The Franchise Memorandum

China’s Ministry of Commerce (MOFCOM) has adopted new Administrative Measures that clarify issues in question since MOFCOM published its original Administrative Measures in 2007. The new Measures became effective April 1, 2012. Our colleague Chen Biaochong, of the Jun He law firm in Beijing, has provided a summary of the new Measures, which have yet to be published in English. The principal changes are:

• Article 5.4 of the 2007 Administrative Measures requires franchisors to disclose information about an affiliate of the franchisor if the affiliate supplies products or services to franchisees. The 2012 amendment clarifies that an individual, as well as a business entity, can be considered an “affiliate” for these purposes.
• The franchisor is not required to make disclosure to the franchisee if the franchise contract is extended on the same conditions. The 2007 Measures did not specify that such an exemption was available.
• Article 9 of the 2007 Administrative Measures states: “Where the franchisor has concealed what should have been disclosed or has disclosed false information, the franchisee may terminate the franchise agreement.” The 2012 revisions limit the misrepresentations or omissions which would allow the agreement to be terminated to those which would make the purposes of the franchise agreement unattainable. This is intended to avoid a right to terminate for unimportant omissions or misrepresentations.
• The 2012 Measures protect a franchisor’s commercial secrets. The franchisee is not allowed to disclose or misuse a commercial secret of the franchisor regardless of whether the franchise contract is executed. The franchisee should keep confidential the commercial secrets of its franchisor after the termination of the franchise contract.
• There are changes regarding the required disclosure information, which mainly include: (i) the bankruptcy information of the franchisor and its affiliates has been shortened to two years from the five years provided in the 2007 Measures; (ii) disclosures about the technology support and business instruction to be provided by franchisors are clarified; (iii) all the lawsuit and arbitration information in the latest five years should be disclosed—the 2007 Measures required disclosures of cases involving RMB 500,000 ($79,216 USD) or more; and (iv) the major illegal business activities are defined as those eligible for a fine of more than RMB 300,000 ($45,530). The 2007 Measures required such disclosures if a possible fine for the illegal business activity ranged from RMB 300,000 to RMB 500,000.
• The punishment to the franchisor for violating the 2012 Measure is more severe.