As provided by Chinese law, a franchise refers to a business activity whereby the franchisor, by virtue of performance of contract, licenses the franchisee to use the operational resources including, the registered trademark, enterprise logo, patent and know-how, and the franchisee undertakes business under the unified business format set up in the franchise agreement and pays franchise fees to the franchisor in return.

 

The provisions governing franchise activities can be found primarily in the following laws and regulations: Administration of Commercial Franchise Procedures, Administration of Information Disclosure for Commercial Franchise Operations Procedures; and the Administration of Foreign Investment in Commercial Sector Procedures.

 

Pursuant to the regulations, the franchisor is required to posses the necessary business resources (such as trademarks) that it will license to its franchisees in order for the franchisees to carry out the franchised business.  The franchisor must already have at least two existing stores and must have been engaged in the franchised business for more than one year.  The franchisor is required to register with the Ministry of Commerce (MOC) or its local counterpart. Specifically, the franchisors, who are undertaking commercial franchise activities within one single province, autonomous region or municipality which is under the direct control of central government, register with MOC’s local branch, whereas the franchisors whose commercial franchise activities span multiple provinces, autonomous regions or municipalities, are required to register directly with the MOC.

 

China also has disclosure laws which requires the franchisor to disclose certain information to its franchisees and franchisees have a confidentiality responsibility regarding that information. The franchisor is required to enter into a franchise agreement in writing with the franchisee, and the term of the franchise agreement may not be less than three years (unless the franchisee agrees otherwise).

 

Additionally, the franchisee is entitled to a cooling-off period wherein the franchisee has the right to unilaterally terminate the franchise agreement within a certain time frame as agreed by the franchisor and franchisee after the franchise agreement is signed. The  franchisor is required to provide a manual, training and support to its franchisees in accordance with the agreement between the franchisor and the franchisee.