The revisions are a mix of good news and bad news for franchisors. Significant provisions have been added to protect the Franchisor from the disclosure or misuse of any confidential information that has been obtained by a prospective franchisee during the process of negotiation and agreement. On the other hand the amendments require significantly more detailed disclosure regarding operational support measures and have now eliminated the option of providing estimated financial performance representations. Financial performance representations are not only required, but also must be actual results. And now all litigation regarding the franchise in the last five years must be disclosed, no matter how trivial it is. The specific amendments are described in below.
In Article 3 the definition of ‘affiliates’ has been expanded to include individuals.
In Article 4 there is now an exemption from disclosure on renewal provided that the renewal is on the same conditions.
In Article 5 (1)(5) the bankruptcy disclosure required has been reduced from the last five years to the last 2 years.
Article 5(6)(1) is new and requires specific details of the content an delivery of the operational guidance to be provided by the franchisor.
In Article 5(8)(2) regarding the disclosure of financial performance of the franchisees has been substantially revised. Estimated gross sales etc. are no longer permitted.
In Article 5(10) the disclosure requirements with respect to litigation in the last 5 years have been modified by the removal of the word ‘material. This means all litigation must now be disclosed.
In Article 7 three paragraphs have been added regarding the protection of the franchisors trade secrets and confidential information from disclosure by prospective franchisees and terminated franchisees.
In Article 9 wording has been added to make rescission available only if the information that is not disclosed would make it impossible for the franchisee to realize the objectives of the agreement.
Paul Jones , IDI Franchising country expert for China
The text of the new Franchise Disclosure Guidelines can be found in the Legislation Section of the IDI website.
