Franchising is a strategy used to grow and spread businesses, where the owner of a business, product, name, or service (referred to as the "Franchisor") gives authorized dealers the permission to sell, distribute, or utilize that business, product, name, or service (known as "Franchisees"). In Malaysia, the Franchise Act 1998 (referred to as "the FA 1998") governs franchising and aims to establish a comprehensive registration system to oversee and regulate the franchise industry in the country.
Definitions
1) Franchise
According to Section 4 of the FA 1998, the term "franchise" is defined as an agreement or contract between two or more individuals that involves the following elements:
The Franchisor grants the Franchisee the authority to operate a business based on the franchise system for a specific period of time, determined by the Franchisor;
The Franchisor allows the Franchisee to utilize any intellectual property or confidential information owned by the Franchisor. This includes cases where the Franchisor is either the registered user or has obtained a license from another party to use such intellectual property, thereby permitting the Franchisee to utilize it;
The Franchisor possesses the right to control and oversee the Franchisee's business operations in accordance with the franchise system during the agreed-upon term;
The Franchisee may be required to provide compensation, such as a fee or other forms of consideration, in exchange for the granted rights. To clarify, each franchise term must be equal to or exceed a duration of five (5) years, as specified in Section 25 of the FA 1998.
2) Franchisor and Franchisee
Section 4 of the FA 1998 further provides definitions for the terms "Franchisor," "Franchisee," and "Master Franchisee" as follows
A "Franchisor" refers to an individual or entity that grants a franchise to a Franchisee. This definition also includes a Master Franchisee in relation to their association with a sub-franchisee
A "Franchisee" refers to an individual or entity to whom a franchise is granted. This definition also includes a Master Franchisee in relation to their association with a Franchisor and a sub-franchisee in relation to their association with a Master Franchisee.
A "Master Franchisee" is an individual or entity who has been granted the rights by a Franchisor to sub-franchise the franchise to another party at their own expense
For instance, in 2019, Company A granted Company B the authority to operate a franchise through a master franchise agreement. As part of this agreement, Company A also permitted Company B to sub-franchise the same franchise to other parties. In 2023, Company B further granted Company C the right to operate the franchise through a sub-franchise agreement. In the given example, Company A acts as the Franchisor, Company B acts as the Master Franchisee, and Company C acts as the Sub-Franchisee.
Application for the Registration of a Franchise
The regulatory authority responsible for franchising laws and regulations in Malaysia is the Franchise Development Division, which operates under the Ministry of Domestic Trade and Consumer Affairs. The Franchise Development Division is overseen by the Registrar of Franchises
Registration of the Franchisor
In order to operate a franchise or offer the right to operate a franchise to a potential Franchisee in Malaysia, the Franchisor must apply to register the franchise with the Registrar. The case of Dr Premananthan a/l Vasuthevan v Permai Polyclinics Sdn Bhd established that if a franchise is not properly registered under Section 6 of the FA 1998, any franchise contract or agreement made under such circumstances would be considered illegal, ineffective, and void.
Regarding foreign Franchisors, the case of Dr HK Fong Brainbuilder Pte Ltd v Sg-Maths Sdn Bhd & Ors concluded that all franchises, whether local or foreign, must be registered with the Registrar. Although the plaintiff argued that registration under Section 6 of the FA 1998 was only required for local Franchisors, the High Court reasoned that exempting foreign Franchisors from registration would allow them to bypass the mandatory provisions in the FA 1998 designed to protect Franchisees. Additionally, Section 54 of the FA 1998 states that foreign individuals intending to sell a franchise in Malaysia or to Malaysian citizens must submit an application to the Registrar.
It is crucial to fulfill the aforementioned registration requirement before commencing operations as a franchise business. Failure to register a franchise is considered an offense under Section 6(2) of the FA 1998. If convicted, the penalties for the Franchisor are as follows:
For a body corporate Franchisor:
First offense: a fine not exceeding RM250,000.00
Second or subsequent offense: a fine not exceeding RM500,000.00
For a non body corporate Franchisor:
First offense: a fine not exceeding RM100,000.00 or imprisonment for up to one (1) year, or both;
Second or subsequent offense: a fine not exceeding RM250,000.00 or imprisonment for up to 3 years or both
Registration of a Franchisee
A Franchisee who has been authorized to operate a franchise from a local Franchisor or a local Master Franchisee is required to register the franchise with the Registrar within a period of fourteen (14) days from the date of entering into a corresponding franchise agreement between the Franchisor and the Master Franchisee, or the Master Franchisee and the Sub-Franchisee, as the case may be.
Registration of a Franchisee of a Foreign Franchisor
Before starting the franchise business, a Franchisee who has been given permission to operate a franchise from a foreign Franchisor must register the franchise with the Registrar prior to the commencement of the franchise. Furthermore, if the Franchisee has received approval from the foreign Franchisor to sell and/or sub-franchise the franchise, they must also register that approval with the Registrar.
Application for Registration of the Franchise
Prior to making an application to register the franchise, the Franchisor must first ensure that the trademark or service mark relevant to the franchise is duly registered in accordance with the Trade Marks Act 1976, if the intellectual property is registrable. In the case of a foreign Franchisor, the foreign Franchisor must ensure that the trademark or service mark relevant to the foreign franchise is duly registered in its country of origin.
Upon the satisfaction of the registration of the relevant trademark or service mark, an application to register the franchise may be made to the Registrar.
The application is to be submitted by the Franchisor to the Registrar, and must be accompanied by the following documents and information:
Complete disclosure documents;
A copy or sample of the franchise agreement;
The operation and training manuals of the franchise;
A copy of the latest audited accounts, financial statements and reports, if any, of the 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.
In addition to the submission of the above, all of which are as prescribed by the FA 1998, the following documents are also required to be submitted by the applicant:
Registration application form;
Certificate of Incorporation;
Forms 24 and 49;
The Franchisor’s organizational chart with the names and position of key personnel; and
The Franchisor ’s business brochures,
(all of the above documents shall collectively be referred to as the 'Registration Documents')
For the avoidance of doubt, all Registration Documents to be submitted to the Registrar must be certified true copies.
The entire process of applying to register a franchise typically takes between two (2) to six (6) months to complete. The Registrar will communicate the decision on the application to the applicant in writing. If the application is approved, the Registrar may request the applicant to pay the prescribed fees. The registration will become effective on the date specified in the written notice from the Registrar.
If the application is rejected by the Registrar, the Registrar is obligated to provide the reasons for the refusal. The applicant has the right to appeal the Registrar's decision within one (1) month from the date of receiving the communication regarding the Registrar's decision.
In a nutshell
Registering a franchise in Malaysia necessitates careful adherence to the requirements outlined in the Act. Although the process may seem uncomplicated, all parties involved in the contract must be thorough in preparing the Registration Documents for the intended franchise registration. This is crucial to prevent any hindrances or delays in the registration and operation of the desired franchise.
Contracting parties should exercise caution when drafting franchise agreements or sub-franchising agreements to address the specific requirements and interests of the parties involved in establishing a franchise business
If you are looking for legal assistance to franchise a business, product or service or wish to know more about this topic in general please feel free to contact/WhatsApp us to schedule a complimentary consultation.
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