The Viva Leisure Ltd (ASX: VVA) share price is in the red after news emerged the gym operator could soon be sued by its franchise owners.
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The Viva Leisure Ltd (ASX: VVA) share price is deep in the red today. The falling price comes after the Australian Financial Review (AFR) reported a consortium of franchise owners are planning to sue the company over “unconscionable and unfair conduct”.
At the market close, shares in the health and leisure company were trading at $1.91 – down 9.05%.
Let’s take a closer look at today’s news and what it means for the Viva share price.
Why the Viva Leisure share price is sinking
According to the AFR report, 53 franchise owners representing 64 outlets have sent a letter and draft statement of claim to Viva Leisure. These documents outline many concerns between the franchise owners and the ASX-listed company. Chief among those is a deteriorating relationship between the parties.
Representing about 33% of all Plus Fitness branded gym franchises, the complainants have delivered Viva Leisure a 28-day ultimatum to resolve their grievances before legal proceedings commence.
In a response to the AFR article, Viva Leisure said this morning it was dealing with franchise owners “appropriately and in accordance with the law”.
The company revealed it has held confidential talks with some franchise owners. However, it did not disclose what those discussions related to or even if the allegations aired in the article were relevant to those discussions.
Key areas of dispute
The franchisees identified the following key areas of dispute:
- Cannibalising membership. Franchise owners allege Viva Leisure is harming their businesses with a clause in its contract that allows the company to open competing, corporate-owned outlets in close proximity to franchises. A franchise owner quoted by the AFR said franchisees were being “significantly financially impacted by the franchisor unfairly competing against them”.
- A breach of good faith. A second but related claim against Viva Leisure is a breach of good faith by the corporation to its franchisees. Owners allege they did not agree to buy gyms that would then be competed against by their own franchisor. One source told the AFR that Viva Leisure’s access to franchise owners’ financial and business information gave it an unfair advantage.
Viva Leisure share price snapshot
The Viva share price is down 7.73% over the past 12 months, and its shares have fallen in value by 34.8% since the beginning of the year. In December, shares in the company were trading for a record $3.66.
At its current valuation, Viva Leisure has a market capitalisation of $157.4 million.
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Motley Fool contributor Marc Sidarous has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.