China: New regulations for Franchises 

July, 2007 -

On 6 February 2007, the State Council promulgated the Regulations for the Administration of Commercial Franchising Operations. Although not stated in the Regulations, the Ministry of Commerce (“MOFCOM”) has indicated that the Measures for the Administration of Commercial Franchising Operations, issued on 30 December 2004 (as discussed in the 2005.1 issue of China Legal Update), will be repealed on the Regulations’ effective date, 1 May 2007. The Regulations are considerably shorter than the former Measures, leaving more room for the development of flexible business practices, while imposing stricter liability on illegal operations.

PRC entity requirement
The Regulations require that a franchisor intending to engage in franchising in China have operated at least two directly-operated businesses for more than one year. Previously, the Measures stipulated that a franchisor or its holding or subsidiary entity must have operated at least two stores in China for more than one year prior to franchising operations to domestic third parties. Whether this change implies permission for crossborder franchising by removing the jurisdictional requirement is still uncertain and will require further clarification when the Regulations go into effect. The Regulations specify that only enterprises (not individuals) can act as franchisors.

Sub-franchising are no longer directly addressed in the Regulations. Previously, the regulations permitted a franchisor to grant master
franchise agreement with a right of sub-franchise or direct franchise without the right to sub-franchise. The Regulations merely provide that
the franchisor’s consent is required for the transfer of the franchise.

FIE-specific requirements
Unlike the Measures, the Regulations do not contain any special provisions applicable to foreign investment enterprises. It therefore appears
that the Regulations apply equally to domestic and foreign-invested franchise activities.

Franchise contracts
The Regulations prescribe the contents of franchise contracts, including a minimum three years franchise duration, unless otherwise agreed by the franchisee.

Franchisors must file their franchising contracts within 15 days of signing either with the local approval authority, when engaging in business solely within the confines of a provincial-level administrative area, or with MOFCOM, when engaging in business across provincial borders. A list of all franchisors will be published and updated on MOFCOM’s website.

Disclosure obligation and liability
According to the Regulations, the franchisee has the right to terminate the franchise contract if the franchisor withholds relevant information or otherwise provides false information. If the franchisee experiences any loss caused by the franchisor’s misrepresentation or disclosure omission, the franchisor may be required to release the valid data or pay a fine.

Franchisors or franchisees that fail to satisfy the qualification requirements, leak information, or violate the stipulation of the Regulations may be required to either remedy the noncompliance or pay fines of a maximum of RMB 500,000. The business license of the offending party may be cancelled by the Administration of Industry and Commerce in serious circumstances.



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