Administration of Commercial Franchising Procedures

Article 2: The term commercial franchising used in these Procedures (abbreviated below as Franchising), means a franchisor, by entering into a contract, authorizing a franchisee to use operating resources such as trademark, trade name and operation model that the franchisor has the right to authorize another party to use; and the franchisee, in accordance with the contract, conducting operating activities under a uniform operating system and paying franchise fees to the franchisor.

Article 3: These Procedures apply to the launch and development of Franchising activities within the territory of the People¡¯s Republic of China.

Article 4: A franchisor may, in accordance with a contract, directly grant a franchise right to a franchisee, who may invest to establish franchise outlets and launch and develop its business but must not sub-franchise the right to another party; or the franchisor may grant an exclusive franchise right within a certain region to a franchisee, who may sub-franchise the right to other applicants and may also establish its own franchise outlets within such region.

Article 5: The launch and development of Franchising shall comply with the laws and regulations of the People¡¯s Republic of China; abide by the principles of free will, fairness and good faith; and must not harm the lawful rights and interests of consumers.

A franchisor must not falsely borrow the name of Franchising and illegally engage in direct selling activities.

A franchisor¡¯s engaging in commercial activities by way of Franchising must not lead to market monopoly or hinder fair competition.

Article 6: The Ministry of Commerce carries out supervision and administration of Franchising activities throughout China, and the department in charge of commerce at each level carries out supervision and administration of Franchising activities within its jurisdictional region.

PART TWO: PARTIES TO A FRANCHISE

Article 7: A franchisor shall meet the following conditions:

(1) be a lawfully established enterprise or other economic organization;

(2) own operating resources such as a trademark, trade name and operation model that it has the right to permit others to use;

(3) be capable of providing long-term operational guidance and training services to a franchisee;

(4) within China, have at least two directly operated outlets, or directly operated outlets established by its subsidiaries or its share-control¹ company, that have been operating for a year or more;

(5) for a franchise requiring the franchisor to provide goods supply, the franchisor shall be equipped with a stable supply system that can guarantee the quality of goods, and shall be able to provide related services; and

(6) have a good reputation, with no record of fraud by way of Franchising.

Article 8: A franchisee shall meet the following conditions:

(1) be a lawfully established enterprise or other economic organization ; and

(2) have funds, fixed premises and personnel, etc. commensurate with Franchising.

Article 9: A franchisor enjoys the following rights:

(1) in order to ensure uniformity of the franchise system and consistency of product and service quality, to carry out supervision of the franchisee¡¯s operating activities in accordance with the contract;

(2) against a franchisee that violates provisions of the franchise contract, infringes the franchisor¡¯s lawful rights and interests or destroys the franchise system, to terminate its franchise status in accordance with the contract;

(3) to collect franchise fees and security deposit in accordance with the contract; and

(4) other rights agreed in the contract.

Article 10: A franchisor shall perform the following obligations:

(1) to disclose information in a timely manner in accordance with relevant provisions of these Procedures;

(2) to authorize the franchisee to use the franchise right, and to provide business symbol(s) representing the franchise system, and operation manual(s);

(3) to provide the franchisee with the guidance, training and other services on sales, business or technology that are necessary for the launch and development of Franchising;

(4) to supply goods to the franchisee in accordance with the contract. Except for monopoly goods, and goods that are required to be supplied by the franchisor or suppliers designated by the franchisor in order to ensure franchise goods quality, the franchisor must not forcefully require the franchisee to accept its goods supply, but may specify the quality standard to which the goods shall attain, or propose several suppliers for the franchisee to select among;

(5) franchisor shall bear the liability to guarantee product quality of its designated suppliers;

(6) sales promotion, advertising and publicity as agreed in the contract; and

(7) other obligations agreed in the contract.

Article 11: A franchisee shall enjoy the following rights:

(1) to receive operating resources such as a trademark, trade name and operating model that are authorized by the franchisor for use;

(2) to receive training and guidance from the franchisor;

(3) to receive, in a timely manner at prices agreed in the contract, goods supply provided or arranged by the franchisor;

(4) to receive promotional support from the franchisor launched and developed in a unified manner; and

(5) other rights agreed in the contract.

Article 12: A franchisee shall perform the following obligations:

(1) to launch and develop operating activities in accordance with the contract;

(2) to pay franchise fees and security deposit;

(3) to maintain the uniformity of the franchise system, and not to transfer the franchise right without permission from the franchisor,

(4) to provide the franchisor in a timely manner with truthful information specified in the contract such as operating performance and financial situation;

(5) to accept the guidance and supervision of the franchisor;

(6) to preserve the franchisor¡¯s commercial secrets; and

(7) other obligations agreed in the contract.

PART THREE: FRANCHISE CONTRACT

Article 13: The contents of a franchise contract will be as agreed by the parties, and in general will include the following contents:

(1) the names and addresses of the concerned parties;

(2) the granted franchise contents, term, location and whether or not it has exclusivity;

(3) the type, amount and payment method of franchise fees, and the method of collection and refund of the security deposit;

(4) confidentiality clause;

(5) franchised products or services quality control and responsibility;

(6) training and guidance;

(7) use of the trade name;

(8) use of intellectual property rights such as trademarks;

(9) consumer complaints;

(10) publicity and advertising;

(11) amendment and termination of contract;

(12) liability for breach of contract;

(13) dispute resolution clause; and

(14) other clauses agreed by both parties.

Article 14: Franchise fees mean fees paid by a franchisee for obtaining the franchise right, which include the following types:

(1) join-in fee: means a one-time fee paid by the franchisee to the franchisor for obtaining the franchise right;

(2) usage fee: means periodic fees paid by the franchisee to the franchisor in the course of using the franchise right in accordance with certain standards or ratios; and

(3) other contractually agreed fees: means other fees paid by the franchisee in accordance with the contract for receiving related goods supply or services provided by the franchisor.

Security deposit means certain fees collected by the franchisor from the franchisee in order to ensure the performance of the franchise contract by the franchisee. Upon expiration of the contract, the security deposit shall be refunded to the franchisee.

Franchise fees and the security deposit shall be negotiated and set by both parties to the franchise in accordance with the principles of fairness and reasonableness.

Article 15: In general, the term of a franchise contract shall be not less than three years.

Upon expiration of the franchise contract, the franchisor and franchisee may, in accordance with the principles of fairness and reasonableness, negotiate and confirm the conditions for extension of the franchise contract.

Article 16: After termination of a franchise contract, without consent of the franchisor, the former franchisee must not continue to use the franchisor¡¯s registered trademark, trade name or other symbols; must not apply to register the franchisor¡¯s registered trademark as a trademark for goods or services of similar categories; must not apply to register words or letters identical or similar to those of the registered trademark of the franchisor as the trade name component in an enterprise name; and must not use, for identical or similar goods or services, symbols identical or similar to that used in the franchisor¡¯s registered trademark, trade name or outlet decoration.

PART FOUR: INFORMATION DISCLOSURE

Article 17: The franchisor and the franchisee, before signing the franchise contract, and during the course of the franchise, shall disclose relevant information in a timely manner.

Article 18: The franchisor shall provide the applicant in writing with truthful and accurate basic information relating to the franchise, as well as the franchise contract text, 20 days prior to formal signing of the franchise contract.

Article 19: The basic information disclosed by the franchisor shall include the following:

(1) key items of the franchisor such as its name, address, registered capital, business scope and number of years conducting Franchising, as well as basic circumstances such as contents of financial reports audited by an accounting firm and tax payment;

(2) the number, distribution of locations, and operating performance of franchisees, and investment budget statement of a franchise outlet, etc. as well as the proportion of the total number of franchisees taken up by franchisees terminating franchise contracts;

(3) circumstances of trademark registration, licensing and litigation, and circumstances relevant to other operating resources such as trade name and operation model;

(4) the type, amount and method of collection of franchise fees, and the method of refund of the security deposit;

(5) all litigation circumstances within the most recent five years;

(6) each type of goods supply or services that may be provided to the franchisee, and supplementary conditions and restrictions, etc.;

(7) proof of ability to provide training and guidance to the franchisees, and the actual circumstances relating to provision of training and guidance;

(8) the legal representative¡¯s and other key responsible persons¡¯ basic circumstances and whether or not [they] have been subjected to criminal punishment, and whether or not [they] have been personally liable for the bankruptcy of an enterprise, etc.; and

(9) other information to be disclosed by the franchisor upon request of the franchisees.

If a franchisee suffers economic loss as a result of inadequate disclosure of information or provision of false information, the franchisor shall bear liability for compensation.

Article 20: A franchisee shall, in accordance with the franchisor¡¯s request, truthfully provide materials regarding its operating capability, including entity status certification, credit certification and property rights certification, etc. During the course of the franchise, information agreed in the contract such as operating performance shall, in accordance with the franchisor¡¯s request, be truthfully provided in a timely manner.

Article 21: During the term of the franchise and after the franchise contract ends, the franchisee and its employees must not, without the consent of the franchisor, disclose, use or permit other parties to use the franchisor¡¯s commercial secrets that they have mastered.

Article 22: Applicants and persons who have not authenticated² the franchise contract with the franchisor, but learn commercial secrets of the franchisor through the franchisor¡¯s disclosure of information, shall bear confidentiality obligations. Without the consent of the franchisor, [they] must not reveal, or disclose or transfer to another person, the franchisor¡¯s commercial secrets.

PART FIVE: ADVERTISING AND PUBLICITY

Article 23: When the franchisor is publicizing, promoting or selling the franchise, the contents of advertising shall be accurate, truthful and lawful, and must not contain statements that are deceptive, omit material facts or are possibly misleading.

Article 24: Direct or indirect inclusion of the record, figures or other relevant information of the franchisor¡¯s operating revenue or profits in the advertising materials of the franchisor or franchisee shall be truthful, and the relevant region and time shall be clear and precise.

Article 25: The franchisor and franchisee must not imitate another person¡¯s trademarks, general appearance or wordings of advertisements, or other identification symbols by any way that may be misleading, deceptive, or confusing.

Article 26: In the course of franchise publicity activities, the franchisor must not artificially exaggerate the benefits to be brought by the franchise, or purposely conceal any circumstances whereby the franchise might, on an objective basis, have an impact on other parties¡¯ interests.

PART SIX: SUPERVISION AND ADMINISTRATION

Article 27: The department in charge of commerce at each level shall strengthen the administration and coordination of Franchising activities within its own administrative district, and offer guidance for the launch and development of local industry associations (chambers of commerce).

The department in charge of commerce at each level shall establish credit files of franchisors and franchisees, and announce a list of enterprises in violation of regulations in a timely manner.

Article 28: Franchising industry associations (chambers of commerce) shall, in accordance with these Procedures, formulate industry norms, launch and develop self-discipline in the industry, provide related services to Franchising parties and promote industry development.

Article 29: A franchisor shall, in January of each year, file-for-the-record, with the departments in charge of commerce at the place where it is located and at the place where the franchisee is located, the circumstances of the franchise contracts signed in the preceding year. Such departments in charge of commerce shall report the filing-for-the-record circumstances to the departments in charge of commerce at the next level above.

Article 30: When patent licensing is involved in Franchising activities, patent licensing contract(s) shall be concluded in accordance with the relevant provisions of the PRC Patent Law and its implementing rules, and filing-for-the-record matters shall be handled in accordance with the Administration of the Record Filing of Patent Licensing Contracts Procedures.

Article 31: Before launching and developing Franchising activities, the franchisor shall handle filing-for-the-record matters concerning trademark licensing contracts in accordance with the PRC Trademark Law and its implementing regulations.

PART SEVEN: SPECIAL PROVISIONS ON FOREIGN-INVESTED ENTERPRISES

Article 32: Foreign-invested enterprises must not, by way of Franchising, engage in the categories of industry prohibited in the Foreign Investment Industry Guidance Catalogue.

Article 33: Foreign-invested enterprises, if engaging in commercial activities by way of Franchising, shall submit to the original examination and approval department an application to add the business scope of ¡°commercial activities engaged in by way of Franchising¡±, and shall submit the following materials:

(1) an application letter and resolution of the board of directors;

(2) enterprise business licence and foreign-invested enterprise approval certificate (copies);

(3) [joint venture] contract and articles of association amendment agreements (wholly foreign-owned enterprises only submit articles of association amendments);

(4) relevant documents and materials certifying compliance with Article 7 of these Procedures;

(5) materials reflecting the basic information specified in Article 19 of these Procedures;

(6) a franchise contract sample; and

(7) the franchise operation manual.

The examination and approval department shall, within 30 days of receipt of all the above application materials, render a decision in writing on whether or not to approve.

After obtaining approval, within one month after receiving the Foreign-Invested Enterprise Approval Certificate replaced and issued by the examination and approval department, the applicant shall handle formalities for enterprise registration amendment with the administration for industry and commerce organ.

Article 34: Foreign-invested enterprises granted approval to engage in commercial activities by way of Franchising shall, in January of each year, file-for-the-record, with the original examination and approval department and the department in charge of commerce at the place where the franchisee is located, the circumstances of franchise contracts signed in the preceding year.

Article 35: When establishing foreign-invested enterprises specially to engage in commercial activities by way of Franchising, foreign investors shall, apart from complying with these Procedures, also comply with the laws, regulations and rules related to foreign investment.

Article 36: Foreign-invested enterprises that had been engaging in commercial activities by way of Franchising before the implementation of these Procedures shall file-for-the-record, with the original examination and approval department, the circumstances of the business launched, if continuing to engage in commercial activities by way of Franchising, [such FIEs] shall handle relevant formalities in accordance with the procedures set forth in this Part.

Article 37: Hong Kong, Macao and Taiwan-invested enterprises engaging in commercial activities by way of Franchising in the Mainland will be handled with reference to this Part.

PART EIGHT: LEGAL LIABILITY

Article 38: In the event of a violation of Article 7 or 8 of these Procedures, the relevant department in charge of commerce shall order a rectification, may impose a fine of not more than Rmb30,000, and if the case is serious, will submit the case to the administration for industry and commerce organ to revoke the business licence.

Article 39: In the event of a failure to disclose information in accordance with these Procedures, the relevant department in charge of commerce shall order a rectification, impose a fine of not more than Rmb30,000, and if the case is serious, submit it to the administration for industry and commerce organ to revoke the business licence

Article 40: If the franchisor implements advertising in violation of the stipulations of these Procedures, it shall be handled in accordance with the PRC Advertising Law and other relevant laws, administrative regulations and rules.

PART NINE: SUPPLEMENTARY PROVISIONS

Article 41: The Ministry of Commerce is responsible for interpretation of these Procedures.

Article 42: These Procedures shall be effective as of February 1 2005. The Administration of Commercial Franchise Procedures (Trial Implementation) promulgated by the former Ministry of Internal Trade are repealed simultaneously.

Translation by Neal Stender and Yan Zeng; Coudert Brothers.

Endnotes

1 The logical meaning of ¡°¡± is ¡°share-controlling company, or holding company [having a controlling shareholding in the FIE]¡±. But verbal comments by MOFCOM personnel indicate that the intended meaning, although less logical, is ¡°company in which the FIE has a controlling shareholding¡±.

2Apparent typographical error: ¡°¡± (authenticated) was probably intended to be ¡°¡± (signed).