China’s Ministry of Commerce has issued revised laws on international franchising. The new Commercial Franchising Administrative Measures permit some things that were previously not allowed but also impose new restrictions, especially for first-time entrants into the Chinese market.
Foreign franchisors not already active in China will be required to make substantial investments of cash and other resources for a period of at least one year before they are entitled to franchising fees from China.
Foreign franchisors are subject to strict information disclosure requirements for the benefit of potential franchisees, although timely disclosure is also an obligation of the franchisees. Penalties for violation of the new Measures include a fine of up to RMB 30,000 and, in serious cases, revocation of the violator’s business license, if the necessary qualifications are not complied with, or there is inadequate disclosure of information to franchisees.
Under the previous law, foreign franchisors were not able to enter into explicit franchising operations. The new Measures do not expressly repeat the prohibition against direct franchising from offshore, but implicitly confirm this.
The new Measures attempt to standardize the regulatory framework for franchising operations, protect the lawful rights and interests of the franchisors and the franchisees, and promote the healthy development of franchising operations in China. However, the Measures only go part of the way in clarifying the problems relating to foreign franchising.
The Ministry of Commerce may, however, soften some of the most onerous provisions by implementing rules or formal or informal exemptions.
Lawyers in Dorsey & Whitney’s Hong Kong and Shanghai offices can help franchisors from around the globe deal with the new Chinese franchising laws.