmed this ‘contribution’ to the franchisor’s breaches, which resulted in particular from:
- The indication by DOMINO’S PIZZA FRANCE in its financial documentation for the first half of 2017 that the end of the conversion of the PIZZA SPRINT network under the DOMINO’S PIZZA tradename was expected at the end of the 2017 fiscal year.
- The clarification in DOMINO’S PIZZA FRANCE’s management report to the Chairman for 2018 that it planned to continue converting PIZZA SPRINT points of sale to the DOMINO’S PIZZA tradename.
- From the auditor’s report on the 2018 financial statements of DOMINO’S PIZZA FRANCE, which shows that most of the activities of the franchisor and the central purchasing unit of the PIZZA SPRINT network had been transferred to DOMINO’S PIZZA FRANCE after the network was acquired.
These were indications that DOMINO’S PIZZA FRANCE’s development strategy was to wipe out the PIZZA SPRINT network.
This was despite the fact that the few franchisees who had refused to convert their points of sale to the DOMINO’S PIZZA tradename should have been able to benefit from the services of the PIZZA SPRINT network until their franchise agreement was terminated.
It is important to note that the liability of the acquiring holding company is extra-contractual only. As a result, it cannot be ordered to enforce the provisions of the franchise agreements at issue.
In this case, DOMINO’S PIZZA FRANCE was ordered – jointly and severally with the network franchisor – to pay the PIZZA SPRINT franchisees damages for non-material loss and loss of value of their businesses.