Tay Partners

InsiderTAPS (7 August 2020)

Franchise Alert: Amendments to the Franchise Act 1998

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Malaysia has introduced various amendments to the Franchise Act 1998 (“FA”) via the Franchise (Amendment) Act 2020 (“Amending Act”) to ensure conformity with the current developments of the franchise business in Malaysia. The Amending Act was published in the Gazette on 6 March 2020 after receiving its Royal Assent on 20 February 2020. It has yet to come into force but is anticipated to do so at the end of this year or early next year.

  1. Key amendments

    In brief, we set out below some of the main changes to the requirements and obligations of franchisors and franchisees under the FA pursuant to the Amending Act.

    No.

    Matter

    Pre-amendments

    Post-amendments

    1.

    Registration of foreign franchisor

    A foreign franchisor is required to obtain the Registrar’s approval under Section 54 of the FA (“approval”) prior to making an offer for sale of the franchise in Malaysia or to a Malaysian.

    After obtaining the approval, a foreign franchisor is required to register its franchise separately under Section 6 of the FA.

     

    Any foreign franchisor who has previously obtained the approval will be deemed to have registered its franchise under Section 6 of the FA and therefore no additional application is required.

     

    It is anticipated that the Registrar may provide partial exemptions for foreign franchisors in respect of the Section 6 application in view that the information required for the Section 6 application is almost identical to the Section 54 application. The only difference is that the Section 6 application requires additional information and documents such as training manual, operational manual and franchisee’s profit and loss projection.

    2.

    Post-registration obligations of foreign franchisor

    Based on notification from the office of the Registrar, the following post-registration obligations do not apply to foreign franchisors but are recommended as a matter of best practice:-

     

    1. to provide a copy of the franchise agreement and disclosure documents (including amendments thereto which have been approved) to the franchisee at least 10 days before the signing of the franchise agreement or after the amendments to the disclosure documents have been approved, whichever is applicable;

       

    2. to submit a report (containing the updated disclosure documents and, if applicable, the financial statement in item (c) below) to the Registrar in the prescribed form within 6 months from the end of each financial year of the franchise business;

       

    3. if a franchisee is required to make any payment to a promotion fund for the promotion of a franchise, to submit a financial statement of the promotion fund which has been endorsed by a registered public accountant to the Registrar within 30 days after the conclusion of the last financial term.

    The foreign franchisor will likely be bound by the post-registration obligations due to the expansion of the scope of Section 6 of the FA (which presently only applies to local franchisors) to foreign franchisors.

     

    There will be slight changes to item (a) of the post-registration obligations as follows:-

     

    1. to provide a copy of the franchise agreement and disclosure documents (including amendments thereto which have been approved) to the franchisee at least 10 days before the signing of the franchise agreement or after the amendments to the disclosure documents have been approved, whichever is applicable.

       

    The “documents” refers to the supporting documents for registration of a franchise.

    3.

    Renewal of franchise registration

    A franchise registration is valid and effective until it is suspended, terminated or cancelled.

    A franchise registration will have a prescribed period of validity.

     

    A franchisor may apply to the Registrar to renew its registration within 30 days from the expiry date upon payment of the prescribed renewal fee. The approval is subject to terms and conditions imposed by the Registrar.

     

    The period of validity and renewal fee are not yet made known.

    4.

    Display of registration of franchise

    There is no requirement to display the registration of franchise.

    A franchisor or a franchisee will be required to display the franchise registrations (i.e. certificate of registration) in a conspicuous position at the place where the franchisor or franchisee carries on its business.

     

    Non-compliance with this requirement will be an offence under the FA.

    5.

    Requirements of franchise agreement

     

     

    There is no statutory requirement to include the term of extension (which is different from term of renewal) in a franchise agreement.

     

    However, the Registrar’s practice is to require the term of extension to be stated in the franchise agreement.

    The term of extension must be set out in the franchise agreement.

     

    This amendment would unlikely affect franchises that have been registered prior to the amendments due to the Registrar’s current practice.

    6.

    Amendments to disclosure document

     

    There is no statutory requirement to obtain the Registrar’s approval for any material change in the franchise agreement. The Registrar’s approval is only required if there is material change in the disclosure documents and supporting information or documents submitted to the Registrar.

     

    However, the Registrar’s practice is to require franchisors to obtain the Registrar’s approval for any material change to the franchise agreement.

    If there is any material change to the franchise agreement, operation manual and training manual, the Registrar’s approval will be required.

     

    This amendment would not have a material impact on foreign franchises registered prior to the amendments due to the Registrar’s current practice.

     

    There will be a prescribed fee for a request to amend the documents.

    7.

    Non-compliance with the requirements of franchise agreement

     

    Failure to include the mandatory terms in a franchise agreement will render the agreement null and void (“this provision”).

    This provision will be deleted.

     

    Notwithstanding this, failure to include the mandatory terms in a franchise agreement will be an offence under the FA.

    8.

    Non-registration of franchisees

     

    The FA is silent as to whether non-registration of franchisees (namely, a franchisee of foreign franchisor and a franchisee of local franchisor or local master franchisee) amounts to an offence.

    Non-registration of franchisees (namely, a franchisee of foreign franchisor and a franchisee of local franchisor or local master franchisee) will be an offence under the FA.

     

    Therefore, it is important for a franchisee of foreign franchisor to register its franchise under Section 6A of the FA before commencing the franchise business to avoid being penalised under the FA. A franchisee of a local franchisor or local master franchisee will be required to register its franchise under Section 6B of the FA within 14 days from the signing of the franchise agreement.

  2. Next steps

    We also highlight the next steps to be taken by (a) a registered foreign franchisor going forward today; and (b) a registered foreign franchisor when the Amending Act comes into force.

    (a) Registered foreign franchisor going forward today

    (b) Registered foreign franchisor when the Amending Act comes into force

    1. If there is any material change to the franchise agreement, to obtain the Registrar’s approval for the changes.

    1. If there is any material change to the franchise agreement, the Registrar’s approval is to be obtained with payment of the prescribed fee. Thereafter, a copy of the approved amended franchise agreement is to be provided to the franchisee.

       

    2. A report in the prescribed form (containing the updated disclosure documents, and if applicable, the financial statement in item (3) below) is to be submitted to the Registrar within 6 months from the end of each financial year of the franchise business.

       

    3. If a franchisee is required to make any payment to a promotion fund for the promotion of a franchise, a financial statement of the promotion fund endorsed by a registered public accountant is to be submitted to the Registrar within 30 days after the conclusion of the last financial term.

       

    4. Evidence of the franchise registration (i.e. certificate of registration, or in the absence of it, the letter of approval) is to be displayed in a conspicuous position at the franchisor’s place of business.

       

    5. The franchise registration is to be renewed with payment of the prescribed fee.

       

  3. Conclusion

    The Amending Act will have a significant impact on the Malaysian franchise industry given the introduction of some new requirements and obligations on franchisors and franchisees, particularly foreign franchisors, and the imposition of new offences and penalties on franchisees who fail to register their franchises.

    It is relevant to note that the additional registration requirement for foreign franchisors gives effect to the high court’s judgment in Dr HK Fong BrainBuilder Pte Ltd v. SG-Maths Sdn Bhd & Ors [2018] 11 MLJ 701 which gave Section 6(1) of the FA a more liberal interpretation such that foreign franchisors are to be subject to the same registration requirements as local franchisors under Section 6(1) to promote fairness and consistency in the regulation of local and foreign franchises.

    In Dr HK Fong BrainBuilder case, it was held that Section 6(1) of the FA applies to all ‘franchisors’, local and foreign, based on the literal interpretation of the provision with the wide definition of ‘franchisor’ under Section 4 of the FA and the purposive construction of Sections 6, 6A and 7 of the FA which is for all franchises, local and foreign to be registered with the Franchise Registry. The court stated that if Section 6(1) of the FA were to apply only to local franchisors, it will create an absurdity where local franchisors must register their franchises under the provision but foreign franchisors are “exempted” from compliance with such requirements. The court further stated that it will also create an injustice to franchisees of foreign franchisors as foreign franchisors may, by virtue of non-registration under Section 6(1), wriggle out from compliance with mandatory provisions intended for the protection of franchisees of foreign franchisors.

     

    In view of the impending coming into force of the Amending Act, it is vital for franchisors and franchisees to be acquainted with the amendments to the FA in order to prepare to adhere to the new requirements and obligations. It is also prudent for other businesses to review their business models and consider if they fall within the ambit of a “franchise” where compliance with the FA is mandatory.

If you have any queries or require more information, please feel free to get in touch with us.


Lee Lin Li
Partner
T: +603 2050 1898
linli.lee@taypartners.com.my


Chong Kah Yee
Associate
T: +603 2050 1831
kahyee.chong@taypartners.com.my