Franchise Agreement

Question 1
Our understanding is that the application to register the franchise will not be made for some time after the pilot operation run by the franchisee has commenced, as the Registry requires proof that the franchise can operate successfully in Malaysia before awarding a franchise license.
We have been proceeded on the following basis:
a) That the letter of intent needs to be submitted and approved before we can make any formal arrangement with the franchisee.
b) That we need to sign a master franchise agreement with the franchisee so that he can start a pilot operation.
c) The franchisee needs to operate said pilot operation for a number of months before we can apply to the registry for a franchise license (so the franchise agreement for the sub franchises would only need to be prepared at this point).

Answer 1
Stage 1 - Approval under Section 54.
First, the letter of intent is submitted to the Registry of Franchises (ROF). In theory, the letter of intent should be filed and approved before offering the franchisor franchise for sale in Malaysia or to Malaysians. This is to ensure that the franchise is not against Malaysian public interests. We should receive a preliminary approval, approval with conditions or rejection in 1 to 3 months, for convenience we shall term this the “Section 54 approval”. You are correct that you should not make any formal arrangements with the franchisee prior to receiving official Section 54 approval.

Please take note that the Section 54 approval does not give the franchisor or the franchisee the permission to commence operations for a trial period. The Master Franchise Agreement should be prepared at this point.

Stage 2 – Application to Register the Master Franchise Agreement.
In the application stage, the ROF will examine the master franchise agreement in detail. As it was highlighted you in our earlier letters, the registry in Malaysia has set out strict rules in registering a franchise agreement.

In relation to your understanding that “the franchisee needs to operate said pilot operation for a number of months before we can apply to the registry for a franchise license (so the franchise agreement for the sub franchises would only need to be prepared at this point.”

This understanding is not quite accurate. At the time of application at this stage, the ROF does not require any proof to indicate that the franchise is operating successfully in Malaysia. The ROF requires evidence of use of the trademark, which can be from any country or countries. The franchisor also can show evidence of use of the trademark in Malaysia, if the franchisor has been using the mark in Malaysia. “Use” here covers direct use by the franchisor itself or use by other third parties via legal agreements. As advised in our earlier letters, the more extensive the evidence of use of the trademark, the greater the popularity of the trademark, the more convincing the application will be to the ROF, as the Registrar is more likely to conclude that Malaysia will benefit from the franchise.

Stage 3 – Registration of Sub-Franchises.
Under the Master Franchise Agreement, it is critical to ascertain whether the franchisee has the right to sub-franchise the franchisor franchise to a third party, at the franchisee own expense – in this case the franchisee would be the Master Franchisee. In this case, he would be treated as a franchisor and he have to register his agreements with every individual sub-franchisor.

If the franchisee does not have the right to sub-franchise, he would be an ordinary Franchisee.