South Korea has a franchise specific law
("Franchise Act") which imposes
registration and disclosure obligations on
franchisors. Failure to register and disclose the required
information to a franchisee prior to signing the franchise
agreement will expose a franchisor to the risk of
administrative fines, closure of outlets, unenforceable agreements
and damage to the brand.
Since 2008, when the registration and disclosure obligations
took effect, there has been a steady increase in the number of
disclosure document registrations. The most recent statistics
from the Korean Fair Trade Commission
("KFTC"), the government agency tasked
with regulating the franchise industry in South
Korea, illustrate not only this upward trend but also of the
growing popularity of franchising as a business model in South
Korea. This is welcome news, but the success of franchising in
South Korea is arguably in spite of the regulatory regime, not
a consequence of it.
Nevertheless, this success story is taking a toll on
the KFTC's capacity to manage the registrations
effectively. In response, the KFTC has implemented a policy
of canceling disclosure document registrations, at its discretion
and without prior notice, if a franchisor fails to satisfy its
annual update obligations by filing an update application within
120 days from the franchisor's fiscal year end. As an
alternative to cancellation, the KFTC may impose an administrative
fine on the franchisor.
The KFTC is taking this approach as a means of identifying
dormant disclosure documents, with the expectation that it can
reduce the number of disclosure documents that are currently on its
system. Franchisors operating in South Korea therefore need to
ensure that they are fully aware of the applicable deadline for
filing their annual update application and act accordingly.
Franchisors should also take note of some recent changes to the
Franchise Act, which will impact on their annual update
applications. Please click
here to read our earlier blog on these changes.
The Franchise Act provides for ten permissible grounds for
immediate termination of the franchise agreement. These
grounds for termination should be reflected in the franchise
agreement and any attempt to enforce a termination based on grounds
which are not consistent with the ten statutory grounds is likely
to fail. In 2015, there was a revision to one of the ten
permissible grounds, specifically to the ground for termination
which relates to breaches of confidentiality, acts which
damage the franchisor's reputation or the dissemination of
A registered disclosure document will include relevant
disclosure on the grounds for immediate termination.
Therefore, due to this revision to the Franchise Act, a franchisor
must update the relevant sections of its registered disclosure
document to reflect the current law. However, whilst it is
necessary to update the registered disclosure document, it not
necessary to amend the existing franchise agreements to incorporate
this revised ground for immediate termination. For
franchisors looking to enter into new or renewal franchise
agreements, the immediate termination provisions must reflect the
latest revision to the Franchise Act.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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