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Korea or Kazakhstan--the waters are always changing.

The international franchise scene continues to change with ever more countries adopting franchise-specific legislation. In the last year, two countries--Korea and Kazakhstan--have added new franchise laws and the web of franchise disclosure requirements continues to spin.

Going to South Korea?

On November 1, 2002, South Korea enacted the South Korean Act on Fairness in Franchise Transactions (AFFI). The AFFT may be distinctive among foreign franchise laws in imposing serious criminal liability (up to five years in jail) for failing to provide a disclosure document.

Principal features of the law include:

* Requiring a franchisor to provide a disclosure document to a prospective franchisee at least five days prior to the execution of an agreement or payment of a fee;

* The disclosure document should be kept on file at the franchisor's office, be provided directly to the prospective franchisee, or be published on an information communication system (e.g., the Interne);

* If there are any changes to the disclosure document prior to delivery of the franchise agreement, the franchisor must provide the prospective franchisee with any changes to the content of the disclosure document;

* The disclosure document must contain information regarding the franchisor's business condition, executive's experience, the franchisee's obligations, conditions of business operations, support, education, training, guidance, and control of the franchisee, the franchise agreement's provisions on cancellation and termination, the franchisor's balance sheet and profit-loss statement for the fiscal year immediately preceding the date of the disclosure information and other items, as determined by the Presidential Decree No. 17773, enacted November 6, 2002 by the Ministry of Government Administration and Home Affairs;

* The South Korean Fair Trade Commission designates a standard form of disclosure document; however, franchisors are not required to use this form;

* If a prospective franchisee or franchisee requests information about historical profit conditions or future expected profit conditions, the franchisor must have at its office these materials as determined by the Presidential Decree, including audit reports prepared by a certified public accountant;

* If a franchisor violates the AFFT, the commission may require that the franchisor provide or amend the disclosure document, and undertake other corrective measures for such violations: and

* The AFFT provides for monetary penalties and imprisonment of not more than five years under Article 41 of the AFFT for failure to provide a disclosure document.

Thinking about Kazakhstan?

In a scantly reported development in June 2002, the Republic of Kazakhstan adopted Kazakhstan Law No. 330, "On Complex Business License. The law does not require pre-sale disclosure, but rather regulates the franchise agreement and the rights and duties of all parties involved in the franchise relationship, and provides for mandatory state support of franchise activity.

Notable provisions of the Kazakhstan law include:

* Granting the franchisor the right to control the quality of goods produced and services rendered by the franchisee, to preemptive purchase in the event the franchisee "alienates its company," and to unilaterally terminate the franchise agreement and claim damages if the franchisee defaults in its obligations specified in the statute;

* Requiring the franchisor to transfer to the franchisee the technical and commercial documentation and other information required by the franchisee to exercise the rights granted under the franchise agreement, to provide training and consultation to the franchisee, and not to disclose confidential commercial information obtained from the franchisee;

* Requiring the franchisee to provide the franchisor with the required documentation and render assistance in obtaining the information necessary for the franchisor to exercise control over the use of the franchised rights, to comply with the franchisor's instructions on operating the franchised business, not to disclose the franchisor's commercial secrets and confidential information, and to inform customers that the franchisee is operating under a franchise agreement;

* If the franchisee discloses the franchisor's confidential information to a third party, the franchisee is obligated to compensate the franchisor for its damages;

* Optional registration of intellectual property rights transferred under the franchise agreement;

* Mandatory measures of state support for franchising relations, including contemplated registration and protection of franchises; and

* Requiring disputes between the franchisor and franchisee to be settled under Kazakhstan Law.

Disclosure Requirements

Australia, Brazil, Canada (Alberta and Ontario provinces), China, France, Indonesia, Malaysia, Mexico, Romania, Russia, South Korea, and Spain have enacted laws which require the franchisor to comply with certain presale disclosure and/or registration or filing requirements in connection with the offer or sale of a franchise. In a recent survey that we conducted, we determined that in nearly all these countries a country-specific disclosure document must be provided to the prospective franchisee prior to the execution of any letter of intent or option to purchase franchise rights, or the payment of any money by the prospective franchisee to the franchisor, pending completion of the contracts. Whether this means that disclosure of the parties' letter of intent is required, along with the terms of the underlying transaction is less clear. To the extent that the letter of intent terms must be disclosed, this would add an additional disclosure that is customarily not included in a franchisor's disclosure document, uniform or not.

Franchisors build their systems based on uniformity, but their global expansion encounters endless variation. As franchising gains popularity overseas, it appears as though franchisors will undoubtedly continue to be faced with the daunting task of researching, learning, and complying with country-specific franchise laws in every local market in which expansion is desired.

Andrew Loewinger is a partner at the law firm of Nixon Peabody LLP in Washington, D.C He can he reached at aloewinger @nixonpeabody.com or 202-585-8855.
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Title Annotation:franchise disclosure regulations; International
Author:Loewinger, Andrew P.
Publication:Franchising World
Geographic Code:9KAZA
Date:Sep 1, 2003
Words:915
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