The Franchise (Amendment) Act 2020 ("Amendment Act") came into force on 28 April 2022 amending the Franchise Act 1998 (“the Act”) to impose more stringent requirements on both franchisors and franchisees in terms of registration as well as the provisions of the franchise agreement. Various regulations including the Franchise (Compounding of Offences) (Amendment) Regulations 2022, Franchise (Qualification of a Franchise Broker) (Amendment) Regulations 2022, Franchise (Manner of Appeal) Regulations 2022, Franchise (Forms and Fees) Amendment Regulations 2022 and Franchise (Prescription of Period of Effectiveness of Registration) Regulations 2022 also come into effect on the same date.
 
A.  Foreign franchisors must register the franchise  
 
Section 54 of the Act has always required a foreign person who intends to sell a franchise in Malaysia or to any Malaysian citizen to obtain approval from the Franchise and Direct Selling Development Division of the Ministry of Domestic Trade and Consumer Affairs (“the Registrar”). At the same time, Section 6 of the Act provides that a franchisor shall register the franchise before he can operate a franchise business or make an offer to sell the franchise to any person. Previous practice obliged only local franchisors or local master franchisees to register the franchise.
 
The Amendment Act now provides that a foreign person who has obtained approval under Section 54 of the Act must also register the franchise under Section 6. It should be noted that failure to comply with Section 6 is an offence, subject on conviction to a fine not exceeding RM250,000 for a first offence and RM500,000 for a second or subsequent offence in the case of a body corporate and separate penalties including imprisonment in the case of an individual.
 
There is some respite in the transitional provisions of the Amendment Act which provide that a foreign franchisor who has obtained approval pursuant to Section 54 prior to the coming into force of the Amendment Act will be deemed registered under Section 6. However, as from 28 April 2022, a foreign franchisor seeking to enter the Malaysian market must now apply for approval under Section 54 and also separately for registration under Section 6 of the Act.
 
The application for registration under Section 6 involves provision of additional information and disclosure including the complete disclosure documents, a sample of the franchise agreement, the operation manual and training manual of the franchise, the latest audited accounts and financial statement and such other documents as may be required by the Registrar. If there is any material change in any of the supporting documents for registration, the franchisor must apply for approval of the same from the Registrar. A copy of all supporting documents submitted during the application for registration must be provided to the franchisee at least ten days before signing of the franchise agreement.
 
B.  Registration by Franchisee
 
The Act requires a franchisee to also register the franchise as follows: 

However, where the Act was previously silent on the consequences of a franchisee neglecting its registration obligation, the Amendment Act now states that a franchisee who fails to comply commits an offence. The general penalty section applies to this offence which may attract a fine upon conviction of not less that RM10,000 and not more than RM50,000 for a first offence and not less than RM20,000 and not more than RM100,000 for a second or subsequent offence in the case of a body corporate and additional penalties of imprisonment in the case of an individual.
 
C.  Period of Effectiveness of registration of franchise
 
The Act previously provided that the registration of a franchise shall continue to be effective for an indefinite period unless the Registrar issues an order to suspend, terminate or cancel the registration of the franchise.
 
The Amendment Act provides that the registration of a franchise shall be effective for a prescribed period. The Franchise (Prescription of Period of Effectiveness of Registration) Regulations 2022 prescribes a period of five years as the period of effectiveness for the registration of a franchise.
 
The franchisor may apply for renewal of the registration within 30 days from the expiration date of the registration. The five-year period of effectiveness will also apply to the renewed registration period.
 
The transitional provisions in the Amendment Act provide that the prescribed period of effectiveness will also apply to registrations obtained under the Act before the coming into force of the Amendment Act. Therefore, all franchisors will now need to watch out for the expiry of the effective period of their registration and apply for renewal of the registration.
 
At this time, it remains to be seen, how the Registrar will compute the five year period for existing registrations under the Act and what information and documents will be required when applying for the renewal.
 
D.  Mandatory terms of the franchise agreement
 
The Act provides for certain mandatory provisions to be included in the franchise agreement. The Act previously provided that failure to comply would render the franchise agreement null and void, whereas the Amendment Act makes non-compliance an offence. No penalties are specifically prescribed, therefore the general penalties mentioned in Part B above will apply. In addition, upon sentencing a franchisor the court may declare the franchise agreement to be null and void, order the franchisor to refund any form of payment obtained from the franchisee and prohibit the franchisor from making any new franchise agreement or appointing any new franchisee.
 
It is therefore important to ensure that the terms of the franchise agreement strictly comply with the requirements under the Act.
  
E.  Display Registration
 
The Amendment Act imposes a new requirement for the franchisor or franchisee to display the registration of the franchise, at all times, in a conspicuous position at the franchisor’s or franchisee’s place of business. Failure to comply with this requirement is an offence.
 
F.  Fee Structure
 
Along with the changes highlighted above, the Franchise (Forms and Fees) (Amendment) Regulations 2022 has introduced new official fees such as approval fees for foreign franchisors, renewal fees and increased costs for existing fees . A summary on the new fees payable is provided below:

In a nutshell, it appears that the Amendment Act has introduced some additional regulatory restrictions on franchise operations in Malaysia and it would be prudent for franchisors and franchisees to be well acquainted with their obligations and requirements to ensure compliance with the Act.
 
Article by Leela Baskaran (Partner) and Melissa Long (Partner) of the Intellectual Property Practice of Skrine.