Navigating Increased Barriers to Entry in Asia

U.S. franchisor interest in Asia seems to be at an all-time high, yet from a legal compliance standpoint it has never been more difficult to enter into many of the various Asian markets.

From franchisor registrations to disclosure obligations to relationship restrictions, a significant number of Asian countries have overhauled existing franchise legislation or enacted new legislation that has put additional burdens on franchisors. This article provides a brief overview of some of the more onerous and/or unique franchise regulatory and compliance frameworks in Asia.

Franchisor experience requirements

Some Asian countries regulate who can franchise in their country. In China, regulations issued in 2005 required that franchisors must have operated two units in China for one year before franchising (the so-called 2/1 requirement). The regulations were modified in 2007 to count operations outside of China, but the operations must be by the franchisor directly and not through an affiliate or subsidiary. In Vietnam, franchisors must meet certain thresholds, including that 1) the business system has been operating for at least one year; and 2) the goods or services to be franchised are eligible in accordance with Vietnamese requirements.

Disclosure and franchise offering filings

A number of Asian countries have implemented disclosure and/or franchise offering registration requirements in the last couple of years, many of which require translation and legalization of documents. These laws have been particularly onerous for franchisors that had previously franchised in a country and now want to sell new franchises or renew or transfer existing franchises. In Korea, since February 2008, there is a much more comprehensive disclosure statement requirement and a new pre-sale registration requirement. In Vietnam, since 2007, there is a pre-sale franchisor registration requirement along with a franchise disclosure obligation.

In China, franchisors have a specific disclosure obligation and must register with the governmental authorities within 15 days after the franchisor signs the franchise agreement to sell its first franchise. In Indonesia, since 2009, the Indonesian Department of Trade requires that franchisors register their franchise disclosure and other materials before selling franchises (and all materials must be translated for registration). In Japan, there are two different franchise disclosure laws that could be applicable to a foreign franchisor. In Taiwan, there is a pre-sale disclosure obligation. In Malaysia, foreign franchisors are technically subject to prior registration and approval as well as franchise disclosure obligations and an obligation on the franchisee to register the franchise agreement after it has been executed.

Relationship laws

Several Asian countries regulate the ongoing franchise relationship. In Korea, its 2008 franchise law overhaul added much more specific restrictions on transfer, termination, and non-renewal, all of which require significant modifications to most U.S. franchise agreements. In the Philippines, franchise agreements are considered technology transfer arrangements subject to certain restrictions on non-competition, transfer, or non-renewal. In Malaysia, a franchisor must provide compensation to the franchisee if the franchisor refuses to renew the franchise agreement without advance notice of six months or if the franchisee will be bound by a non-competition covenant following the expiration of the franchise agreement. Malaysia also requires that the term of a franchise agreement not be fewer than five years.

Local ownership restrictions

Certain Asian countries also limit foreign ownership of all or certain types of businesses in their country, which can limit the franchisee pool and a franchisor's ability to buy out a franchisee and operate in the country. In the Philippines, the Retail Trade Law prohibits persons who are not citizens of the Philippines from engaging in the retail business, either directly or indirectly, subject to certain net worth and sales exemptions available only to the largest of companies. In October 2006, Vietnam made certain WTO commitments to open up its economy, but in doing so temporarily reserved certain markets for Vietnamese nationals, including in the area of "catering services" (i.e., restaurants). This has made franchising in restaurants by non-Vietnamese franchises extremely difficult until January 2015, unless "in parallel with investment in hotel construction, renovation, restoration, or acquisition."

Conclusion

While it has never been a better time to franchise in Asia, it is important that franchisors considering Asian markets plan ahead and factor in the added time, cost, and effort necessary to satisfy the various disclosure, registration, and relationship laws in Asian markets.

Robert A. Lauer is a Partner in the Franchise and Distribution Practice Group of Haynes and Boone LLP and can be reached at rob.lauer@haynesboone.com.