NEWSLETTER

VOL 1 NO 4.0 DECEMBER 2002

KDN NO. PP 12544/3/2003

CORPORATE&COMMERCIAL

Requirements Of Franchise Registration Under The

Franchise Act 1998
IN THIS ARTICLE, ALINA TEH AND TINA FERNANDEZ BRIEFLY SET OUT THE LAW AND PRACTICE
RELATED TO THE REGISTRATION OF A FRANCHISE IN MALAYSIA.

In broad terms, franchising provides a means for cultivating an entrepreneurial spirit among those
who prefer to venture into a new industry with relatively low risk and quick returns by subscribing
to a proven and successful business model developed by another person.

In a franchise business, the franchisee normally does not have much room for negotiation with his
or her franchisor as the former is almost entirely dependent on the latter’s knowledge and
experience. To protect franchisees’ rights, some jurisdictions, through their national franchise
associations, issue guidelines for their member franchisors. The admission as members to those
associations acts as a benchmark for potential franchisees to gauge the credibility of the
franchisors.

In Malaysia, however, the membership to the Malaysian Franchise Association is voluntary and only
a few franchisors apply for membership. This meant that the burgeoning franchise industry in
Malaysia was largely left unregulated. It is in this context that the Franchise Act 1998 (“the Act”)
was enacted.

Under the Act, franchisors are required to register their franchises with the Registrar of Franchises
(“Registrar”), who comes under the Ministry of Entrepreneur Development. The Act represents the
Government’s initiative to provide a sound and orderly business system to the franchise industry.
In this regard, it seeks to strike a balance between the competing interests of franchisors and
franchisees.

Meaning of ‘Franchise’
The Act defines ‘franchise’ as “a contract or an agreement (either expressed or implied, whether
oral or written) between two or more persons by which –

• the franchisor grants to the franchisee the right to operate a business according to the
franchise system as determined by the franchisor during a term to be determined by the
franchisor;

• the franchisor grants to the franchisee the right to use a mark, or a trade secret, or any
confidential information or intellectual property, owned by the franchisor or relating to
the franchisor, and includes a situation where the franchisor, who is the registered user
of, or is licensed by another person to use, any intellectual property, grants such right
that he possesses to permit the franchisee to use the intellectual property;
• the franchisor possesses the right to administer continuous control during the franchise
term over the franchisee’s business operations in accordance with the franchise system;

• the franchisor has the responsibility to provide assistance to the franchisee to operate his
business including such assistance as the provision or supply of materials and services,
training, marketing, and business or technical assistance;

• in return for the grant of rights, the franchisee may be required to pay a fee or other
form of consideration; and

• the franchisee operates the business separately from the franchisor, and the relation-ship
of the franchisee with the franchisor shall not at anytime be regarded as a partnership,
service contract or agency”.1

Relationship between Franchisors and Franchisees

A ‘franchisor’ is a person who grants a franchise to a franchisee and includes a master franchisee
with regard to his relationship with a sub-franchisee.2 A ‘franchisee’ is a person to whom a
franchise is granted, and includes a master franchisee with regard to his relationship with a
franchisor and a sub-franchisee with regard to his relationship with a master franchisee. 3 A ‘master
franchisee’ is a person who has been granted rights by a franchisor to subfranchise the franchise
(of the franchisor) to another person.4

The definition of a ‘franchisor’ is very broadly drafted and would, on plain reading, include a
foreign franchisor, a local franchisor and a master franchisee in all instances envisaged under the
Act.

The relationship between a franchisor and a franchisee is akin to that of a licensor and a licensee. In
the scenario where a master franchisee is involved, the franchisor would grant the master
franchisee an exclusive licence to use its systems and procedures, marks, trade secrets and
intellectual property within a specific geographic area (normally defined by country). The master
franchisee is also licensed by the franchisor to grant the franchise to subfranchisees whose
geographic area would be determined by the master franchisee, which could be on an exclusive or
non-exclusive basis. Sub-franchisees are only licensed to use the systems and procedures within
their territory and cannot sub-franchise the business.

Registration Process
A franchisor must register a franchise with the Registrar before he can make an offer to sell the
franchise to any person.5 The following documents have to be submitted to the Registrar together
with the application to register:

• complete disclosure documents (in the prescribed form);

• a sample franchise agreement (terms to be included are set out in section 18 of the Act);

• the operation manual of the franchise;

• the training manual of the franchise;

• a copy of the latest audited accounts, financial statements, and the reports, if any, of the

REQUIREMENTS OF FRANCHISE REGISTRATION UNDER THE FRANCHISE ACT 1998 2

 auditors and directors of the applicant; and

• such other additional information or documents as may be required by the Registrar for
the purpose of determining the application.6 In the case of foreign franchisors seeking to
sell their franchises in Malaysia, section 54 of the Act further provides that the Registrar
may refuse the application without assigning any reason, or approve the application
subject to such conditions that the Registrar may impose.

Current Practice
Despite the registration requirements for franchisors under section 7 of the Act, in practice, the
Registrar applies a slightly different criteria to foreign franchisors pursuant to section 54 of the Act.
Although there are no written guidelines on the registration process concerning foreign
franchisors at present, we understand that the Registrar currently requires the following
documents to be submitted together with the application:

• letter of intent from the foreign franchisor;

• list of domestic and international franchisees;

• latest annual report of the applicant;

• promotional package for franchisees;

• business brochures or leaflets on the franchise products; and

• such other documents that the Registrar requires.

Once the application is approved, a letter of approval will be issued by the Registrar requesting the
franchisor to instruct the master franchisee to comply with the requirements under sections 6 and
7 of the Act, if the master franchisee is to sub-franchise the franchise business.

Effects of Non-registration
The failure by a franchisor to register the franchise with the Registrar is an offence under the Act
(unless the franchisor is exempted pursuant to the Act).7 The penalty for non-registration ranges
from RM5,000 to RM50,000 and/or up to five years’ imprisonment, depending on whether the
offence is a first or a subsequent one.8 Upon sentencing a first offender, the court may:-

• declare the franchise agreement between the franchisor and any franchisee to be null
and void;

• order that the franchisor refunds any form of payment which he or she has obtained from
any franchisee; or

• prohibit the franchisor from making any new franchise agreement or appointing any new
franchisee.9

Conclusion
It appears that there is room to further improve the process of franchise registration: a more
definite registration process could be set out for foreign franchisors, and the term ‘franchisor’ could
be more precisely defined to avoid any confusion regarding its actual scope. Addressing these

REQUIREMENTS OF FRANCHISE REGISTRATION UNDER THE FRANCHISE ACT 1998 3

relatively minor issues will go a long way in regulating the franchise industry in Malaysia, which is
the proclaimed objective of the Act, more efficiently.

ALINA TEH AND TINA FERNANDEZ

CORPORATE & COMMERCIAL LAW GROUP

For further information concerning Franchise matters, please contact

Michael H. K. Lim
michaellim@shearndelamore.com

Michael V. M. Tang
mtang@shearndelamore.com

1
Section 4.
2
Section 4.
3
Section 4.
4
Section 4.
5
Section 6.
6
Section 7.
7
Section 58.
8
Section 39.
9
Section 39(2).

REQUIREMENTS OF FRANCHISE REGISTRATION UNDER THE FRANCHISE ACT 1998 4