March 22, 2012

Administrative Measures on the Filing of Commercial Franchises

Issuing Body: Ministry of Commerce
Issuing Date: December 12, 2011
Effective Date: February 1, 2012

In an effort to improve regulation of the commercial franchise market in China, the Ministry of Commerce (MOFCOM) has issued an amended version of the Administrative Measures on the Filing of Commercial Franchises (New Franchise Filing Measures). The new rules, which took effect on February 1, 2012, replace filing rules that had been in effect since May 1, 2007. The New Franchise Filing Measures strengthen the administration of commercial franchise operations in China by making adjustments in filing requirements. While the changes are relatively minor, they are nevertheless important to those who are already involved or plan to become involved in franchising in China.

As stipulated in the New Franchise Filing Measures, all franchisors that conduct commercial franchise activities within the People's Republic of China, including those established both inside and outside China, must file with MOFCOM or its provincial-level agencies. Where a franchisor confines its commercial franchising activity to a single province, the franchisor shall file with the corresponding provincial-level MOFCOM agency. A franchisor that engages in commercial franchise activities across provinces must file directly with MOFCOM. All filings must be made through the online management database established by MOFCOM.

Delegation of Authority

One major change brought by the new rules is that the New Franchise Filing Measures allow MOFCOM to delegate authority when the central government agency does not have the resources to review submitted filings in a timely manner. According to the new rule, with filings subject to MOFCOM's jurisdiction, MOFCOM has the discretion to delegate its reviewing power to provincial-level agencies. The agency to which MOFCOM delegates authority must, in turn, complete the review itself, without a further delegation of authority to other individuals or entities. If an agency fails to fulfill its obligations with respect to franchise filing, MOFCOM may handle the review directly.

Changes in Filing Documentation Requirements

The New Franchise Filing Measures also change the filing documentation requirements. Under the new measures, franchisors must submit:

  1. Basic information about the commercial franchise system
  2. The location of all franchisee stores in China
  3. The franchisor's marketing plan
  4. Business license of the legal entity or any other entity qualification certificate
  5. Registration certificates for the trademarks, patents, and other business operational resources relating to the franchise system
  6. Documents showing that the franchisor has a minimum of two directly managed stores and has conducted business operations for more than one year
  7. The first franchise agreement concluded between the franchisor and a franchisee in China
  8. A sample franchise agreement
  9. Table of contents of the franchise operation manual (The number of pages of each chapter and the total number of pages in the manual must be given. Where the manual is provided on an internal website, an estimate of the number of pages in a printout should be given.)
  10. Where any prior approval to sell the franchised product or service is required by any national law or regulation, the franchisor must submit an approval from the relevant authority. "In case of any foreign-invested enterprises," the new rules say, "the Certificate of Approval on Establishment of Foreign-Invested Enterprises must be submitted and the approved business scope must include ‘engagement in franchise activities.'"
  11. A letter of undertaking, signed by the legal representative and stamped with the franchisor's corporate seal, attesting that the franchisor has satisfied all legal conditions necessary to conduct franchising activity in China
  12. Other documents deemed necessary by the reviewing authority

Items 4, 5, 7, 10, and 12 in the above list are new additions introduced by the New Franchise Filing Measures. The amendments in the documentation requirements reflect the stricter standards and expanded authority for MOFCOM or its agencies when filings are reviewed.

Changes in Ongoing Report Requirements

The New Franchise Filing Measures specify that changes in the following items need to be reported with MOFCOM or its agencies within 30 days of the occurrence of such changes:

  1. All information about the franchisor recorded with the local administration of industry and commerce (AIC), including, but not limited to, the franchisor's registered address, company name, legal representative, and registered capital
  2. Business operational resources such as trademarks, trade names, logos, patents, technology, and other resources owned by the franchisor
  3. The opening of each new store in China

By providing detailed guidance about the changes franchisors are obligated to report to MOFCOM, the New Franchise Filing Measures limit the reporting obligations of franchisors, who previously were expected to report even minor changes to all the documents listed in the preceding section.

Conclusion

The New Franchise Filing Measures strengthen government scrutiny of franchise filings while to some extent easing the filing burdens on franchisors. With the new rules now in effect, however, it seems likely that franchise filings will be more regulated.

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