Listing of Equity Securities

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Franchising In the PRC - The Current Regime
Harry Elias Partnership
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Summary

• The current legal regime
• What is franchising?
• Prerequisites as a Franchisor
• Filing requirements
• Relationship between Franchisor and Franchisee
• - Information disclosure rules
• - Franchise contract
• Specific Issue How to protect your IP rights?

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1. The Current Regime - Legislation

• The current regime comprises three legislations
  which took effect on 1 May 2007
• The Regulations on the Administration of
  Commercial Franchises (Franchise
  Regulations)??????????
• The Administrative Rules on Commercial Franchise
  Filing (Filing Rules)????????????
• The Administrative Rules on Information
  Disclosure of Commercial Franchising (Disclosure
  Rules)??????????????

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1. The Current Regime - How does the new
regime affect foreign franchisors?

• Under the old regime
• A foreign franchisor must set up a foreign
  investment enterprise (FIE) ?????? in China
  before it is allowed to offer franchises in the
  country.
• A foreign franchisor must own two
  directly-operated stores within China to be
  eligible as a franchisor.
• Under the new regime
• Not limited to setting up a FIE cross-border
  franchising arrangements are allowed (if viewed
  from a strict reading of Chinese laws).
• Requirement for directly-operated stores
  requirement relaxed so that two directly-operated
  stores outside China are allowed.

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• What is Franchising

• What is Franchising? - 3 Elements (Article 3)

• A franchisor grants the franchisee the right to
  use its business resources.
• Franchisees must conduct their business
  operations according to a uniform model.
• The franchisee pays fees to the franchisor.

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• Prerequisites As A Franchisor

• An individual is not allowed to engage in
  franchising activities as a franchisor.
• Franchisor must have a mature business model and
  be able to provide business training and
  continuous operational guidance and technical
  support.

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Prerequisites As A Franchisor

• The 21 Rule (2nd para of Article 7)
• A franchisor is required to have two
  directly-operated company-owned stores and must
  have operated them for at least one year.
• 21 Rule to be evidenced by certificate
  prepared by franchisor which should be notarised
  and authenticated (if stores are outside China)
  or issued by the competent commercial
  administration authorities (if stores are in
  China).
• Such certificate must be filed in accordance with
  the Filing Rules.

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• Filing Requirements
• - Franchise Regulations

• Authorities to file documents with Article 8
• If franchising business is located in more than 1
  province Ministry of Commerce (MOC) ???
• If franchise business is located in 1 province
  MOCs provincial counterparts ????????
• Initial filing
• within 15 days from the date of signing of the
  franchise contract

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• Filing Requirements
• - Franchise Regulations

• Documents for Initial Filing
• Basic information on the franchisor's business
• Certificate evidencing compliance with the 21
  Rule
• Written undertakings to comply with PRC laws
• Locations of the franchisors stores in China
• Franchisors marketing plans ?????
• Copy of business licence ????
• Copies of certificates of trademarks, patents and
  other business resources related to the franchise
  activities
• Draft franchise contract
• Franchise operation manual ????

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• Filing Requirements
• - Filing Rules

• Modification Filing - Article 7 of the Filing
  Rules
• within 30 days of any change in information of
  the franchisor
• Annual Update Filing - Article 8 of the Filing
  Rules
• by 31 March of each year
• any conclusion, rescission, extension and
  modification of franchise contracts taking place
  in the preceding year.

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• Relationship Between Franchisor and Franchisee
• - Information Disclosure

• Chapter 3 of the Franchise Regulations (Article
  20-23)
• A franchisor must disclose relevant information
  to the prospective franchisee at least 30 days
  before the franchise contract is signed.
• The franchisor must update the franchisee with
  any material changes.
• Franchisee is entitled to terminate the franchise
  contract if a franchisor conceals information
  that is should have disclosed, or provides false
  information.

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• Relationship Between Franchisor and Franchisee
• - Franchising Contract

• Article 11-13 of the Franchise Regulations
• Must be in written form.
• Must contain a provision that the franchisee may
  unilaterally terminate the franchise contract for
  a certain period of time after signing it.
• Term not less than 3 years. Shorter tenure is
  possible provided the franchisee agrees
• Certain items are required in the franchise
  contract.

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• Relationship Between Franchisor and Franchisee
• - Franchising Contract

• Other important clauses
• Disputes resolution Arbitration - SIAC or CIETAC
• Language Chinese or English or both
• Governing law normally by Chinese law
• Renewal of contract mutual agreement
• Post-termination restraint clauses

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• Specific Issue
• - How to protect your IP rights?

• Intellectual Property System In China
• China is a party to international treaties for
  the protection of intellectual property.
• Trademarks and Patents China follows a
  first-to-register rather than a first-to-use
  principle.
• Company names company name registration is
  separate to trademark registration.

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• Specific Issue
• - How to protect your IP rights?

• How to protect your IP rights?
• An obligation must be imposed on franchisees to
  keep their franchisors' trade secrets
  confidential.
• Confidentiality agreement to protect your
  disclosed information.
• File and register your company name/IP with the
  relevant PRC authorities as early as possible
  (before licensing the trademark/patent to
  franchisee) to protect and ensure enforcement of
  your IP rights.
• Licensing agreements

Harry Elias Partnership
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Thank you
For queries, please contact June Ho, Partner,
Corporate Financial Services Practice
Group Harry Elias Partnership SGX Centre 2,
17-01, 4 Shenton Way, Singapore 068807 Tel
65 6361 9852 Fax [phone] E-mail
june_at_harryelias.com.sg Website
www.harryelias.com