Greater disclosures for franchising agreements

The Measures for the Administration of Information Disclosure in Connection with Commercial Franchising (Revised) (商业特许经营信息披露管理办法) (修订) were promulgated by the Ministry of Commerce on February 23 and come into effect on April 1. Poppy Huang, a commercial franchise lawyer at Chang Tsi & Partners in Guangzhou, noted: “Most importantly, the measures heighten legal liability and slightly enlarge the scope of disclosure.”

Article 3 of the measures now includes shareholders under the definition of affiliated parties. The obligation of information disclosure has to cover the franchisor and affiliated parties. Article 5 of the measures sees disclosure of the business status of the current franchisor in the agreement. Previously, this status was not disclosed. “This gives potential franchisees an idea of how great the investment has to be to see future returns,” said Huang. She also noted that while the investment was never included in the initial agreements, the new measures allow for greater transparency. This is especially useful when advertising for potential franchisees. Huang warned however that advertisements were often misleading, as they never stated the actual investment.

Huang said it is hard to tell what effects the new measures will have on future franchising agreements, adding that it is not the aim of the government to slow down franchising through the new policy. Rather, the government's attitude towards franchising has been incredibly supportive, as demonstrated by the fast pace of change in legislation and the growing awareness of franchising in China.