Joint Franchise Ownership in Hong Kong: Agree Equity, Decision-Making Powers and Funding Obligations Before Signing

When buying a franchise with friends or family, discussions often start with how much each person will contribute. Less attention is paid to who can sign contracts on the company’s behalf, who will cover losses and how disagreements will be resolved. In Hong Kong, the franchise agreement governs the relationship between the operating company and the franchisor, but the rights of the joint investors still need to be set out through a clear corporate structure and shareholders’ agreement. Settle these issues after choosing a brand but before taking on any payment obligations.

1. Establish who holds the franchise rights: shareholders and the company are not the same

If you plan to operate through a limited company, first confirm whether the franchise agreement, lease, bank account and key purchasing contracts will all be held by the same operating company. Do not let one friend sign in their own name and assume the contracts can automatically be transferred once the company is incorporated. Transferring a contract may require the other party’s consent, and the original signatory may not be released from liability immediately.

Owning shares in a company does not mean an individual shareholder directly owns the shop’s equipment, cash or franchise rights. Directors are responsible for managing the company and cannot simply act on the wishes of the shareholder who nominated them: they must fulfil their duties to the company. Even where one person is a shareholder, director and shop manager, the rights and responsibilities attached to each role should be recorded separately.

Hong Kong has no franchise-specific legislation, nor any generally applicable statutory franchise disclosure document, franchise registration system or mandatory franchise code. This does not mean franchising is outside the law: contractual and common law principles, the Misrepresentation Ordinance and other laws may still apply. A business operating through a limited company must comply with the Companies Ordinance and obtain business registration under the Business Registration Ordinance. Neither company incorporation nor business registration amounts to government endorsement of the brand or its investment returns.

2. Record equity, loans and pay for work separately

“We will each put in half” does not adequately explain the nature of the funding. Money paid into the company may be capital used to subscribe for shares or a shareholder loan. These carry different rights and repayment arrangements; a bank transfer reference alone should not determine how the money is treated.

Before signing, prepare a contribution schedule setting out the following for each person:

• Share capital: the number and class of shares being subscribed for, the amount payable and the payment date.
• Shareholder loans: whether interest is payable, when repayment can be requested and whether repayment is restricted by bank financing terms.
• Pay for work: the full-time manager’s salary, duties, working hours and approval process.
• Profit distributions: how dividends will be considered after setting aside money for tax and working capital.

Do not treat “we will share out the profits every month” as an unconditional promise. Dividends must comply with applicable law and the company’s governing documents. Cash in the bank is not necessarily all available for distribution. If someone is receiving shares in return for management work, specify when those shares will be earned and what happens if they leave early. This helps avoid a situation where someone permanently acquires their entire stake without fulfilling their commitment.

3. Define decision-making powers and plan for additional funding

Shareholding percentages do not automatically determine who decides every operational matter. The shareholders’ agreement should work alongside the company’s articles of association, setting out the board’s composition, quorum, voting arrangements and matters requiring special approval. The two documents should not conflict.

Routine purchasing within an approved budget can be delegated to the shop manager. Matters such as taking on new borrowing, opening a second outlet or renting equipment from a shareholder or their relatives may warrant a higher approval threshold. Bank payment authorisations should also be set according to the amount and purpose, with a mechanism for emergency repairs so that every minor issue does not require everyone’s signature.

Additional funding must not be left undefined. The agreement should specify who can raise a funding request, what cash-flow information must be supplied, the payment deadline once approved and whether the new money will be a loan or share capital. If one person cannot contribute, can the other shareholders lend money to the company? Could a new shareholder be brought in? Will existing shareholders have priority rights to subscribe for new shares?

Do not assume that missing one payment automatically means losing shares. Any dilution, share transfer or consequences of default should follow an appropriate procedure designed by a lawyer. Check whether these steps trigger consent requirements in the franchise agreement or financing documents. The budget should also cover professional fees, corporate administration costs and operating reserves—not just franchise fees and fit-out costs.

4. Protect access to financial information and provide a way to resolve disputes

Shareholders who are not involved in day-to-day management should receive more than a vague “business was average this month”. The agreement can require monthly management accounts, bank balances, a list of outstanding debts and explanations of variances against budget. It should also set out procedures for inspecting documents, confidentiality obligations and reasonable response times. Statutory information rights do not mean every shareholder is entitled to operate the company’s bank account whenever they choose.

Decision-making deadlock is particularly important to address in a 50:50 ownership arrangement. Both parties could first set out the dispute in writing, followed by negotiation or mediation. Only if the issue remains unresolved would a pre-agreed share buyout process begin. Consider the valuation method, appointment of an independent valuer, payment deadlines and sources of funding together. Simply stating that someone can “exit at market value” is not enough.

A shareholder’s departure and termination of the franchise are separate matters. Even if the company remains the original contracting party, a change in shareholding or control may require the franchisor’s, bank’s or landlord’s consent. An internal agreement cannot replace those consents or, by itself, release shareholders from personal liabilities they have separately undertaken.

Practical takeaway: Before making any payments, complete a contribution schedule, a decision-making authority matrix and a plan for funding shortfalls. Then ask a Hong Kong lawyer to check that the shareholders’ agreement, articles of association and franchise agreement are consistent. Clear internal rules provide the foundation for running the business together.