Franchising In China & Elsewhere in Asia

Presented by:

Philip F. Zeidman

DLA Piper US LLP

Laws Applicable to FranchisingAugust 2007

Blue = Disclosure LawGreen = Relationship Law Red = Disclosure & Relationship Laws Black = Other

The AmericasBarbadosBrazilCanada Alberta Ontario Prince Edward Island MexicoUnited States Federal Several StatesVenezuela

EuropeEU

Within EU Belgium Estonia France Lithuania Italy Spain Sweden

Non-EU Albania Belarus Croatia Georgia Moldova Romania Russia Ukraine

Central AsiaKazakhstanKyrgyzstan

AsiaChinaJapanMacauSouth KoreaTaiwanVietnam

The Middle EastSaudi Arabia

South PacificAustraliaIndonesiaMalaysia

Does Not Include:

• Codes of conduct which do not provide for governmental or private enforcement, even if (e.g., South Africa) promulgated under governmental authority.

• Bodies of law (e.g. competition, intellectual property, etc.) which also cover franchising, unless explicitly mentioned.

4854521

Blue = Disclosure LawGreen = Relationship Law Red = Disclosure & Relationship Laws Black = Other

Central AsiaKazakhstanKyrgyzstan

AsiaChinaJapanMacauSouth KoreaTaiwanVietnam

Does Not Include:

• Codes of conduct which do not provide for governmental or private enforcement, even if (e.g., South Africa) promulgated under governmental authority.

• Bodies of law (e.g. competition, intellectual property, etc.) which also cover franchising, unless explicitly mentioned.

South PacificAustraliaIndonesiaMalaysia

Laws in Asia Applicable to Franchising August 2007

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Asia: Relationship Laws Only

• Kazakhstan

• Kyrgyzstan

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• Taiwan

Asia: Disclosure Laws Only

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• Australia• China• Indonesia• Japan

• Macau• Malaysia• South Korea• Vietnam

Asia: Disclosure & Relationship Laws

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• China• Indonesia

• Malaysia• Vietnam

Asia: Disclosure & Registration Laws

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The Development Of The Development Of FranchisingFranchisingIn ChinaIn China

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The Growth of Services

www.franchise.orgSource: China Chain Store & Franchise Association

Number of Franchise Businesses in China (2000-2005)

0

500

1000

1500

2000

2500

2000 2001 2002 2003 2004 2005

0

10

20

30

40

50

60

70

80

Number of Franchises Number of Units per Franchise

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Foreign Franchisors

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Franchise Law In China:Franchise Law In China:How Did It Come About?How Did It Come About?

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• Fraud

• Direct selling

• Fear of social unrest

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• The Franchise Rules (1997)• The Franchise Measures (2005)

The Predecessors of theNew Franchise Regulation

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• Several Agencies involved (MOFCOM, Legislative Affairs Office of the State Council, State Administration of Industry and Commerce)

• Closed and secretive process

The Rule Making Processof the Regulation (2005-2007)

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• The revised “two plus one” rule

• Franchisor’s outlets do not have to be within China

Qualifications

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• The information provided by the franchisor shall be true, accurate and complete; and

• Shall not conceal the relevant information; and

• Shall not provide any false information

Disclosure

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• Name• Trademark• Fees• Prices (products,

services, equipments)• Training• Operations plan

• Investment Budget

• Existing Franchisees

• Financial Reports• Litigations/

Arbitrations• Illegal Operation• Other

Disclosure

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• Provide a more detailed explanation of what is to be disclosed for each of the 12 items

• Other provisions

Implementation Guidelines

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• Cover items which must be covered in the agreement between franchisor and franchisee

• In general, do not describe provision in detail

• The provision that the franchisor bear joint and several liabilities for injuries significant, but not included

Relationship Provisions

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• Franchisor is required to register within 15 days after the execution of its first franchise agreement

• Foreign Franchisors should register with MOFCOM

• Franchisor must update certain information annually

• Government is required to register a franchisor within 10 days after receipt

Registration

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• “Cooling- off period”

• Existing franchisors exempted from “two plus one” requirement

Features Worth Noting

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• Interaction with general contract law

• The status of the franchise measures

• Cross-border Franchising

• Trademark law’s effects on franchise operations in China

Other Related Issues

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• Other laws (anti monopoly, dispute resolution, foreign exchange)

• The discretion of government officials

• The role of the CCFA

Other Related Issues

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Questions For The FutureQuestions For The Future

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• Business And Cultural Questions

• Legal Questions

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Conclusion