Brief — McDonald's

Fax regu de : 81 .45.27 63_13 LELOUP LAW FIRM MCDONALD'S FRANCE / SEBOL, B&O, LES PINS. COLLORAFI JUDGMENT OF THE PARIS COURT OF APPEAL OF 9 DECEMBER 1998 RG: 1998.14119 28/04628u-.32154 15-4-99/SF BRIEF TO THE EXPERTS JEAN-LUC DUMONT and ALAIN MARTIN 1. In accordance with the request made by the Experts, the S.A. MCDONALD'S has the honour to supplement, by this brief, the documents given to the Experts on 23 February 1999. This brief also answers the submission addressed to the Experts by counsel for the appellants, insofar as that submission itself answers the questions put by the Court. It does happen that the appellants' submission goes beyond the scope of the questions put by the Court. It seemed to us in such cases pointless to burden the exchanges with subjects outside the questions submitted by the Court to Mesyicury les Experts. This is particularly so in the preliminary remarks occupying the first 5 pages of the appellants' submission; the appellants try there to give a misleading presentation of the reality of the case file, and to return to claims that the Court declared inadmissible. All this has already been examined in our pleading file, in our written submissions before the Court and rejected by the Court's judgment. It must therefore be quite clear that: - the absence of a reply to certain arguments of the appellants, for the reasons just stated, implies no approval of these arguments, - the company MCDONALD'S and its Counsel are entirely ready to answer any additional question that the Experts consider useful for shedding light on the questions making up the assignment entrusted to them by the Fax regu de : 01,45 27 63_13 LELOUP LAW FIRM Reto It is regrettable that, notwithstanding the volume and weight of the disclosure of documents made by the appellants as an appendix to their submission, certain items are missing, making unusable or incomprehensible items of the disclosure, thus: - in the 1997 accounts of the GIE SODEVA, the detail of the accounts is not given, - in the 1997 accounts of the SARL LES PINS, likewise, in the 1997 accounts, neither the detail of the liabilities nor sheets 4 to 8 of the tax return bundle are to be found. 3. Having made these observations, this brief will examine the questions put by the Court: FIRST QUESTION: If Mr COLLORAFI had halved his salary in 1995 and 1996 and had left in current account all or part of the dividends received in those years, in the de cette societe) il avait fait un apport en compte-courant en 1997, this would not have enabled these two companies to reach the annual break-even point, which is the turnover enabling the operation to break even, in 1996 and 1997. 4. Mr COLLORAFI's salary: In 1995, Mr COLLORAFI's gross remuneration in SEBOL was 625,000 FRF, i.e. a cost to the company of 625,000 + 44% employer's contributions = 625,000 + 275,000 = 900,000. In 1996, likewise. Halving Mr COLLORAFI's remuneration would therefore have saved, over the 2 years 1995 and 1996, 900,000 FRF. 1 nin de reduire sa rémunéraliur, Mr COLLORAFI increased it in 1997 by 14%, bringing it to / 10,400 FRF gross, i.e. with 44% employer's contributions (312,576): 710,400 + 312,576 = 1,022,976. …./. atturudité LELOUP LAW FIRM In 1997, the difference, compared with what would have resulted from halving Mr COLLORAFI's salary, comes to 572,976 FRF over one year. In total, over 3 years (85 + 46+4/), the cost actually borne compared with what the cost would have been after halving Mr COLLORAFI's salary is therefore: 450,000 FRF 450,000 FRF 572,976 FRF 1.412.9/6 FKF 5. Current account and dividends: The company SEBOL distributes as dividends to Mr COLLORAFI: in 1995: 1,850,000 FRF in 1996: 1,000,000 FRF i.e. over 2 years: 2,850,000 FRF, reducing the cash position of SEBOL for the benefit of Mr COLLORAFI. It is useful to compare this figure with that of 1,628,100 FRF including VAT justifying the mico on domeuro du 27 mavamhra 1997 (natre niène 15 snis cote 24 du dossier de plaidoirio) ot provoquant la réciliation du contrat But it must be added (as was explained as early as our written submissions at first instance of 09.01.98, p. 9), that previously Mr COLLORAFI had already received as dividends: in 1993: 400,000 FKF in 1994: 900,000 FRF 1,300,000 FRF added to the 2,850,000 FRF of 1995 + 1996 i.e.: 4,150,000 FRF Fax_ regu de : 01,45.3? 67, 13 20072-01834-59. 0 LELOUP LAW FIRM As 350,000 FRF remained in current account at the end of the 1996 financial year, Mr COLLORAFI therefore received and set aside 3,800,000 FRF by the end of 1996, drawing on the results of SEBOL. Rather than devoting part of it to increasing his current account in B&O, then in LES PINS, he preferred to put SEBOL further into debt by withdrawing the balance of his current account (350,000 FRF) and taking out a loan of the same amount at the rate of 4.625%. Mais sur pa 350 n00 FRF provenant du retrait de son compte courant dans SEBOL : il appuite - he contributes 200.000 ГПГ 50,000 FRF à Dao to LES PINS see opposing submission, p. 9 1st paragraph i.e. 250,000 FRF and keeps 100,000 FRF It follows from all this that Monsier COll ORAFI did not behave as a responsible business owner: he allocated to himself the profit of the profitable years without reinvesting enough in his businesses at a time when they were experiencing accelerated development and therefore had substantial financial needs. Mr COLLORAFI's current account in B&O: Examination of the accounting statements as at 10/06/98 provides us with further interesting information: Mr COLLORAFI's current account in Bão is B$ 184 FRF against 750 103 FRF five months earlier. The 700 KF withdrawn were not reinvested in another restaurant. Mr COLLORAFI decidedly does not like investing his personal money in his businesses! Mrs COLLORAFI's salary: In addition to the salary received by Mr COLLORAFI, which we have seen (see no. 4 above) represented for SEBOL a cost of: 900,000 FRF in 1996 • 1,022,976 FRF in 1997 .l.. Fax_regu de : 01,45 27 63_13 LELOUP LAW FIRM 20/04622--.1134 ,.59. Mrs COLLORAFI receives, according to the opposing submission (p. 9 in fine), 156,109 FRF gross, i.e. a cost to the company (social contributions included) of: 156,109 + 68,688 = 224,797 FRF According to the opposing submission (p. 10), her work consisted of: "- upkeep of the plants supervision of the upkeep of the restaurants, in collaboration with the cleaning teams, the restaurants always received the rating exceptional or Excellent upkeep of the uniforms reception hostess during busy periods birthdays" What other restaurants of the MCDONALD'S chain need this post, when moreover Jusen dubre 1890, il l'y avail qu'un seul restaurant ? In June 1998, when MCDONALD'S took back the management of the three restaurants, no one was recruited to replace Mrs COLLORAFI. In conclusion on this first question Even without reinstating Mrs COLLORAFI's unjustified salary, the group of appellants, taking into account 800,000 FRF reinvested in B&O at the end of 1997, could have benefited at the end of 1997 from additional cash of: • saving from the reduction in the remuneration of Mr COLLORAFI • total reinvestment of the dividends of 95 and 96 (see no. 5 above), i.e. 2,850,000 - 800,000 actually reinvested in B&O • with the saving of Mrs COLLORAFI's salary ...t.. Fax regu de : 01.45_27 63_13 28/84/99 17:34. Pg: LELOUP LAW FIRM SECOND QUESTION: iro fi l'avanant nus rontrat ne vi foriere D al O vitrité cal intorvenu à bonne dare e op tard et était suffisant si Mr COLLORAFI réduisait son salaire dans la société et O, si toutefois il en a perçu de cette société. The ANTIBES NORD restaurant opened in October 1996. The fees were adjusted from January 19ST. Geul iduund à l'inlurogation da la Cour our the speed of reaction of MCDONALD'S FRANCE. Knowing whether this reduction in fees was sufficient refers back to two other questions: - is the sufficient level the one that allows a MCDONALD'S restaurant to make money from the 1st year? The opposing party very often recalled that it found normal the situation encountered at the start of SÉBAI = ? 5 MF de neras anrès 1 an ½ : - le milveau de la redurance est il lo adul lovior permattant à lin restaurant de gagner de l'argent ? Is the quality of the business owner's management not just as important? This point will be dealt with below in answer to questions 6 and 7. THIRD QUESTION: State whether the opening of the "ANTIBES NORD" restaurant made it possible to transfer partially fixed costs from the company SEBOL to the company B et O as asserted by Mr GANDUR in his annual report drawn up at the request of Mr COLLORAFI (cf. page 24). 10. Would it not be appropriate for the appellants to produce a coherent answer? On page 12, they state that they are replying "on the basis of table 1", but the figures fiyuul Jure se tablonu no pont pas rally nuli sont renris en paqe 12. FOURTH QUESTION: 11. There is no fundamental distinction between the situation prior to 1 July 1997 and the situation afterwards. Fax regu de : 01.45.27 63 13 20/84623-10134.9 9 LELOUP LAW FIRM Thus, for the sake of concision, this point will be dealt with together with the seventh question below. But it is really difficult to give credit to the figures communicated by the appellants: on page 14 of their submission, they state that SEBOL's turnover in 1996 was 18,300,000 FRF. It was in truth 18,305,795 as appears in the first table of our document 18 inserted in our appeal submissions, served on 25 September 1998, after page 18. This figure of 18,305,795 moreover cannot be disputed by the opposing party: it appears on page 10 of the report of its expert, Mr GANDUR. But there is worse: For Bao, in 1996, the opposing party states, on page 14 of its submission, a turnover of 2,388,837 FRF. It is in truth, as appears in the same table of our aforementioned document 18 and in Mr GANDUR's report page 29, 3,388,837 FRF. Such a lack of rigour is entirely in line with the appellants' management, to which we will therefore return below at nos. 17 to 19. FIFTH QUESTION: State whether the new "Antibes-Ouest" restaurant was viable in itself or whether, as McDONAl M'$ l'a nuser en mêre lomys sur unlui de Vallauris, ce qui n'est pe • hasard mais montre qu'elle avait envisagé une « gvnergie» entre ces deu restaurants, its profitability had not been assessed a priori within an "Antibes- Ouest" - "Vallauris" whole, the management of which the company McDONALD'S has, contrary to what seems to have been its forecasts, entrusted by lease-management (*location-gérance*) to two different persons, - the "Antibes-Ouest" restaurant being only the complement of the locomotive "Vallauris". 12. The appellants' answer consists of the usual refrain about Mr COLLORAFI's disappointment at not being lease-manager (*location-gérance*) of the Vallauris restaurant (although he was not in a position to finance the Straight contract of Antibes Ouest). But the Antibes Ouest restaurant was from the outset the best performing in the short term: snis la pestion de Musien COLLORAFI. Antibes Ouest achieved, in $ months of 1997, 6,410,177 FRF, whereas Vallauris made only 4,800,000 F Moreover, it is in this Antibes Ouest restaurant that MCDONALD'S ANTIBES RESTAURATION (MAR) earns the most money since the management was returned to Mr COLLORAHI on the zu juin lyya, after a period of d months and 9 days during which Mr COLLORAFI was an occupant without right or title: the growth in total sales there is 13.43%. ...t... Fax_ regu de : 81 45 27 67_13 .Py: 18 LELOUP LAW FIRM Indeed: • total sales for the 2nd half of 1997: • total sales for the 2nd half of 1998: 4,675,406 FRF 5,303,091 FRF i.e. + 13.13% SIXTH QUESTION: State whether, given the financial situation of the "Carrefour" - "Antibes Nord" group and the fact that Mr COLLORAFI claimed to be unable to finance the "Straight licence" contract of Antibes-Ouest, the company McDONALD'S gave Mr COLLORAFI a "poisoned gift", as the latter seems to claim, or whether on the contrary it wanted to give him an additional chance to pull through. Lao rópondos donnóoo à la promióro quartion coue ni A, t at À pormattant ra see that Mr COLLORAFI, having made a lot of money, notably by distributing to himself 4,150,000 FRF of dividends in SEBOL from 1993 to 1996, and increasing his salary by 14% in 1997, should have been able to make the contribution necessary to sign a Straight contract (1,000,000). What did he do with his profits? Since he refused to make his businesses live, while living off them better than well, it would have been normal to refuse him a third restaurant. In a spirit of appeasement, and in the presence of the determination of Mr COLORAI pour aient un gome destaman (o sus dussie de candidature for Antibes Ouest - document CA under item 63 of the pleading file), MCDONALD'S FRANCE gave him, in lease-management (*location-gérance*) with a BFL contract, the Antibes Ouest restaurant, taking on 96.60% of the investment (11,825,000 FRF), whereas Mr CULLUKAHI bore only 3.10% (387,000 FRF). The practical consequences for the company LES PINS were as follows: - monthly minimum fee lowered from 125,000 FRF to 100,000 FRF to avoid, as in any BFL contract, the minimum fee paid exceeding the percentage fee, - saving on equipment investment: 2,543,000 FRF. - replacement of a fixed cash outflow (repayment of a bank loan), independent of the financial health of the company, by a variable charge (equipment fee of 4.5%) less costly for the company in the event of a low level of sales. .!... Fax regu de: 81,45 27 6L.13 4004322-703894 LELOUP LAW FIRM In this specific case, a loan of 2,543 KF over 7 years at 5% would entail an annual repayment of 131 KE. Cola corroopond à la radaramos équipiriurl for sales of 9.6 MF. Now, having achieved in 8 months of 1997: 6,410,177 FRF, we obtain an annual base of 9,615,265 FRF In the event of a turnover below 8,600,000 FRF, he benefited from additional security. SEVENTH QUESTION: 16. The investment policy of Mr COLLORAFI, who preferred personal withdrawals to financing his companies, has already been answered at points 4, 5, 6 above. Juant à la goction propromont dito, ai Monoiour COLLOMN.FI avait gárá so estauranls dans la muyenne de de que réaliserl les autres locataires-gérants he would not have experienced such financial difficulties. This diagnosis rests on the following findings. 17. Compared with MAR: If one compares the P&Ls of the 2nd half of 1997 (B. COLLORAF|) with those of the 2nd half of 1998 (MAR), one observes (table attached as document E1) • a notable increase in sales, despite the additional opening of a MCDONALD'S restaurant in Villeneuve Loubet in July 1998, 7.97% on the market, varying from 2.23% (Antibes 1) to 13.43% (Antibes Ouest). • an improvement in the management levels in all the restaurants which is reflected in the levels of PAC: the PAC difference varies between + 0.85% (Antibes Nord) and + 2.22% (Antibes 1), this development is surprising because it occurs very shortly after the resumption of direct management by MCDONALD'S and because one traditionally observes the opposite effect: the PAC levels of lease-managers (*location-gérance*) are generally higher than those of the McOpCo, 5 63_13 LELOUP LAW FIRM - a drastic reduction in administrative costs, which go from 086.€23 FRF to 282,834 FRF per half-year. Would Mr COLLORAFI object that the operating modes cannot be compared as regards administrative costs since in the case of a lease-manager (*location-gérance*), this type of cost includes the remuneration of the lease-manager and the latter's induced costs (transport costs...), which is not the case for McOpCo restaurants? Admittedly, but this does not prevent asking the question of the amount of these administrative costs specific to lease-managed restaurants (*location-gérance*). Munsitur COLLORATI trouvo t'il juctifió que cas frais spermiques se montent à (987,623 - 282,834) × 2, i.e. 1,407,578 FRF per year. How could restaurants bear this additional cost if moreover their management levels (PAC) are lower? 18. Compared with the other lease-managers (*location-gérance*): MCDONALD'S restaurants under lease-management (*location-gérance*) of the same type and the same turnover level obtained PAC levels clearly higher than those of Mr COLLORAFI in 1997 (see document E2). While this can be explained for Antibes Ouest (year of opening), it is much more surprising for the two other restaurants, especially given the size of the differences: • 3.61% at Antibes 1 • 8.57% at Antibes Nord 19. Conclusion: The cause of Mr COLLORAFI's financial troubles is essentially to be sought in the weakness of his management levels: - he is clearly less successful than the other lease-managers (*location-gérance*) in similar situations, - he is worse than McOpCo on the same restaurants. Consequently, any question relating to the causes of his losses and to the adequacy of the level of fees must be put in perspective in relation to what another operator than him could have done. This point had already been noted in the HUSSON- DUMOUTIER report on the question of the "bearable" level of fees. Fax_reçu de : 81 _45.27 67 13 20/84/99.17:34 ...Pg: 13 LELOUP LAW FIRM EIGHTH QUESTION: Considering that the experts will give their opinion on the accounts of the companies SEBOL, B et O and LES PINS, between 1 January 1998 and 10 June 1998, the date of their eviction. 20. The period running from 1 January to 20 June 1998 is a period during which, notwithstanding the termination by operation of law of the lease-management agreements (*location-gérance*) covering the three restaurants, the appellants remained in the premises This is a trespass (*voie de fait*). During this period of unlawful occupation, of unlawful use of the MCDONALD'S trademark, whereas the appellants no longer have any right: - to occupy establishments belonging to MCDONALD'S FRANCE, - to adorn themselves with a trademark that is not theirs, an occupation indemnity is due. It cannot be lower than the amount of the previous fee. But it may be higher, because it would be profoundly unjust to treat equally the one who acts under a regular title and the one who, in breach of the law, persists in restaurants that do not belong to him at the risk of tarnishing their reputation. This is why the Commercial Court, following our claims, ordered each of the appellant companies to pay an occupation indemnity of: • 16,000 FRF per day, for SEBOL, • 14,000 FRF per day, for B&O. • 16,000 FRF per iour. dour LES PINS. This is also why the appellants' submission wants to insist on the fact that no remarks were ever made on Mr COLLORAFI's management, whereas this is inaccurate: numerous loans had to be granted to him (See item 35 of the pleading file and our documents 1, 2, 82 to 85). 21. But we already know that Mr COLLORAFI took from the current account of B&O approximately 700,000 FRF (see no. 6 above). Fax cegu de : 01 • 1-2 63_13 LELOUP LAW FIRM Moreover, the 1998 P&Ls show an amount of administrative costs of 485,000 FRF for 5 months, i.e. 1,164,000 FRF on an annual basis. The appellants would have been well advised to show the same moderation in 1997. NINTH QUESTION: Cantidámano qu'an revancho, los arpora dourant donnos locr drie çur ano autre affirmation contained in the document, "Objective No. 3": making the Restaurants profitable With the spreading of administrative costs over several restaurants, we will reduce administrative costs" ..that, in other words, the experts must say whether the increase in the cumulative fees of the three restaurants could be offset by the reduction in their administrative costs. 22. The report of Mr HUSSON-DUMOUTIER and the explanations given above make it possible to note that the 1997 deductions were indeed bearable for well-managed restaurants. The company MCDONALD'S and the undersigned remain at the disposal of the Experts to answer any question that would be useful to shed light on the nine questions put by the Court Jean-Marie LELOUP Attachments: E1 and E2 Fax regu de : 01 145-23 62_13 Total sales (Food sales BINET D'AVOCATS LELOUR Gross profit IPAC Standard fee Other non-controllable exp. ¡Net operating result Administrative costs result before tax Total sales Food sales Bérefice trut PAC Recevance standard Autres deg. non Controlabies Roslltar nat nopigitation "administrative costs ¡Result before tax Total sales Food sales Gross profit PAC Standard fee Other non-controllable exp. -Net operating result Administrative costs Result before tax Manias totales Marras alimentairas Benéfice brut SPAC Standard fee Other non-controllable exp. Net operating result Administrative costs Result before tax 2° sem 87 € 059 510 101,29% 5982 3Af 100.00% 2ª sem 98 6 194 507 101,38% ฿ 11034? 100.00% + 100050 00,04% 11,93% 1 823 812 30,49% : 998 779 32,71% -898 328 -15,02% -904 959 -15,13% 20575 0,2186 -966 818 -15.82% - 1 059 725 -17,51%% -306 230 -5,12% 478% 377C+ -94 278 -1,54% =2.16% 2" sem 97 101,53% 6441 628 100.00% Antibes Nord .2 sem 9B 7154421 101.42% 7 053 975 100.00%| 4 591 791 71,28% 73,53% 1 978 108 30.71%, 31,56% -! 133 863 - 17.60% -6Z2 023 -9.66% -1 464 995 -20.77% -15.30% 202 222 7,4676! •390590 1,18% -1,54% -2,71% -5.84% Antibes Ouest 2nd half 97 4675 408 101.25% 4617 485 100,00% 2° sem 98 101,21% 5 239 689 100.00% 3 278 075 70,99% 73,41% 32,39% 34.01% +14,96% -E11 070 - 13,23% -B20 357 -15,56% 193 926 4,29% 4,28% 283797 -5,15%! -1.90% -1.35% 243%l Total Antibes 2° sem 97 17 374 010 101,379 : 1041 600 100,0046 2' sem 98 10 052 022 101.90% 15401014 100,00061 11 976 216 70,20% 72,96% 5 297 530 31,09% 32.64% 2:22 805 -15,98%| -2 138 052 -12,55% 2,56% -986 623 5,79% -3,23 -3 252 170 - 17.67% -2 886 340 - 15.38%6 -0.71 % -1.54% 2,25% 2,23% 9.39% 13.43% 7.07% Fax cegu de : 81952 5 USMEBAISOM U CELERE BuyEunE lunalalies ytranlo su 19Z Food sales PAC Difference Food sales PAC Difference Antibes 1 KF 100,00% 29,85% -3,61% Antibes Nord KF 100,00% 29.64% -6,57% Average Mall KF 100,00% 33,46% Average FS KF 100.00% 36.20% Food sales PAC Difference Antibes Quest KF 100,00% (annual basis! 27,83% -$55 -5,84% Average FS KF 100,00% 33,67% =7., E= PiccE CABINET TYAVONATS LEICUT TOTAL PAGECSO 1€