International Law

Franchise Disclosure Statement Registration Starts in August

Last year the Franchise Act was amended, introducing, among other things, an obligation for franchisors to register their disclosure statements with the Korea Fair Trade Commission, which would make the disclosure publicly available. Previously, although there was a recommended form promulgated for use by franchisors, its use was not mandatory. For international franchisors appointing a single franchisee or licensee in the Korean market, whom they reasonably believed could read and understand English, it was lawful to use their already-prepared disclosure statements from the home market.

The Franchise Act amendment became effective February 4, 2008. But because the KFTC’s computer systems and internal processes were not ready to accommodate the new legal obligation to store and publicize franchise disclosure statements, the agency has postponed the effectiveness of the disclosure-registration requirement until August 4, 2008.

This month I’ve received five incoming franchise-agreement matters (thank you, referral sources!), and all of them have been concerned about compliance with the registration requirement. So we’ve been doing some checking and double-checking with regulators concerning the interpretation of the August 4 deadline. Do franchisors have to conclude the entire franchise agreement on or before August 3, or is it sufficient that disclosure shall have been made by that date?

The answer is: So long as disclosure is made by August 3, 2008, the franchisor has no obligation to register the disclosure statement with KFTC. On or after August 4, the disclosure must be registered—which means it must be prepared in the Korean language in accordance with a format yet to be promulgated by KFTC. That will be more expensive for foreign franchisors, so we recommend that any international franchisor considering a Korea franchise get their disclosure out by August 3.

For ease of understanding by the franchisee, we do recommend a Korean-language “wrap letter” as a roadmap to content in the English-language disclosure statement. Still, this is optional, and franchisors concerned about costs (and willing to leave themselves open to arguments that there was no mutual understanding between the parties, since the legalese in the disclosure statement and franchise agreement were so dense) are free not to do so. At least until August 4.

Remember, the execution of the franchise agreement—and, more importantly, acceptance of any franchise fee including “holding fees” for discussions—must be delayed at least 14 days from delivery of franchise disclosure (or seven (7) days in the case the franchisee appoints an attorney to receive disclosure).

Full post as published by Korea Law Blog on April 18, 2008 (boomark / email).