Franchise Registration for International Franchisors in China

--- Registration Process & Insight into Potential Problems

By Dr. Michael Liu, Dr. jur. (Münster), LL.M. (Münster), M. A. in English, Attorney-at-Law, Partner & BBAC Vice President

I. Background Introduction

Franchising, the fast-spreading business model originating from the USA, which has become popular in the USA, Japan and EU, has also established and gained its solid footing in China. Until May 2007, there have been 2,600 franchising systems in China, covering more than 60 branches of industry, and the total franchise outlets amount to 200,000, thus China has become the country with the richest franchising systems in the world (Linxiao, Commercial & Legal Solutions to Franchise Operations/Application Guidance in Administrative Regulations on Commercial Franchise Operations, hereinafter called “Franchise Application Guidance”, P. 6). Following the mass presence of franchise operations in China, the Chinese government has been making efforts in regulating and directing commercial franchising activities in the direction of healthy development under the macro-market economy, whereby China has combined the successful regulating practices of franchising management in western countries with the on-going franchising reality in China, having thus created the newest and also one of the most advanced franchising regulation schemes in the world: from the earliest franchising regulation Administrative Methods of Commercial Franchising Operations (Trial) by the former Ministry of Domestic Trade in 1997, the later Administrative Methods of Commercial Franchising Operations in 2004, to the latest Administrative Regulations on Commercial Franchise Operations in 2007 plus the Administrative Methods of Record Registration of Commercial Franchising Operations in 2007 (hereinafter called “Administrative Methods of Franchise Registration”), which is based upon the Administrative Regulations on Commercial Franchise Operations in 2007 (hereinafter called “Franchise Administrative Regulations”). Through the said Franchise Administrative Regulations, the legal frameworks of the franchisor’s information disclosure system, the franchise registration system and the system of limited public announcement have been established (see Linxiao, Franchise Application Guidance, P. 63) to regulate the franchising activities in China. 

II. Legal Basis & Aim of Compulsory Franchise Registration

The franchise registration in China, as can clearly be observed from the wording of the legal text, is a compulsory, namely, franchisors are legally required to fulfill the obligation of franchise registration. However, the franchise registration itself should not be taken as an administrative permission to conduct commercial franchising activities under the market economy in China, for, based on the freedom of will under market economy, these commercial franchising activities belong to the civil rights of individual market participants, and the establishment and alteration of these activities by them should not be too much intervened from outside, including administrative intervention of the government (also see Linxiao, Franchise Application Guidance, P. 63). Therefore, the system of franchise registration in China is a legal scheme established according to the notion that on one hand the commercial franchising activities should be developed as freely as possible under the market economy mostly by franchisors and franchisees plus to some extent the mass consumers in general, in other words, the governmental intervention therein should be as little as possible, on the other hand, the legitimate interests of the weak market participants such as franchisees should not be harmed by the strong position of the franchisors. To put it simply, the system of franchise registration is to keep the balance of interests between franchisors and franchisees, and direct the commercial franchising activities to the direction of healthy development under the market economy.

Furthermore, the specific aim in establishing and implementing the system of franchise registration in China is to strengthen the administration of activities of commercial franchising operations, and regulate the franchising market order (Art. 1 of Administrative Methods of Franchise Registration), making it easier for competent governmental organization to be informed of the relevant franchisors’ information in a timely manner and take proper regulating and/or supervising measures for franchising activities, meanwhile facilitating potential investors/franchisees in knowing about relevant franchisors and making proper investment decisions, so that eventually a social supervisory scheme for franchisors can be established (see also Linxiao, Franchise Application Guidance, P. 63) for the sake of achieving a good and smooth development of commercial franchising operations in China.

The specific legal rules relating to the franchise registration are: Artt. 7 II, 8, 9, 10, 19, 25, 33 of Franchise Administrative Regulations. To be exact, Art. 7 II states one of the preconditions for franchising activities: two directly operated outlets plus more than one year of operation time, for which the proving documents are supposed to be provided in the process of franchise registration; Art. 8 clarifies the exact requirements of franchise registration to be fulfilled by franchisors: when it should be done, to which competent governmental organization it should be done, and what documents should be submitted therefor; Artt. 9, 10 further state the obligations of the competent governmental organization in franchise registration; Art. 19 stipulates the franchisors’ obligation in keeping the competent governmental organization informed of the situation with respect to the conclusion of franchise agreement; Art. 25 specifies the consequences of failure of franchise registration according to the aforesaid legal rules; and Art. 33 is an exception regulation with respect to franchise registration for franchising activities before the Franchise Administrative Regulations coming into effect.

The detailed implementation rules for the said Artt. 7 II, 8, 9, 10, 19, 25, 33 of Franchise Administrative Regulations with respect to franchise registration are to be found in the Administrative Methods of Franchise Registration. Both Franchise Administrative Regulations and Administrative Methods of Franchise Registration have come into force since May 1, 2007 in China.

III. Process of Franchise Registration

Though the franchise registration itself is no high-tech, a rather lengthy process is involved therein that requires the constant and meticulous attention of the person handling the franchise registration, in particular it is the case with international franchisors, as the formalities therefor are more complicated, whereby a better understanding of the relevant economic system in a foreign country as well as the successful experience in franchise registration are necessary to ensure the smooth fulfillment of the franchise registration. International franchisors are highly encouraged to retain a qualified agent who possesses not only the relevant educational and professional qualifications but also the successful experience therein to take care of the specific fulfillment of it, if they will not experience a tedious, discouraging franchise registration process. In this aspect, BRIGHT & RIGHT enjoys rich successful experience in representing international franchisors from EU and the USA in the actual implementation of the franchise registration in the Ministry of Commerce of the People’s Republic of China.

As said, the detailed implementation rules for franchise registration are to be found in the Administrative Methods of Franchise Registration. The answers to the following questions are to further illustrate the complete process of franchise registration.

1. Who should do the franchise registration?

As explained before, the franchise registration is compulsory. Then, the first most important question to be raised is: who has the obligation to fulfill this franchise registration? Franchisors alone or franchisees alone, or both franchisors and franchisees, or only domestic franchisors or rather international franchisors?

The question is about the application scope of this Administrative Methods of Franchise Registration and the Franchise Administrative Regulations. The Administrative Methods of Franchise Registration and the Franchise Administrative Regulations apply to all the commercial franchising activities within the territory of the People’s Republic of China (Art. 2 of Administrative Methods of Franchise Registration and Art. 2 of Franchise Administrative Regulations), hence, the application of these legal rules is restricted to the area of Mainland China, excluding Hong Kong, Macau and Taiwan where different legal systems respectively govern. That is to say, anyone who conducts commercial franchising activities in Mainland China is supposed to be governed by these legal rules, including the international franchisors, as long as they conduct the same activities within Mainland China (Art. 17 of Administrative Methods of Franchise Registration). Consequently, it is the franchisors, including both the international and the domestic franchisors conducting commercial franchising operations in Mainland China, who are obligated to fulfill the franchise registration (Art. 8 of Franchise Administrative Regulations and Artt. 3, 17 of Administrative Methods of Franchise Registration). 

2. Where should the franchise registration be done?

The competent governmental organization responsible for processing the franchise registration is the governmental organization in charge of commerce, which is further divided into two levels, depending upon the specific areas of franchising activities: for those franchising activities restricted only within the area of one specific province, autonomous region or municipality directly under the Central Government, the franchise registration should be done in the governmental organization in charge of commerce in that province, autonomous region or municipality directly under the Central Government; for those franchising activities that go beyond the area of one specific province, autonomous region or municipality directly under the Central Government, it should be done in the Ministry of Commerce of the People’s Republic of China (Art. 8 of Franchise Administrative Regulations and Art. 3 of Administrative Methods of Franchise Registration).  

3. What documents are required for franchise registration?

In general, the following documents are required for the franchise registration:

a. Basic information of commercial franchise operations;

b. Information on the outlet locations of all the franchisees within the territory of the People’s Republic of China;

c. Franchisor’s market development plan;

d. Copy of business license of the enterprise legal person or copy of proof of the other legal entity;

e. Copy of registration certificates for the rights in trademarks and patents and for other management resources that are related to the activities of franchising operations;

f. Proving documentations issued by the governmental organization in charge of commerce in a city that has districts within it upon the existence of two directly operated outlets that have been managed for more than one year, or documentations including their translations certifying the business operation of the directly operated outlet, which are to be locally notarized and then legalized by the local embassy or consulate of the People’s Republic of China, if the outlet is located in a foreign country; however, the aforesaid proving documentations upon two directly operated outlets should be exempted, and instead only the first franchise agreement between the franchisor and the franchisee from within the People’s Republic of China should be submitted if the franchisor has already started his franchising activities before May 1, 2007;

g. Sample franchise agreement;

h. Index of operation manual for franchising operations, whereby the page number of each section und subsection and the total number of pages should be indicated, and the estimated number of printing pages should be indicated if the operation manual is available within the intranet of franchising system;

i. Approving documentation from relevant governmental organization if the relevant administrative permit for the product and/or service concerned is required according to the relevant laws and regulations of the state;

j. Franchisor’s letter of undertaking signed and stamped by the legal representative (Art. 8 of Franchise Administrative Regulations and Art. 5 of Administrative Methods of Franchise Registration).

4. When should the franchise registration be done?

Franchisors are supposed to carry on the franchise registration within 15 days following the date at which the first franchise agreement is signed, (Art. 8 I S. 1 of Franchise Administrative Regulations and Art. 6 S. 1 of Administrative Methods of Franchise Registration). Exception to the aforesaid is that the franchise registration should be fulfilled within one year starting from May 1, 2007 when the activities of franchising operations have started before May 1, 2007 (Art. 33 I of Franchise Administrative Regulations and Art. 6 S. 2 of Administrative Methods of Franchise Registration).

The franchisors are further required to fulfill the following two obligations of updating the record of their franchise registration: the franchisors are obligated to carry on the application for change in the original governmental organization for franchise registration within 30 days following the date at which the information for franchise registration has been changed after the franchise registration is finished (Art. 7 of Administrative Methods of Franchise Registration); and the franchisors are annually obligated to report the information in the previous year with respect to the conclusion, cancellation, continuance or alteration of franchise agreement to the governmental organization for franchise registration before March 31 of the current year (Art. 8 of Administrative Methods of Franchise Registration).

5. What are the guiding principles for franchisors’ fulfilling the franchise registration?

The guiding principles for franchisors’ fulfillment of franchise registration are: the franchisors are supposed to earnestly fill out all the items required in the franchise registration, ensuring that the information filled therein is true, accurate and complete (Art. 9 of Administrative Methods of Franchise Registration).

6. What are the obligations of the competent governmental organization in the franchise registration process?

The governmental organization for franchise registration should make the franchise registration for franchisors within 10 days after the receipt of the relevant documentations consistent with the legal requirements and make the relevant public announcement on the website of the Ministry of Commerce (Art. 10 I of Administrative Methods of Franchise Registration). When the documentations submitted by franchisors are not complete, the governmental organization for franchise registration can ask the franchisors to submit additional documents and/or materials within 7 days, and when the documentations become complete, the franchise registration will be done by the governmental organization for franchise registration within 10 days (Art. 10 II of Administrative Methods of Franchise Registration).

When processing the franchise registration for franchisors, the governmental organization for franchise registration should completely and accurately record and keep the documentations of franchise registration for franchisors, and is legally required to preserve the franchisors’ business confidences (Art. 13 of Administrative Methods of Franchise Registration).

7. What kind of data can be found on the website of the Ministry of Commerce for franchise registration?

Following the principles of preserving franchisors’ business confidences, the public has access only to the following information of the franchisors on the website of the Ministry of Commerce:

a. Franchisors’ names, the management resources for franchising operations such as registered trademarks, enterprise logos, patents, know-how and the like;

b. Time of franchisors’ franchise registration;

c. Legal address, contact information, and name of the legal representative of the franchisors;

d. Business addresses of the franchisees within the territory of the People’s Republic of China (Art. 14 of Administrative Methods of Franchise Registration).

8. What are the consequences of failing to fulfill the franchise registration?

The failure in franchise registration should have no material effect upon the validity of the franchise agreement, namely, the franchise registration is not a precondition for entering into a franchise agreement (see also Linxiao, Franchise Application Guidance, P. 73). The legal consequences of such a failure are the administrative punishments such as the administrative fines ranging from 10,000 Yuan RMB to 100,000 Yuan RMB as well as the public announcements therefor (Art. 25 of Franchise Administrative Regulations and Artt. 15, 16 of Administrative Methods of Franchise Registration).

IV. Insight into Potential Problems in Franchise Registration for International Franchisors

When international franchisors planning to fulfill the obligation of franchise registration to start franchising operations in China, they face more potential problems than those domestic franchisors. The experience tells us that they might have difficulties in the following areas:

a. Misunderstanding by international franchisors of the obligation of franchise registration

International franchisors, being informed of the franchise registration, might, as first reaction due to improper counseling at the beginning, have the misunderstanding that Chinese government intended to create extra trouble, make franchising operations more difficult for them. With a proper counseling at the outset, such a misunderstanding can be easily eliminated, realizing that the franchise registration is an obligation for all franchisors from home and abroad, and the purpose of the franchise registration will also do good to franchisors themselves.

b. Complicated formalities involving foreign elements

Compared with the franchise registration for domestic franchisors, the franchise registration for international franchisors is relatively complicated due to the relevant documentations originating from foreign countries, for such documentations from foreign countries, according to the civil procedural regulations, should be first notarized in relevant foreign countries and then legalized by Chinese Embassies or consulates there. The process of notarization and legalization of each relevant document itself will take long, a few weeks should be normal. Besides, due to the differences in the legal systems between China and the foreign countries concerned, it is also important for international franchisors or their agents to be aware that even the same legal concept like notarization in Germany or in the USA means different legal process to be involved from that in China.    

c. Difficulties in documentations upon business operations of directly operated outlet

Though the franchise registration itself should not be hard, as it is only the re-presentation of the basic information of international franchisors to the governmental organization for franchise registration. However, the difficulties lie in the right understanding of different legal and economic management systems in China and other foreign countries. The most typical example of this sort is the proof upon the business operations of franchisors’ two directly operated outlets in foreign countries. If these two outlets were in China, the documentations thereupon would be easy, namely, relevant documents produced by local Administration Bureau of Industry and Commerce about the existence and business operation of such an outlets like the business license or other registration documents, and the organization for franchise registration will have no difficulty in accepting them, as these are the best reliable proof available in China. And if the legal and economic realities in foreign countries were the same or similar to those in China, things would be easier. Yet, the realities in foreign countries are: there is no such administration bureau of industry and commerce in foreign countries, and the equivalent document for operation of these outlets like the one from administration bureau of industry and commerce is hardly to find. In such a situation, it is, on the one hand, confusing to the international franchisors as to what exact documents to be required therefor, and it is, on the other hand, also impossible for Chinese legal rules to specify what exactly to be prepared in respective foreign countries, for the legal realities therein are different, and also even within one foreign country the legal system of one state differs from that other state, therefore, a consequent general statement of legal requirements is the only feasible solution, leaving the concrete actualities with relevant international franchisors to the officials in charge of franchise registration. The basic guiding lines in preparing these sorts of documents are that as long as they are the relevant original documents from relevant governmental organizations in that specific foreign country, being able to prove the existence and business operation of such an outlet that has been directly managed by relevant international franchisor, they should serve the purpose. Professionals like us engaged in the franchise registration for international franchisors usually know roughly what exact documents will be accepted by the officials therefor in the Ministry of Commerce.

V. Conclusion

With the implementation of Franchise Administrative Regulations in China, a new era of franchise regulations in China has started. The timely and professional fulfillment of the franchise registration by international franchisors will help them have a good legitimate start of their franchising operations in China. A good beginning is half done, and this professional implementation of franchise registration will be a worthwhile good beginning for international franchisors to enjoy their forthcoming great opportunities in China.