Franchising is a form of strategy to expand and/or distribute businesses, whereby an owner of a business, product, name or service ("Franchisor") grants affiliated dealers the right to sell, distribute and/or use such a business, product, name or service ("Franchisees"). In Malaysia, franchising is governed by the Franchise Act 1998 ("the FA 1998") and its objective is to create a thorough registration system to regulate the franchise business in the country.
Pursuant to Section 4 of the FA 1998, "franchise" is defined as a contract or an agreement between two or more persons where the following takes place:
- A Franchisor grants a Franchisee the right to operate a business according to the franchise system during the term of the franchise, both of which are determined by the Franchisor;
- The Franchisor grants the Franchisee the right to use any intellectual property and/or confidential information owned by the Franchisor, including where the Franchisor, who is either the registered user of or is licensed by another person to use any such intellectual property which allows the Franchisor, to allow the Franchisee to use such intellectual property;
- The Franchisor has the right to control the Franchisee's business operation in accordance with the franchise system during the term of the franchise; and
- The Franchisee may be required to pay a fee or some other form of consideration for the grant of such rights.
For the avoidance of doubt, each franchise term shall not be less than five (5) years, as set out under Section 25 of the FA 1998.
Franchisor and Franchisee
Section 4 of the FA 1998 also provides for the definition of a Franchisor and a Franchisee, which are as follows:
- 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;
- 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; and
- A "master franchisee" is a person who has been granted rights by a franchisor to sub-franchise the franchise to another person at his own expense ("Master Franchisee").
For example: In 2016, ABC Sdn Bhd granted HMN Sdn Bhd the right to operate a franchise by way of a master franchise agreement, wherein ABC Sdn Bhd also granted HMN Sdn Bhd the right to sub-franchise the said franchise to other parties. In 2019, HMN Sdn Bhd granted XYZ Sdn Bhd the right to operate the said franchise by way of a sub-franchise agreement.
In the above scenario, ABC Sdn Bhd is the Franchisor, HMN Sdn Bhd is the Master Franchisee, and XYZ Sdn Bhd is the Sub-Franchisee.
Application for the Registration of a Franchise
In Malaysia, the Franchise Development Division under the Ministry of Domestic Trade and Consumer Affairs is the governing body for franchising laws and regulations. The Franchise Development Division is headed by the Registrar of Franchises ("Registrar").
Registration of the Franchisor
Prior to the operation of a franchise or the making of an offer to grant a prospective Franchisee the right to operate a franchise, a Franchisor must make an application to register the said franchise with the Registrar. In Dr Premananthan a/l Vasuthevan v Permai Polyclinics Sdn Bhd 1, the High Court held that, if a franchise is not duly registered under Section 6 of the FA 1998, any franchise contract or agreement made under such circumstances will be in contravention of the said provision and thus illegal, ineffective and void.
In relation to foreign Franchisors, the High Court in Dr HK Fong Brainbuilder Pte Ltd v Sg-Maths Sdn Bhd & Ors2 took the view that all franchises, both local and foreign, must be registered with the Registrar. Although the plaintiff in the said case contended that the registration of franchises under Section 6 of the FA 1998 was only applicable to local Franchisors, the High Court reasoned that, if a foreign Franchisor is not required to register its franchise with the Registrar, the foreign Franchisor may be able to avoid compliance with the mandatory provisions in the FA 1998 for the protection of Franchisees. This comes as an addition to the requirements under Section 54 of the FA 1998, which stipulates that a foreign person intending to sell a franchise in Malaysia or to any Malaysian citizen is required to submit an application to the Registrar.
It is important that the above requirement is satisfied prior to the commencement of operating a franchise business. Section 6(2) of the FA 1998 sets out the penalties for failure to register a franchise, which is an offence, and the Franchisor shall, on conviction, be liable to the following:
Where the Franchisor is a body corporate
- For the first offence: a fine not exceeding RM250,000.00; and
- For a second or subsequent offence: a fine not exceeding RM500,000.00;
Where the Franchisor is not a body corporate
- For the first offence: a fine not exceeding RM100,000.00 or imprisonment for a term not exceeding one (1) year, or both; and
- For a second or subsequent offence: a fine not exceeding RM250,000.00 or imprisonment for a term not exceeding three (3) years, or both.
Registration of a Franchisee
A Franchisee who has been granted the right to operate a franchise of a local Franchisor or a local Master Franchisee must register the said franchise with the Registrar within fourteen (14) days from the date of executing the relevant 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
A Franchisee who has been granted the right to operate a franchise of a foreign Franchisor must register the said franchise with the Registrar prior to the commencement of the franchise business. In addition, where the Franchisee has been granted the approval by the foreign Franchisor to sell and/or sub-franchise the said franchise, the Franchisee must register such 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 for the application to register a franchise may take between two (2) to six (6) months to complete. The Registrar will provide the applicant with a written notice of his decision towards the application. Upon approval of the application, the Registrar may require the applicant to pay such fees as may be prescribed. The current fee for each franchise registration is RM1,000.3 The registration shall be effective on the date stated in the written notice of the Registrar.
In the event the application is refused by the Registrar, the Registrar is required to provide the reason(s) for such refusal. The Registrar's refusal of an application may be appealed within one (1) month from the date of communication of the Registrar's decision to the applicant.
The registration of a franchise in Malaysia requires strict compliance with the various requirements set out in the Act. The process may appear to be straightforward, however, all contracting parties must be diligent in the preparation of the Registration Documents to register the intended franchise. This is pertinent in order to avoid setbacks or delays in the registration and/or operation of their intended franchise.
Contracting parties should ensure that franchise agreements or sub-franchising agreements are carefully drafted to cater to the needs of the parties who intend to open a franchise business.
The Franchise (Amendment) Bill 2019 ("Bill") was passed by the Dewan Rakyat on 3.12.2019. It has yet to come into force. The Bill seeks to amend the FA 1998 and to introduce the new provisions, some of which are as follows:
- The definition of "sub-franchise", which means a franchise granted by a Master Franchisee to a sub-franchisee;
- The definition of "sub-franchisee", which means a sub-franchise holder;
- The requirement for a foreign Franchisor to register his franchise under Section 6 of the FA 1998, which is in addition to the requirement to register his franchise under Section 54 of the FA 1998;
- It is an offence where a Franchisee of a foreign Franchisor fails to register the franchise prior to the commencement of the franchise;
- It is an offence where a Master Franchisee of a local Franchisor or a Sub-Franchisee of a local Master Franchisee fails to register the franchise within fourteen (14) days of the execution of the franchise agreement;
- The renewal of the registration of a franchise within thirty (30) days from the expiration date of such registration; and
- The requirement to display the registration of the franchise in a conspicuous place at the place of business, and the failure to comply constitutes an offence.
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
1 Dr Premananthan a/l Vasuthevan v Permai Polyclinics Sdn Bhd  MLJcon 127
2 Dr HK Fong Brainbuilder Pte Ltd v Sg-Maths Sdn Bhd & Ors  MLJU 682
3 Schedule 3 in the Appendix of the Franchise (Forms and Fees) Regulations 1999
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.