FRANCHISING IN CHINA

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1 FRANCHISING IN CHINA Asiawide Franchise Consultants - Franchise Business Study Mission Paula Cao DLA Piper UK LLP Beijing Representative Office November 1, Insert date with Firm Tools > Change Presentation 0

2 AGENDA 1 Franchise Legal Regime in China 2 2 Key Requirements for Offering Franchises in China 4 3 Franchise Disclosure Requirements 10 4 Franchise Agreement 14 5 Franchise Filing (Post - Contractual Registration) 17 1 Data Protection in China August 8, 2016 Confidential, for Internal Use Only Insert date with Firm Tools > Change Presentation 1

3 1 Franchise Legal Regime in China

4 Franchise Regulations and Rules There are 3 major franchise regulations: 1)Administrative Regulations on Commercial Franchising (promulgated by the State Council on 6 February 2007 and effective as of 1 May 2007) ("Franchising Regulations"); 2)Administrative Measures for the Record Filing of Commercial Franchises (promulgated by MOCFOM and effective as of 1 February 2012) ("Filing Measures"); and 3)Administrative Measures for Information Disclosure of Commercial Franchises (promulgated by MOFCOM and effective as of 1 April 2012) ("Disclosure Measures"). The Ministry of Commerce ("MOFCOM") and its local counterparts are the government agencies that primarily regulate the offer and sale of franchises. Insert date with Firm Tools > Change Presentation 3

5 2 Key Requirements for Offering Franchises in China

6 Are there requirements that must be met if a franchisor intends to offer franchises in China? Yes, the following requirements must be met by franchisors who plan to offer franchises in China: have the capability of providing continuing services to franchisees, which include operational instructions, technical support and business training, etc.; have a mature business model; have owned and operated two units for at least one year somewhere in the world ("2+1 requirement"); and have at least one registration certificate issued by China for trademark rights, patent rights or other business operation resources related to franchise activities (not a pre-sales requirement but needs to be planned at least 1 year early before officially entering into the China market). Insert date with Firm Tools > Change Presentation 5

7 2+1 Requirement Requirement under the Franchising Regulations: Franchisors must have owned and operated at least two units under the franchise brand for at least one year (exemption for hotel operators). Administrative practice in the past: the two company units be the ones which are either directly owned by the franchisor or by an affiliate-one level up only; administrative practice changed in 2015 and the two units operated by the parent company had been no longer acceptable as a general rule (exemptions were granted to certain franchisors). US Client 2+1 HK Subsidiary franchisor Insert date with Firm Tools > Change Presentation 6

8 2+1 Requirement Current practice: The two units owned by the parent company of the franchisor and other affiliates may satisfy the requirement as a general rule (with a majority equity interest requirement down the chain). Accepted structure Insert date with Firm Tools > Change Presentation 7

9 To be filed structure Insert date with Firm Tools > Change Presentation 8

10 Registration of Business Resources (IP) In addition to the 2+1 requirement, another regulatory requirement which may be a big obstacle for the franchisor to comply with the franchise rules in China is, the franchisor, when it applies for franchise filing with MOFCOM (within 15 days of signing the franchise agreement), must provide at least one registration certificate issued by China for trademark rights, patent rights or other business operation resources related to franchise activities. a Chinese trademark certificate is most acceptable by MOFCOM in practice; recent relaxation (may be subject to change): copyright registration + Notification of Acceptance for New Trademark Application (in Chinese 商标申请受理通知书 ); the franchisor does not have to be the owner of the registered right, it could be a licensee in which case the license agreement is required; a new requirement as of February 2017: the IP right has been obtained at least 1 year prior to the filing (negotiable). Insert date with Firm Tools > Change Presentation 9

11 3 Franchise Disclosure Requirements

12 Pre-contractual Disclosure Requirements The franchisor must disclose the following to its franchisees at least 30 days before the franchisor and franchisee sign the franchise agreement: 1)Basic information concerning the franchisor and its commercial franchise business 2)Basic information concerning the franchisor s business resources 3)Information about franchise fees 4)Information on the prices and conditions of the products, services and equipment provided for the franchisee 5)Franchisor s continuous provision of services to the franchisee 6)Method and content of guidance and supervision on the business operations of franchisees 7)Investment budget for the franchise business Insert date with Firm Tools > Change Presentation 11

13 Pre-contractual Disclosure Requirements 8) Information on the franchise business in China The quantity, geographical location and scope of authorization of existing and expected franchisees; whether there is exclusive authorization for franchisees in a specific geographical region (if yes, provide details); and the operation status of existing franchisees, including actual investment amount, average sales volume, costs, gross and net profit; and the sources of above data. 9) Financial statements: Abstracts of the franchisor s financial and audit statements which have been audited by an accounting or audit firm for the past two years. 10)Litigation and arbitration history 11)Records of unlawful business operation by the franchisor or its legal representative 12)Sample franchise agreement Insert date with Firm Tools > Change Presentation 12

14 How often must the disclosures be updated? Pursuant to the Franchising Regulations and the Disclosure Measures, there is a continuing disclosure requirement imposed on the franchisors. In situations where there are any material changes to the disclosed information, the franchisor must notify the franchisee of such changes in a timely manner. Insert date with Firm Tools > Change Presentation 13

15 4 Franchise Agreement

16 Requirements on Franchise Agreement Franchising Regulations stipulate that franchise agreements contain the following: basic information about the franchisor and franchisee; contents and duration of the franchise; type, amount, and payment method of the franchise fees; specific details and methods for the provision of guidance, technical support, training and other services by the franchisor; quality, standard and measures for the product or service; sales promotion, advertising and publicity about the product or service offered; protection of rights and interests of consumers and the assumption of liability by the franchisor and franchisee; alteration, rescission and termination of the franchise; liability for breach of the franchise agreement; dispute resolution methods; and other matters as stipulated by the franchisor and the franchisee. Insert date with Firm Tools > Change Presentation 15

17 Requirements on Franchise Agreement Cooling - off period Furthermore, pursuant to the Franchising Regulations, the franchise agreement must include a provision for a mandatory cooling - off period during which the franchisee may terminate the franchise agreement without a cause. Term of the agreement Moreover, a franchise contract shall not be less than three years in duration, unless agreed by the franchisee. This requirement does not apply when a franchise agreement is renewed. Insert date with Firm Tools > Change Presentation 16

18 5 Franchise Filing (Post - Contractual Registration)

19 Initial Franchise Filing Within 15 days of signing its first franchise agreement in China, the franchisor should file as a franchisor with MOFCOM or its counterparts. 1)Notarized and legalized documents Certificate of Incorporation ORIGINAL board resolution which appoints the legal representative Passport copy of the legal representative POA The first franchise agreement Notarized and legalized 2+1 letter (IFA letter) Notarized and legalized IP Licensing Agreement (if applicable) 2)Trademark Certificate or copyright registration + Notification of Acceptance for New Trademark Application ( 商标申请受理通知书 ); 3)A template of franchise agreement 4)The index of the franchise operating manual 5)Letter of Undertaking 6)Basic Information Sheet 7)Explanation Letter for Late Filing Insert date with Firm Tools > Change Presentation 18

20 Franchisor Filed in China (by city) Source: mofcom.gov.cn Insert date with Firm Tools > Change Presentation 19

21 Franchisor Filed in China (by industry) Education & Training, 183 Resident Services 344 Intermediary Services, 86 Hospitality, 83 Other Business Service, 477 Retail, 1280 Food & Beverage 1170 Total: 3626 Source: mofcom.gov.cn Insert date with Firm Tools > Change Presentation 20

22 Consequence for Late/Not Filing? By law First an order of rectification and a fine from 10,000 RMB to 50,000 RMB will be imposed; Failure to make the filing according to the MOFCOM order: a fine from 50,000 to 100,000 RMB plus public announcement on the MOFCOM website. In practice A Late Filing Explanatory Letter will Suffice if it is several months late. Insert date with Firm Tools > Change Presentation 21

23 Annual Filing & Modification Filing Annual filing In the first quarter of each year, the franchisor shall file an annual report. Modification filing Franchisors filed with the MOFCOM are required to update its filing with the MOFCOM within 30 days if any of the following changes occurs: Incorporation Information Business Resources (e.g. trademarks, patents, enterprise logos used for China franchise business) Distribution of the franchised units in China (e.g. Addition/deduction of franchised units) Insert date with Firm Tools > Change Presentation 22

24 Summery of the Steps to Offer Franchises in China 1. Review two plus one status 2. Attend to trademark registrations 3. Find the right franchisee and negotiate 4. Provide disclosure document to the franchisee 5. Sign the franchise agreement 6. Franchise filing 7. On-going obligations i) material changes of the disclosed information; ii) annual filing; and iii) update filing Insert date with Firm Tools > Change Presentation 23

25 Key Contacts Tao Xu Partner (US) T F M E tao.xu@dlapiper.com Paula Cao Associate (China) T F F E paula.cao@dlapiper.com Insert date with Firm Tools > Change Presentation 24

26 Thank You! Insert date with Firm Tools > Change Presentation 25

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