The Ministry of Justice of Ukraine, through its Order No. 1601/5 recently adopted a new “Procedure for the State Registration of Commercial Concession (and Sub-Concession) Agreements” (the “Franchise Registration Procedure”). Commercial Concession is the Ukrainian legaleze for franchises. The Franchise Registration Procedure entered into force on 1 October 2014 and becomes effective six (6) months from that date, i.e., on 1 April 2015.
The Franchise Registration Procedure finally plugs in a significant gap in Ukrainian franchise law since franchise was originally recognized under the Ukrainian Civil Code of 2003, namely, that all franchise agreements by law have been subject to registration (in order to be effective vis-à-vis third parties) for over a decade but there has been no procedure or registry to give effect to the law. Clearly it is not the purview of the Ministry of Justice to challenge the legislator as to whether or not registration per se is in fact useful.
In this regard, pursuant to its new reform agenda, the new Government of Ukraine submitted to the Ukrainian Parliament on December 22, 2014, a new draft law No. 1580 “On Amendments to Certain Laws of Ukraine regarding Simplification of Conditions of Business Activity (Deregulation)”. This law contemplates fundamental cancellation of the franchise agreement registration requirement. As the new draft law contemplates a host of sweeping changes, it is not clear how quickly it will be adopted in final reading in Parliament and signed into law by the President.
Hence, until that time, the Franchise Regulation Procedure is effective and is to be implemented. To date, franchise agreements effectively have been limited in their legal effect as between franchisee and franchisor only, severely limiting the right of either party to seek any redress in Ukrainian courts for infringements by third parties. As a result, the Ukrainian legal market to date has utilized various compromise structurings, including splitting a standard franchise contract into its composite intellectual property licensing and distributor arrangements.
The Franchise Registration Procedure should now lay to rest the confusion in the market by requiring registration of all franchise arrangements.
The Franchise Registration Procedure does not distinguish between new agreements and those already in place as of its effective date. Hence, we assume – pending any clarifications by the Ministry – that existing franchises should also register and comply with the new Franchise Registration Procedure.
As of 1 April 2015, the Ukrainian State Registrar of Legal Entities and Physical Persons-Entrepreneurs (the “Corporate Registrar”) shall have the additional legal capacity and, it is anticipated by the Franchise Registration Procedure, the technical capability, to record all franchise agreements entered into by Ukrainian entities whether as franchisees or franchisors. This also applies to cross-border franchise arrangements regardless of the governing law of the franchise agreement.
In short, as of 1 April 2015, Ukrainian franchisees and franchisors will have a choice: either register their agreements or risk not being able to secure such agreements against third party infringers.
The registration procedure itself is fairly straight-forward and allows for paper submissions (by mail or in person submission) or electronic submission. Registration is to be confirmed by an extract to be issued by the Corporate Registrar within five (5) days of submission of a complete application package. Registration is to take place based on the location of the entity resident in Ukraine (be it the franchisee or the franchisor). The amount of the registration fee has not yet been publicized. It will obviously be payable in UAH.
Once registered, the information on the agreement will be publicly available on the Corporate Registrar’s web-portal (once fully operational).
Any sub-franchising arrangements (if so contemplated by the primary franchise contract) will not be recorded until such time as the primary arrangement is registered. Any amendments to franchise agreements and termination of such agreements also should be recorded.
Registration will require, however, submission of: an application letter, copies of the actual franchise agreement (and its translation into Ukrainian); original or notarized documents confirming the bona fides of the signatories; and documents confirming the right of the licensor to the intellectual property being franchised. Any documents issued in a foreign language must be accompanied by certified Ukrainian translations and foreign documents must be either apostilled or legalized (depending on whether the issuing country is a party to the Geneva Convention on the Apostille). The Ukrainian applicant also must place its corporate seal on the application form (even though subsequent Ukrainian legislation has made the use of the seal optional on contracts; this remains an application, not a contract).
The bona fides of foreign signatories (powers of attorney or corporate appointments) also must include documents confirming the legal existence (good standing) of the signatory entity.
We trust, but this also needs clarification, that mere confirmation of the franchisor’s master franchise / license agreement will be sufficient for the Corporate Registrar. However, looking to Ukrainian tax legislation, there remains a risk that the Ukrainian tax authorities may continue to look to the beneficial ownership of the license rights when looking to apply any relevant double tax treaty preferences on royalties. In that regard, franchisors and franchisees should also take note: Ukrainian tax law allows double tax treaty benefits to accrue only to registered intellectual property rights (such as TMs), not to rights still in registration (which often may be an issue owing to the lengthy time period required to register a TM).
The Franchise Registration Procedure also contains additional requirements that, absent clarification, may complicate or even frustrate what should be a simple registration, for example:
- Submitted documents should not contain any typos (literary or mathematic) and documents cannot contain any hand-written corrections, cross-outs or white-outs;
- Electronic applications through the electronic portal of the Corporate Registrar must be accompanied by an electronic signature in the form of an electronic “signature key” certified by an authorized key certification center as listed on the web-site of the Ukrainian State Registry (Ukrderzhreyestr) and (NB - not “or”) the web-site of the technical administrator of the Corporate Registry, the state enterprise “Informational-Resource Center;” and
- Scanned (pdf) documents must be black-and-white (not color) submitted in a compressed file format (TIFF).
Franchisees and franchisors also should be forewarned that the information that will become publicly available on the Ministry’s web portal as to the parties and their arrangement shall be substantial, and shall include:
- Names and addresses of the parties
- Date of the agreement and the date of its registration in the Corporate Registry (and its registration number)
- The subject matter of the agreement
- The duration of the agreement and the duration of the intellectual property right of the franchisor
- The territory of the franchise Any right of the franchisee to sub-franchise
- Any reference to exclusivity granted to the franchisee or agreement of the franchisor not to engage in activity in the franchise territory
- Any reference to prohibitions against the franchisee servicing any competitors of the franchisor or competing directly against the franchisor in the franchise territory
- Any requirement of the franchisee to obtain consent from the franchisor on any franchise location
- The name, residential address and contact telephone number of the individual submitting the application
The Franchise Registration Procedure resolves the current debate on registration of Franchise Agreements, but it remains to be seen whether this legal requirement itself will not be cancelled in the future in light of Ukraine’s new reformist agenda.