Malaysia Update: Amendments to the Franchise Act 1998

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:-

4. 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.

(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.

2. 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.

3. 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.

4. 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.

5. 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.

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