Changes To Franchise Law In Malaysia
The Franchise (Amendment) Act 2012 (“FAA”) has come into operation on 1 January 2013. Principal changes introduced by the FAA and their implications on the franchising industry are highlighted below.
Extension of Scope
One of the principal amendments brought about by the FAA is the extension of the scope of the Franchise Act (“the Act”). First, the amendment seeks to regulate the operation of a franchise, whereas previously the Act applied more restrictively to the sale of a franchise in Malaysia. Secondly, the FAA extends the law to the sale of any franchise even where the offer is accepted outside Malaysia, provided the franchise is operated or will be operating in Malaysia. Thirdly, the definition of a “franchise” has been simplified by removing two defining criteria in the previous regime, namely, (i) that the franchisor has the responsibility to provide assistance to the franchisee and (ii) that the franchisee operates the business separately from the franchisor and such relationship shall not be that of a partnership, service contract or agency. However, the latter criterion has been retained in the form of an obligation on the franchisee in the now Section 29(3) requiring the franchisee to conduct its business separately from the franchisor.
Registration of Franchisor
Previously, a franchisor only had to register the franchise before making an offer to sell it. Now, post amendment, such registration is compulsory additionally for franchisors prior to operating their franchise businesses, failure of which is an offence.
Registration of Franchisee
The FAA also imposes the obligation of compulsory registration on all franchisees. It must be noted that there is a different threshold for registration of franchisees that are granted a franchise by a foreign franchisor as opposed to those that are granted a franchise by local franchisors or local master franchisee. The former will be required to register the franchise before commencing the franchise business whilst the latter will be required to register the franchise with the Registrar within 14 days from the date of signing of the franchise agreement.
Submission of Annual Report and Disclosure Documents
Every franchisor is required to submit an annual report to the Registrar and the amendment has extended the period to do so to 6 months from the end of each financial year of the franchising business to be in line with the reporting obligations under the Companies Act 1965. Failure to do so is an offence under the Act. The Registrar has the power to cancel the registration of the franchise if he is satisfied that there has been a failure to submit an annual report which persists for 5 continuous years.
The Registrar’s prior approval is now also required for any material change in the disclosure documents.
Registration of Franchise Consultants
Previously, the Act only regulated franchise brokers. The FAA introduced a new category of “franchise consultant”, which is defined as any person who provides advice and consultancy services to another person on the registration of a franchise business and compliance of related laws. Registration term for both franchise brokers and consultants is now 2 years.
Termination of a Franchise
Previously, the Act only prohibited the franchisee from terminating a franchise agreement before expiration. Similar prohibition is now extended to franchisors. In any event, terminating a franchise agreement requires good cause as stipulated in the Act and this has been extended to include bankruptcy and insolvency of the contracting party.
Extension of Franchise Term
A franchisee now has to give the franchisor written notice of its intention to renew the franchise at least 6 months prior to the expiry of the franchise term.
The Act requires a written guarantee to be provided by a franchisee stating that it will not disclose any confidential information and conduct similar business within 2 years after the expiration or early termination of the franchise term. Previously, this duty only extended to the franchisee and its employees. This duty now extends to the franchisee’s directors, spouses and immediate family of directors.
Offence of Holding Out as a ‘Franchise’
It is now an offence for any person to use the term “franchise” or any of its derivatives indicating the carrying on of a franchise business including using the term as part of the name or title in documents, agreements, books, advertisements or publications, without registering the franchise.
The penalties for contravention of the Act have been amended by prescribing different penalties for offences committed by a body corporate and that of non-body corporates such as natural persons or partnerships. A body corporate may be liable to a fine of not less than RM10,000 and not more than RM50,000 for a first offence, and a fine between RM20,000 and RM100,000 for a second or subsequent offence. A person who is not a body corporate will be liable to a fine not less than RM5,000 and not more than RM25,000 or an imprisonment term not exceeding 6 months for the first offence, whilst for a second or subsequent offence, the fine shall be not less than RM10,000 and not more than RM50,000 or imprisonment for a term not exceeding 1 year.
The amendments to the existing Franchise Act have resulted in more stringent requirements and greater regulation with increased penalties and offences. It is thus pivotal for both franchisors and franchisees to note these changes as current practices and documentation may have to be revised in light of the same.
Su Siew Ling