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Franchising in Taiwan: due diligence

by Gregory Buxton, Yi-Kai Chen and Bryan Tan

As in our first installment of this series of articles on franchising in Taiwan, in this second installment we are going to focus on basic common sense. Like the need to register related intellectual property covered in our previous article, it should go without saying that franchisors should perform adequate due diligence on their potential Taiwan franchisees.

2. Do adequate diligence on your Taiwan franchisee

So, what is adequate due diligence in the context of identifying and signing a new Taiwan franchisee? We advise clients to take a two-pronged approach, using the diligence process: (i) to determine whether the potential franchisee has the finances, experience, and connections to be successful in the Taiwan market and (ii) equally as important, to determine the exact corporate structure of the potential franchisee and identify assets of the franchisee and any guarantors which would become the focus of future legal action should the franchisee breach its obligations under the franchisee agreement. The first aspect of diligence is looking at upside potential. The second is attempting to mitigate downside risk.

We cannot overemphasize the importance of this second aspect of the due diligence exercise. Of course, any well-drafted franchise agreement will have the franchisee represent and warrant to its current corporate structure and covenant that control of the franchisee will not change without the consent of the franchisor. These provisions, however, have no “teeth” unless the franchisor and any guarantors have significant assets against which a franchisor can enforce its franchise agreement rights. You, the franchisor, are granting the franchisee the rights to use and exploit your most valuable assets, your brand and your system. It is prudent to identify equally significant assets of the franchisee against which enforcement may be taken in the unfortunate case of a material breach by the franchisee of its obligations.

In a particularly egregious case we have seen recently, a franchisor (prior to engaging us) executed a franchise agreement with an individual as the franchisee and another individual as guarantor. Having not identified any significant assets of either individual, when the franchisee ultimately violated the franchise agreement, the franchisor was left with no viable leverage to prevent further violation. The franchisor was left (i) attempting to obtain a preliminary injunction (which are notoriously hard to obtain in Taiwan and which are the subject of a separate part of this series) and (ii) seeking monetary damages in an offshore arbitration proceeding which if successful would still need to be enforced here in Taiwan.

On a more positive note, Taiwan does allow guarantors to guarantee the full performance of the franchisee’s obligation under the franchise agreement. The guarantor and the franchisee may be jointly and severally liable for any liabilities that result from the franchise agreement. Provided that the guarantee language specifically so states, Taiwan law also allows the franchisor to make claims directly against a guarantor without the need to take any prior action against the franchisee or other contracting party.

In our next part of this series, we will examine obtaining preliminary injunctions in a franchising dispute. If you have any questions or require additional information on franchising in Taiwan, please contact Gregory Buxton at gbuxton@winklerpartners.com.

 

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