Legal Insight: A guide to foreigners starting a business in Malaysia and navigating registration process in Franchise Industry.
Written by: Atiqah Binti Abdul Razak
Corporate Lawyer
Introduction
This article provides information on how foreign franchisors can start a business in Malaysia through franchise system and comply with Malaysian law specifically the registration process.
As one of the fastest -growing nation in the region, Malaysia provides a good avenue for foreigners to do business in Malaysia, particularly in the franchise system. Franchising is a rapidly growing business model around the world. In today’s competitive market, franchising helps companies develop quickly and penetrate global market widely. In Malaysia, the Franchise Act 1988 regulates the entire franchise Industry.
Definition: What is the definition of a franchisor?
Section 4 of the Franchise Act 1988 defines “franchisor” as a person who grants a franchise to a franchisee and includes a master franchisee with regard to his relationship with a sub franchisee, unless stated otherwise in this Act.
The definition of franchisee also can be defined in Section 4 of Franchise Act 1988 which means a person to whom a franchise is granted and includes, unless stated otherwise in this Act; –
(a) A master franchisee with regard to his relationship with a franchisor; and
(b) A sub franchisee with regard to his relationship with a master franchisee.
Referring to the above definition, the first step that needs to be taken by foreign franchisor is to find master franchise in order for them to expand their business or establish their brand in Malaysia.
Registration of Trademark
Secondly, there is a requirement for the registration of trademarks in Malaysia.
Even if the foreign franchisor already registers a trademark in their country, they still need to register to register a trademark in Malaysia before they can operate their business in Malaysia. This is because trademark registration is based on a territorial basis. It is mandatory to register trademark in Malaysia because it is the requirement provided by registrar.
Section 24 of the Franchise Act 1998 highlights that
“A franchisor is required to register his trademark relevant to his franchise in accordance with the Trade Marks Act (if they are registrable under the Act) before applying for the registration of the Franchise under Section 7.
Franchise Agreement
Thirdly, there is a requirement for a franchise agreement. It is very important to protect the rights of the franchisor and franchisee. The solicitor may help the parties prepare a comprehensive agreement and comply with the requirement under Franchise Act 1998.
The agreement will detail the terms and conditions agreed upon between the parties. According to Section 18 (1) of the Franchise Act 1998, a franchise agreement shall be in writing.
Section 18 (2) of the Franchise Act 1998 highlights the elements that need to be included in the agreement as follows:
(a) The name and description of the product and business under the franchise;
(b) The territorial rights granted to the franchisee;
(c) The franchise fee, promotion fee, royalty or any related type of payment which may be imposed on the franchisee;
(d) The obligation of the franchisor;
(e) The obligation of the franchisee;
(f) The franchisee’s rights to use the mark or any other intellectual property;
(g) The conditions under which the franchisee may assign the right under the franchise;
(h) A statement on the cooling off period as provided in subsection (4);
(i) A description pertaining to the mark or any other intellectual property owned or related to the franchisor which is used in the franchise;
(j) If the agreement is related to a master franchisee, the franchisor’s identity and the rights obtained by the master franchisee from franchisor;
(k) The type and particulars of assistance provided by the franchisor;
(l) The term of the franchise, and the terms of renewal and extension of the franchise agreement; and
(m) The effect of termination or expiration of the franchise agreement.
Registration of Franchisor
Fourthly, a foreign franchisor needs to register a franchise in Malaysia. Based on Section 6 (1) of Franchise Act 1998, it clearly states that:
“A franchisor or a foreign person who has obtained an approval to sell a franchise in Malaysia or to any Malaysian citizen under Section 54 shall register his franchise with the Registrar before he can operate a franchise business or make an offer to sell the franchise to any person”.
Procedurally, the registration process shall be made with the Ministry of Entrepreneurship and Cooperatives.
The following documents shall be submitted to the registrar:
(a) The complete disclosure documents with all the necessary particular filled in;
(b) a sample of the franchise agreement;
(c) the operation manual of the franchise;
(d) the training manual of the franchise;
(e) a copy of the latest audited accounts, financial statements, and the reports, if any, of the auditors and directors of the applicant; and
(f) such other additional information or documents as may be required by the Registrar.
This is in accordance with Section 7 (1) of Franchise Act 1998.
At the same time to commence the business, the registration of the franchisee of a foreign franchisor needs to be completed before running the business. According to Section 6A (1), it is clearly stated that a franchisee who has been granted a franchise from foreign franchisor shall apply to register the franchise with Register.
Conclusion
In conclusion, registering a foreign franchisor in Malaysia is a critical process that requires compliance with Malaysian’s law and regulations governing franchising. It is important for foreign franchisors to seek legal advice and appoint an advocate & solicitor or franchise consultant to provide consultation and assist on registration and comply with Franchise Act 1998. By following the prescribed procedures, conducting market research, collaborating with local partners, a foreign franchisor can establish a strong presence in the Malaysia market.
Disclaimer: This newsletters contains general information only. It does not constitute legal advice nor an expression of legal opinion. For further information or inquiries kindly email atiqah@legalasa.com.
