China to Further Regulate Commercial Franchise

The Regulation on Administration of Commercial Franchise ("Regulation") was issued by the State Council (Decree No. 485) on February 6, 2007 and will come into force as of May 1, 2007. The Regulation applies to the franchisors that have been engaging in franchising activities before and after the promulgation of the Regulation, including five chapters and thirty four articles.

Franchisors and commercial franchise

According to the Regulation, "franchisors" refer to the enterprise which is in possession of a registered trademark, enterprise logo, patent, know-how and any other business resource. The "Commercial franchise" as mentioned in the regulation means business activities whereby the franchisor allows the franchisee the use of the operational resources through contracts, and the franchisee undertakes business under the unified business format in accordance with the provisions of stipulated in the contracts and pays franchise fees to the franchisor.

The basic requirements for franchising activities

1. Only the franchisors prescribed in the Regulation may carry out franchising activities, no entities or individuals other than enterprises may engage in franchising activities as franchisors;

2. A franchisor engaged in franchising activities shall own a well-developed business format and has the capabilities to continuously provide operational guidance, technical support, business training, and other services to the franchisee;

3. A franchisor engaged in franchising activities shall own at least two directly operated outlets, and shall be in operation for more than one year.

4. Within 15 days after the execution of the initial franchise contract, a franchisor shall file with the commercial administration authority and put on records in accordance with the Regulation. For the franchisors who have been engaging in franchising activities before the promulgation of the Regulation, they shall put on records within one year starting from the promulgation date of this Regulation..

Commercial franchise contract

1. A franchise contract shall be signed by franchisor and franchisee in written form and meets the requirements of the Regulation;

2. The franchisor and the franchisee shall set forth in the franchise contract that the franchisee is entitled to unilaterally terminate the franchise contract within a certain period after the contract is signed;

3. The term of the franchise as stipulated in the franchise contract shall not be less than three years, unless otherwise agreed to by the franchisee.

Information disclosure

The Regulation prescribes that the franchisor shall establish and implement a complete information disclosure system. The franchisor shall provide the franchisee with the information in written form and the text of the franchise contract at least 30 days before the franchise contract is signed.

The information shall be disclosed by the franchisor include the basic information of the franchisor and its legal representative, commercial reputation record, the business resource owned by the franchisor, the capacity of the franchisor to provide service to the franchisee, specific measures in respect of the guidance and supervision over the operational activities of the franchisee, the amount and payment method of the franchise fees and investment budget for the franchised outlets.