Franchising in South Korea - important updates to disclosure rules

Franchisors doing business in South Korea need to ensure that they update their registered disclosure document on an annual basis and file the updates with the authorities, or risk having their registration - and therefore their right to franchise - cancelled.

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. 

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 false information.

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.