The sale of any franchise businesses in Malaysia is regulated by the Franchise Act 1998. In pursuant to the Act, registration is also compulsory for companies/businesses that have registered with the Prime Minister's Department.

 

The sale of a franchise business is deemed to be in Malaysia if such offer to sell or purchase a franchise:-

 

              - is made in Malaysia and accepted in Malaysia or outside Malaysia;

- is made outside Malaysia and accepted in Malaysia; or

- the franchise business is operated or will be operated in Malaysia.

 

One requirement that is highly unpopular among franchisors and local master franchisees is that they must be in operation for at least three years before they are permitted to appoint sub-franchisees.  While this requirement is not expressly provided in the Franchise Act 1998 or any of the regulations, the authorities have taken the view that it is one of the prescribed requirements under law due to section 18 of the Disclosure Document, which requires the franchisors or master franchisees to submit audited financial statements for the past three years.

 

The franchisor must submit to a franchisee a copy of the franchise agreement, together with the disclosure documents, at least 10 days before the franchisee signs the agreement with the franchisor. Basically, disclosure documents provide a full overview of the franchise business system that will be franchised to the franchisee. A franchisor’s failure to submit such documents is an offence under the FA. If there is any material change in the disclosure documents, they must be amended and filed with the registrar of franchisees. The franchisor must submit an annual report with the registrar. The report must contain updated disclosure documents.

 

The disclosure documents contain a large amount of information, including, without limitation, the following: name, business address and type of business, including the franchisor’s; business experience; details of the intellectual property rights granted to the franchisee; types and amount of fees imposed on franchisees; other financial obligations, including advertising, training or service fees payable; whether the franchisee is required to purchase equipment or products from the franchisor or from a source designated by the franchisor and, if so, to identify the source;  the obligations of the franchisor, prior to operating or during operation, in determining the business site; the territorial rights granted to the franchisee and circumstances when the boundary of the territory may be altered; the franchise term, terms for renewal and termination of agreement by the franchisor or franchisee, and the parties’ obligations upon termination; and the franchisor is required to submit audited financial statements or the past three financial years and financial forecasts for five years.

 

In the event of violations of disclosure requirements, the franchisees may lodge a complaint against the franchisor with the Registry of Franchises. A contract induced by misrepresentation is voidable at the choice of the innocent party. The innocent party may rescind the contract by giving notice to the other party and any party who has received any advantage under the contract is bound to restore it, or compensate the other party for it.