Saturday, May 26, 2007

Franchise in China--Opportunities & Challenges Come Along with the New Law (II)

Franchisor Registration
A. Timing of Registration

According to Article Six of the Registration Guidelines, “a franchisor shall register the franchise with governing registration agency within fifteen (15) days of the date of the execution of the first franchise contract with a franchisee in China.” In the same vein as the analysis above, “days” refer to calendar days rather than business days. And those franchisors already in operations in China have till May 1, 2008 to register their franchises.

B. Required Documents for Registration

Before initiating the registration process, it is advisable for a franchisor to ascertain with which agency to register the franchise. China has a complex administrative structure in that it is divided into provinces, autonomous regions, and municipalities, which are under direct control of the central government. As stated in Article Three of the Registration Guidelines, franchising to take place within provinces, autonomous regions, or municipalities shall be registered in the highest administrative agencies in charge of commercial regulations; whereas franchising to occur beyond or across boundaries of provinces, autonomous regions, and municipalities shall be registered with the Ministry of Commerce of China. Deciding the right place to register a franchise is a crucial first step in the registration process.

After choosing the right place, the next thing a franchisor need to know, naturally, is what documents to prepare for registration. Article Five of the Registration Guidelines is devoted to specifying the requisite documents for registration with any registering agency. Article Five requires the following:

(1) Basic information about the franchise.

(2) Basic information about the geographical distribution of all the franchised units in China.

(3) A copy of the franchisor’s marketing plan.

(4) A copy of the franchisor’s corporate business license or other important documents evidencing eligibility.

(5) A copy of the registrations of the franchisor’s trademarks, patents or other business resources related to the franchising operations.

(6) Documents provided by a commercial regulatory department in a city with administrative districts, evidencing a franchisor’s compliance with Article 7 Section 2 of the Regulations; with respect to company-operated units located outside China, a franchisor shall provide documents evidencing same (including Chinese Translation), which shall be notarized and certified by a Chinese Consulate located in the administrative region as such company-operated units.

The above section does not apply to a franchisor in franchising operations before May 1, 2007, but such a franchisor shall provide a copy of the first franchise agreement executed by both the franchisor and a franchisee inside China.

(7) Sample Franchise Contract.

(8) Table of contents of the Franchise Operation Manual (Must include the page number of each chapter and the total number of pages. With respect to the Franchise Operation Manual accessible via franchise system intranet, provide the estimated pages after printing.).

(9) With respect to franchising of services or products subject to pre-approval pursuant to relevant laws and regulations, a franchisor must provide documents evidencing such approval by relevant government agency.

(10) Franchisor’s affidavit, signed and sealed by legal agent of such franchisor.

A foreign franchisor needs to pay special attention to (6) of Article Five. The Regulations regrettably kept the “two company-operated units for at least one year” requirement (“2 + 1 Requirement”). It is an eligibility requirement whereby only franchisors with two existing company-operated units in operations for over a year can franchise in China. As onerous as it might be, the Registration Guidelines clarified the uncertainty inherent in the Registrations as to whether a foreign franchisor can satisfy the “2 +1” requirement with units in operations in its home country. And the answer is affirmative.

Item (6) suggests that in order to satisfy the requirement, a franchisor, however, has to have the assertion that it has two company-operated units in operation for over a year notarized and certified by a local Chinese Consulate. The Registration Guidelines do not address how item (6) works if the two company-operated units are located in two geographical places far away from each other, for instance Seattle, Washington and Houston, Texas. Shall the two units be notarized and certified by just one consulate or two? To avoid the potential problem of non-compliance, the author suggests that they be certified by the consulate administratively responsible for the location where the unit is.

C. Method of Registration

For ease of management, registration of franchise has gone hi-tech in China. A franchisor can directly fill out items (1)—(3) on the Chinese version of the Ministry of Commerce website:, the rest of the items can be submitted on the same site in PDF format. But in order to start the process, a franchisor has to create an account and password. The English version of the website does not yet have the registration management data base running yet as of May 16, 2007, but the laws have gone into effect for 16 days. Navigating the Ministry of Commerce website is not exactly a breeze even for the author whose native language is Mandarin Chinese. Therefore, a attempting to register in the Chinese government database could present considerable difficulties to a foreign franchisor who has limited knowledge of the Chinese language.

In the unfortunate event that a registering agency finds deficiency in registration documents, the franchisor may be required to submit additional supplemental materials seven days following the initial round of registration. And if the franchisor submits materials as requested by the agency, the agency, according to Article Ten of the Registration Guidelines, is required to register the franchise within ten days of the submission of additional materials. Given the time difference, vast geographical distance, and language barriers, it might in reality take longer than ten days if a problem occurs in the registration process unless the foreign franchisor has local counsel inside China.

D. Changes after Registration

A registered franchisor is also required to file changes and annual reports with the registering agency. Article Seven of the Registration Guidelines mandates that “with respect to changes to information provided in the registration, a franchisor shall petition the registering agency to amend such changes within thirty days of such changes.” (Emphasis added) “Changes” are not modified by any adjectives, therefore, it means any changes, material or immaterial. It seems, undoubtedly, very burdensome to amend any changes with the registering agency. However, the critical word “petition” might be the word that decreases the burden to amend. After changes occur in the franchise system, the franchisor should petition the agency to amend. It is up to the agency to either grant the petition or deny the petition to amend. Logically, if the petition is granted, then amendment becomes mandatory; if not, amendment would be unnecessary. Of course, absent a clear and transparent demonstration of the standards to be used by the agency in its evaluation of the petitions, the franchisors would not know what types of changes ought to be amended and what not to.

Franchisors’ annual report filing seems less problematic than amendments. The bright line rule requires an annual filing before March 31. Article Eight of the Registration Guidelines states that the annual filing report should include basic information regarding new, cancelled, renewed or amended franchise contracts in the past year. Even though the law does not require that amended contracts be offered to future prospective franchisees, the annual filings become public information listed in the Ministry of Commerce website, which is easily accessible for any interested prospective franchisees.

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