China’s New Franchise Regulations Require Disclosure, Registration

The anticipated China franchise regulations—entitled “Commercial Franchise Administration Regulation”—have been released and will become effective on May 1.

The new regulations require franchisors to make presale disclosures, register within 15 days of signing the first franchise agreement, and impose a duty of good faith and fairness on the parties to a franchise agreement.

The language of the disclosure requirement has been significantly changed, according to Toronto franchise attorney Paul Jones. The State Council or the Ministry of Commercial may require information other than the items listed in the regulation.

The rule states that “related” information may not be concealed, that franchisees be promptly informed of significant changes, and that a franchisee may terminate a contract for the franchisor’s concealment of information or provision of false information. Franchisors must estimate whether the franchisee’s business is doing well or not.

The regulations mandate that franchisors register with the local Ministry of Commerce within 15 days of signing the first franchise agreement; provide a copy of the standard franchise agreement, operating manual and marketing plan; and certify that the agreement conforms to the regulations.

Franchisors are required to have a “mature management pattern” sufficient to provide support to franchisees and requires franchisors to have owned two locations for at least one year before offering franchises. The parties to the franchise are obligated to conduct themselves fairly and “in good faith.”

Official text of the regulations appear at the Chinese language web site of the China Chain Store & Franchise Association. An unofficial English translation will appear in an upcoming report of the CCH Business Franchise Guide.