12 Oct 2016
Rules and Regulations on Commercial Franchising
On 6 February 2007, the State Council promulgated the Regulation on the Administration of Commercial Franchises for implementation on 1 May. In a bid to ensure the full implementation of the Regulation, the Ministry of Commerce issued the Administrative Measures for the Record Filing of Commercial Franchises and the Measures for the Administration of Information Disclosure of Commercial Franchises on 1 May 2007. Amendments were made to these two measures afterwards and the revised Administrative Measures for the Record Filing of Commercial Franchises and Measures for the Administration of Information Disclosure of Commercial Franchises were implemented on 1 February 2012 and 1 April 2012, respectively.
Franchiser Access System
Under mainland rules and regulations, commercial franchising refers to “a form of business operation whereby an enterprise possessing operation resources such as registered trademark, corporate logo, patent, patented technology etc (the franchiser) grants permission to another operator (the franchisee) to use the operation resources it possesses by means of a contract, under which the franchisee operates the business according to the standard operation model specified in the contract and pays the franchiser a franchise fee”.
According to the existing rules and regulations:
- A franchiser must be an enterprise, i.e. a profit-oriented operation unit with independent accounting system. It may be a sole proprietorship, a partnership, a limited company or a foreign-invested enterprise, but Hong Kong companies may not engage in franchise operation in the form of individually-owned business;
- To engage in franchise operation, the franchiser must have a mature operation model and be able to provide the franchisee with continuous operation guidance, technical support, business training and other related services;
- To engage in franchise operation, the franchiser must have at least two direct sales stores that have been operating for more than a year.
Franchiser Record Filing System
Under existing rules, to undertake franchise operation, it is not necessary to apply for a separate licence. However, the franchiser has to file a record with the commerce department within 15 days upon signing the first franchise contract, and must thereafter report to the government every year on details regarding the signing of contracts within the year.
Filing Authorities and Procedures
A franchiser undertaking commercial franchising in a province, autonomous region or municipality directly under the central government should file a record with the local commerce department of the people’s government. For franchise operation spanning across provinces, autonomous regions and municipalities directly under the central government, a record should be filed with the commerce department under the State Council.
A company engaging in commercial franchise operation in a province, autonomous region or municipality directly under the central government should submit relevant supporting materials to the local provincial/municipal record filing authorities in person or by mail in order to obtain a login ID and a password. After obtaining the login ID and password, the company should file a record at the Ministry of Commerce’s commercial franchise webpage.
Materials to be submitted for record filing
- Basic information about the commercial franchise operation.
- The locations of all franchisee stores in China.
- The franchiser’s marketing plan.
- Business license of the legal entity or any other entity qualification certificate.
- Registration certificates for the trademarks, patents and other operation resources related to the franchise operation.
- Proof documents as required by the provisions of Paragraph 2, Article 7 of the Regulation on the Administration of Commercial Franchises.
For franchisers who have been conducting franchise activities before 1 May 2007, the provision of the preceding paragraph shall not apply when materials for the filing of commercial franchise are submitted.
- The first franchise agreement concluded between the franchiser and a franchisee in China.
- A sample franchise contract.
- Table of contents of the franchise operation manual.
- Where any prior approval to sell the franchised product or service is required by any national law or regulation, the franchiser must submit the approval document issued by the relevant authority. In case of foreign-invested enterprises, the Certificate of Approval on Establishment of Foreign-Invested Enterprises must be submitted and the approved business scope specified therein must include “engaging in business activities in the form of franchise”.
- Franchiser’s letter of undertaking signed and stamped by the legal representative.
- Other documents deemed necessary by the record-keeping authority.
Franchiser Information Disclosure System
According to the Measures for the Administration of Information Disclosure of Commercial Franchises, the franchiser should, at least 30 days prior to the conclusion of the franchise contract, provide the following information to the franchisee:
- Basic information on the franchiser and the franchising activities.
- Basic information on the operation resources held by the franchiser.
- Basic information on the franchising expenses.
- Information on the prices and conditions of the products, services and equipment to be provided to the franchisee.
- Information on the on-going services to be provided to the franchisee.
- Modes and contents of the guidance to and supervision over the franchisee’s business activities.
- Information on the investment budget of franchising outlets.
- Information on the franchisees within the territory of China.
- The abstract of the financial and accounting statements and that of the auditor’s reports of the franchiser in the past two years audited by accounting or audit firms.
- Information on the franchise-related litigations and arbitrations involving the franchiser in the past five years, covering the causes of action, litigation (or arbitration) claims, jurisdiction and outcomes.
- Records of the major illegal business operations committed by the franchiser and his legal representative.
- The text of the franchise contract.
Before disclosing information to the franchiser, the franchisee has the right to ask the franchiser to sign a confidentiality agreement.