Franchising Regulations in Macau, SAR (II)

III. Mandatory Pre-sale Disclosure

Pre-sale disclosure by a franchisor to prospective franchisees is mandatory. As is the norm in many franchise regulations in the world, a franchisor must deliver a written disclosure document detailing the franchised business in accordance with Article 680 of the MCC. A franchisor, however, must note that the MCC does not stipulate a bright-line rule on how many days the disclosure must predate the execution of a franchise contract. The code only requires “adequate advance” disclosure. In comparison with a bright-line 30-day rule in China’s franchise regulation, the flexibility inherent in this rule could potentially cause trouble for a franchisor because a franchisee could always allege that disclosure was not adequately advance. Therefore, a franchisor should keep detailed records of the date when initial negotiations for a franchise, the date of delivery of disclosure, and of course the date of contract. In fact, for those franchisors used to the old FTC Rule (with a tricky trigger disclosure requirement), this MCC requirement should not be difficult to keep up with.

Information disclosure under Macau’s franchise regulation, to a certain extent, resembles that of the disclosure requirements under the Chinese franchise Disclosure Guidelines. The MCC does not prescribe a rigid format for disclosure, such as the Uniform Franchise Offering Circular ("UFOC") in the United States new FTC Rule; rather, it only stipulates a few categories of information to be provided in a truthful manner to prospective franchisees. Here they are:

a) the identification of the franchiser;
b) the franchiser's annual accounts of the last two accounting periods;
c) any judicial proceedings in which the franchiser, the holders of trademarks, patents and other industrial or intellectual property rights related to the franchise are or have been involved, as well as their sub-franchisers, which may directly or indirectly come to affect or render impossible the functioning of the franchise;
d) a detailed description of the franchise;
e) the profile of the ideal franchisee regarding previous experience, level of education and other characteristics that compulsorily or preferably he must have;
f) the necessity and extent of the franchisee's personal and direct participation in the exercise of the franchise;
g) the specifications as to the estimated sum of the initial investment needed for acquisition, installation and entry into functioning of the franchise;
h) the value of the periodic payments and other amounts to be paid by the franchisee to the franchiser or to third parties indicated by him, specifying the respective bases of calculation and what these remunerate, or the purpose for which they are destined;
i) the composition of the franchise network, lists of franchisees, sub-franchisees and sub-franchisers of the network, as well as of those who have left the network in the last 12 months;
j) the profitability of the franchisees' enterprises and the incidence of bankruptcies;
l) the professional experience gained, his know-how and entrepreneurial methods;
m) any services that the franchiser obliges himself to render to the franchisee for the duration of the contract.

See Article 680 (1).

In addition, a franchisor should also provide a sample contract (including relevant addendum) to a prospective franchisee in connection with the disclosure document. A failure to disclose information required in this article constitutes breach by the franchisor of the commercial code, which entitles a franchisee to annulment of the franchise contract. See Article 680 (3).

Relatively speaking, information disclosure as required in Article 680 is by no means expansive in comparison with disclosure in the United States and China. (A detailed comparison is beyond the scope of this post.)

--to be continued...

Franchising Regulations in Macau, SAR

Rivaling Las Vegas in grandeur, Macau is poised to be a major tourist attraction in Asia for those eager to try their fortune. Critical to the formation of a tourist hot spot is the growth of complementary service industry, and a proven method of growth in the service industry is franchising. I want to introduce the basics of franchising regulations in Macau in a few posts.

I. Introduction

Franchising is permissible in Macau, and an entire Title in the Macau Commercial Code (“MCC”) is devoted to the regulation of franchising. (Title VIII). Compared to franchise regulations in mainland China and other Asian countries, such as South Korea and Malaysia, Macau’s regulation seems pretty straight forward. The regulation can be roughly divided into three sections: franchisor disclosure, franchise contract, and franchisor-franchisee relationship.

II. Definition of Franchising

Franchising in Macau, in essence, is a form of expansion through a contract, and, under the MCC, a franchise contract is defined as:

A franchising contract is that by which one of the parties, against a direct or indirect payment, grants to the other, in a certain zone and in a stable manner, the right to produce and or to sell certain goods or services under his entrepreneurial image, according to his know-how, with his technical assistance, and subject to his control. See Article 679

A commercial franchise contract bears three basic features, a grant to use intellectual property of the franchisor, control by the franchisor, and a fee element. From the above definition, one can easily spot the IP and control elements (“entrepreneurial image”, “know-how”, “subject to his control”). Article 692 provides the fee element, as it states: “A franchiser is obliged to adequately compensate the franchisee for new experience gained, in accordance with article 697, in the running of the franchise.”

III. Mandatory Pre-sale Disclosure

(to be continued…)

China Anti-Monopoly Law Research Paper

If you have not read Professor ELEANOR M. FOX 's resent paper on China's Anti-Monopoly Law, I highly recommend you read it.

Her paper focuses on administrative monopoly in China, and she puts the topic in the context of how the U.S., Europe, and the WTO dealt with it. Truly illuminating. Without further compromising her superb scholarship, I'd direct you to read the full article.

An Anti-Monopoly Law for China – Scaling the Walls of Protectionist Government Restraints

Wahaha v. Danone: My Arbitration is Better Than Yours (II)

Remember that Danone joined Wahaha’s chief Zong Qinghou personally as a defendant in the Stockholm arbitration (in May 2007)?

Remember that Wahaha filed for arbitration in Hangzhou Arbitration Commission in June 2007?

Have you been wandering how exactly Zong Qinghou can file a parallel arbitration in China while the original joint venture contract between Wahaha and Danone designated Stockholm as the venue for mandatory arbitration?

Apparently, Zong Qinghou, through the Chinese media, is shedding some light on his lawyer’s strategies behind this legal maneuver. His legal team points out a possibly lethal defense to Danone’s Stockholm arbitration against Zong personally.

As most American lawyers know, the first line of defense is through procedural challenge: jurisdiction or venue. And that is exactly what Zong’s lawyers are doing. They claim that the alleged breach of non-compete and non-disclosure agreements by Mr. Zong falls within the purview of the Chinese labor law, not commercial law since Mr. Zong was in a employment relationship with the Wahaha-Donone joint venture.

They further claim that the Chinese Labor law controls when labor disputes between parties within the boundaries of the P.R.China. See Article 2:

This Law applies to all enterprises and individual economic organizations (hereinafter referred to as employing units) within the boundary of the People's Republic of China and laborers who form a labor relationship therewith.

Upon establishing the proper law to be applied in the dispute between Danone and Zong personally, Zong’s lawyers employed their sharp weapon—arbitration arising under a labor dispute should be inside China pursuant to Article 79:

Where a labor dispute takes place, the parties involved may apply to the labor dispute mediation committee of their unit for mediation; if the mediation fails and one of the parties requests for arbitration, that party may apply to the labor dispute arbitration committee for arbitration. Either party may also directly apply to the labor dispute arbitration committee for arbitration. If one of the parties is not satisfied with the adjudication of arbitration, the party may bring the case to a people's court.

How about that?! Stockholm arbitration suddenly sounds irrelevant with respect to claims against Zong personally.

So what is Danone’s response to that? They countered, according to the report (Chinese only), that the non-compete and non-disclosure agreements were supported by nifty consideration and they should be enforceable. (note: this really makes no sense. Maybe the reporter did not understand Danone’s argument. Let’s assume that Danone did not respond.)

What are its possible responses?
--get around the employment relationship argument
--argue that Zong’s role in the joint venture was multi-faceted and being an employee was a minor part (weak)
--argue that even if the labor law applies, the parties’ original intent was to arbitrate all disputes in Stockholm

Anything else, folks?

Giddy up Partner: One More Way to Strike Gold in China

Soon, foreign investors would be able to invest in the form of partnership in China.

Currently, an investor can form a joint venture company (equity or cooperative), wholly foreign owned company, or representative office. With the impending promulgation of the 《外商投资合伙企业管理办法》(Foreign Investment Partnership Measures), a foreigner, either natural person or entity, can form a investment partnership with a local Chinese partner (Draft of the law in Chinese, here).

Chine Economic Review put out a nice article on some of the details of the law. It states:

The draft law reduces initial investment capital in comparison with forming a Joint venture or wholly foreign-owned Co.;

The draft law applies to “general partnerships and limited partnerships”;

Foreign-invested partnership has unlimited liability for partners;

Tax wise, foreign-invested partnership is a pass-through entity, where the partnership is not taxed, but the partners are taxed individually in accordance with individual tax law;

To invest in sectors inaccessible to a wholly-foreign owned Co., a foreign investor need to partner up with at least one Chinese party who has more than 50% in stake;

Foreign partners can contribute IP, cash, or reap property rights;

In terms of currency repatriation, no funds can leave China before the liquidation of the partnership (does this make sense?);

Distribution of profits and losses can be agreed upon in the partnership agreement as long as such distribution is reasonable.

In terms of the significance of this new law, the article wraps up by saying:

The creation of a new category of foreign investment in China is not an everyday occurrence. While certain restrictions that apply to foreign investors do not apply to domestic Chinese investors, draft rules such as the FIPL signal a significant change in China’s attitude towards business.

I agree that this law reflects a big step towards opening up more to foreign investors, but to those who want to partner up with a local entity or person (required), you probably want to stay clear of the sectors where foreign partners can only hold a minor stake. Without control, you are subject to the mercy of your Chinese partner(s), which can be a very bumpy ride to riches.

Full article here.

Will the New Chinese Food & Drug Resolution Be Enforced Resolutely?

If there is one vivid way to describe the crisis faced by the “made-in-China” label, it has to be the ancient Chinese idiom “四面楚歌”, meaning besieged on all sides and surrounded by “enemy” battle cry.

Against the backdrop of intense domestic and international pressure, on July 26, 2007, Premier Wen Jiabao signed a new executive order, titled Special Rules on the Supervision of Food and Drug Regulations (“Special Rules”) (in Chinese only).

To a cynical China watcher, this law represents another manifestation of the all-too-familiar syndrome in Chinese authority’s response to problems—when existing laws and regulations are not enforced against certain problems, more new laws and regulations are thrown at problems resulting from a lack of such enforcement.

If you are do think so, I’d argue that this seemingly familiar pattern was woven with a different fabric. And let me explain why.

Textually speaking, the Special Rules packs some potent new measures unseen in a host of existing laws, regulations, measures, rules, circulars, and opinions (almost impossible to calculate the total number and no wander enforcement has been…), to wit:

a. calls for coordinated actions amongst ministries of agriculture, public health, quality inspection, commerce, industry and commerce, and medical quality control. Each has the power to crack down food and drug quality violations in accordance with its designated authority;

b. specifies the administrative authorities and power of the above-mentioned ministries/departments in connection with executing quality regulations;

c. any person or entity has the right to report quality violations;

d. establishes food quality violation recording system to track repeat offenders;

e. increases administrative penalties for violations (where amount in question exceeds 10,000 yuan, the violator will be fined 10 to 20 times of the amount in controversy.)

f. requires distributors/sellers to establish mandatory quality inspection system to record purchase and sale information relative to products distributed or sold;

g. requires producers to recall problematic products;
h. ties food quality regulation results with evaluation of county-level officials;

i. specifies incentives and penalties for importing high or low quality products.

In a political sense, the Special Rules pronounce a loud and clear message—an admission that the existing regulatory scheme is too fraught with overlapping responsibility among ministries to be effective, too ambiguous to enforce, and too toothless to have a bite. Each ministry has a portion of authority in food and drug quality control, and authorities have been dispersed among six ministries. Down to the provincial or county level, the sharing and overlapping of authorities severely hinders effective enforcement of existing rules because no one has clear understanding of what they can do and no one wants to take responsibility. To a large extent, the quality woes of China can be blamed on this ineffective distribution of power and authority. The problem is compounded with relatively insignificant consequences for quality violations.

Special Rules clearly states that ministries/departments must act in concert, and they all have identical authorities in their execution of the Special Rules. Of course, the sharing of enforcement power problem is still not eliminated, but the newly created Food & Drug Special Group under the State Council and the specification of enforcement authorities are two mitigating factors.

To put things in a historical context, China is at a very critical stage of development where sharp social conflict exist between and among segments of the society. Harmony cannot be cultivated when people cannot even trust what goes into their stomach. As a Chinese proverb puts it nicely, food is of first priority ("民以食为天") (literally means people regard food as important as the sky). Food quality concern is not just an international trade problem; this is one that affects the very fiber of the Chinese society, and the stability of the country as a whole, for which the CCP has sworn to maintain. Therefore, I believe (and hope) that the government has the critical impetus to enforce the Special Rules.

Examined in a purely economic sense, export will in the near future continue to be a major engine for the growth and development for China. When the world’s faith in “made in China” is shaken, the consequences are as clear as the Tibetan blue sky. The United States already issued a ban on certain Chinese seafood imports, which is a billion dollar industry. Without drastic measures, the image of Chinese products could spiral further down, thus jeopardizing China’s economic bottom line—export. China has no other option other than enforcing quality control laws, now.

Historical records of the idiom—“besieged on all sides” account an impossible and hopeless situation for General Xiang Yu. His beloved wife committed suicide amid intense pressure. Most of his brave soldiers suffered low morale due to enemy’s siege. Seeing a complete loss of support, General Xiang Yu killed himself by the Wu River. What distinguishes the current Chinese government from General Xiang Yu is that the situation is not impossible and hopeless. EU’s chief consumer protection, Meglena Kuneva, went to China last week for joint efforts to solve problems; likewise, the American food and drug safety team is in China with the purpose—to develop an agreement on food and drug safety in cross-border trade.


Short of a complete loss of hope and support home and abroad, the current government is no General Xiang Yu. However, continued hope and support depend on China itself. Do you think the Chinese leaders know that?

Where Art Thou, Chinese Anti-trust Law?

Ok, I know that is a rhetorical question. Here, I blogged about the legislative progress in China’s Anti-Monopoly Law. But the recent chain of events in China only highlights the urgent need for the promulgation of a comprehensive antitrust law in China.

Collusions in price fixing in beef noodles and milk products caught people’s attention and caused quiet a few controversies.

Now, instant Raman noodles are the most recent consumer product that fell prey to, as I suspect, price fixing by major producers in China. Leading producers like Master Kang and President have lifted prices of their noodles by about 20%. Others are following the lead. They blamed the price hike on rising food material costs.

Behind the façade of inflation, in the form of food price increases, is a more culpable factor—horizontal price fixing. And this got me plenty concerned for very personal reasons.

1. Raman noodles are the staple food for college students. When I was getting my undergraduate degree in China, I lived on that stuff of various flavors: spicy beef, fresh seafood, comforting chicken…Poor and cheap students cannot afford to buy noodles that cost more than 1.5 yuan. I am talking about empathy here.

2. Raman noodles are a source for many small business owners. I sold Raman noodles in my dorm to make money, and many others too. For a cent on the dollar, we made a little cash enough for occasional movies and date nights. If the prices of all brands rose for more than 20%, fewer people could afford to buy a package to stave off late-night hunger. That would potentially kill the dormitory grocers' opportunity for entertainment and romance. Serious consequences!!

So, what is horizontal price fixing? Under the U.S. federal law, it is defined as:

Horizontal price fixing is any arrangement among competitors that interferes with the setting of price by open market forces. These price fixing claims arise from competitors’ concerted action to charge pre-set minimum or maximum prices for their goods or services. Horizontal price fixing can violate Sections 1 and 3 of the Sherman Act, which proscribe concerted action in restraint of trade, as well as Section 5 of the Federal Trade Commission Act, which prohibits unfair methods of competition in or affecting commerce, and Section 2 of the Sherman Act, which prohibits conspiracies or combinations to monopolize.

To prove an antitrust claim, the plaintiff must show evidence of agreement between or among manufacturers. And uniform price increases could be one result of such an agreement in restraint of trade.

China Anti-trust Law, you can help this situation (at least cause a serious investigation into the noodle monsters’ pricing hikes). Would you come out soon?

Until then, eat more rice.