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The new Chinese Regulation
on Commercial Franchises will significantly widen
the door for international franchisors looking to
franchise their brand in China.
Two years
on from the introduction of the Measures for the
Regulation of Commercial Franchises (the
"Measures"), China's franchising sector is
preparing itself for the implementation of the
Regulation on Commercial Franchises (the
"Regulation").
Coming into effect on 1 May
2007, the Regulation is a clear signal of the
Chinese government's intent to develop a more
relaxed and liberal franchising regime,
potentially making China a more accessible market
for both franchisors - particularly international
franchisors and
franchisees.
Franchising Regime -
three major improvements
1.
'Registration' over 'Approval'
Under
the Regulation, it will no longer be necessary for
a franchisor, before franchising in China, to be
approved and obtain a licence. Instead,
franchisors need simply register with the
provincial government or with China's Ministry of
Commerce ("MOFCOM"), in the case of cross-province
franchising.
Registration will be required
within 15 days of selling the first franchise and
existing franchisors in China must register by 1
May 2008. Interestingly, the onus is on the
government agency - it must register a franchisor
within 10 days of receiving the requisite
documents.
2. 'Two plus One' rule
relaxed
Under the old Measures, before
a franchisor could franchise in China, the
franchisor needed to have two directly-operated
stores in China in operation for more than a year.
This, coupled with the implicit prohibition on
foreign franchisors granting direct franchise
rights to Chinese entities, was seen as a barrier
to international franchisors.
The new
Regulation states that when engaging in franchise
operation, a franchisor must 'own a well-developed
mode of operation' and 'be capable of providing
operational guidance, technical support, business
training, and other services to the franchisee'.
In addition, a franchisor must own at least two
directly-operated stores and have operated for
more than one year. However, there is no mention
of these two stores having to be in China and this
is clearly good news for overseas
franchisors.
It is not entirely clear what
MOFCOM's intentions are and the wording of the
Regulation requirement is somewhat ambiguous - do
the stores need to be within China and is it the
actual stores that must operate for more than one
year or just the franchisor's overall business?
MOFCOM has hinted that it will prepare
Implementation Guidelines to deal with such
ambiguities but as to actual interpretation, only
time and the possible involvement of the Chinese
courts will tell.
3. Separation of
'Franchisor' and 'Designated Supplier'
relationship
Under the Regulation,
franchisors will no longer be jointly and
severally liable for any products or services
provided by their designated suppliers. This is a
welcome change in the area of franchising
liability and could greatly benefit franchisors by
removing the hassle of unwanted and potentially
very expensive litigation.
We see this new
Regulation as a much welcomed improvement in the
regulation of franchising in China, making
franchising easier for both franchisors and
franchisees. By no means is this Regulation a
flawless document but difficulties surrounding
interpretation should be eased by the drafting of
MOFCOM's Implementation Guidelines - all that is
left to say is watch this space...
For
further information please contact Mark Abell or
Graeme
Payne.
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