Managing Franchise Non-Compete Restrictions in Malaysia

Business owners looking to build a franchise network need to clarify one issue from the outset: can franchisees continue to own or operate another similar business? This is not simply a matter of brand loyalty. Malaysia has specific legal provisions that need to be reflected in clear processes for declaring interests, assessing applicants and managing franchise relationships.

Understand the restrictions under the Franchise Act

The Franchise Act 1998 (Act 590) governs the sale and operation of franchises in Malaysia. Alongside registration and disclosure requirements, it also regulates aspects of the ongoing relationship between franchisors and franchisees.

Section 27 prohibits franchisees from carrying on a business similar to the franchised business during the franchise term and for two years after the agreement expires or is terminated. Non-compete restrictions should therefore not be treated as optional terms that apply only when a franchisor chooses to include them in the contract.

However, what counts as “similar” requires an assessment of the actual circumstances. Do not assume that all food businesses, education centres or retail shops automatically fall into the same category. Products, target customers, operating models and the nature of a person's involvement may all be important to a legal assessment.

Engage a lawyer familiar with franchise law to review the scope of the obligations, who must provide the relevant undertakings and how these should be documented. Avoid copying non-compete clauses from overseas agreements, as the legal framework may differ.

Obtain declarations before deciding to appoint a franchisee

When an established business starts accepting franchise applications, do not wait until the agreement is ready to be signed before asking about an applicant's business interests. By then, the applicant may already have committed to a lease, financing or recruitment.

Prepare a short declaration form requesting relevant information, such as:

• Businesses the applicant owns, operates or manages.
• Directorships, shareholdings and operational roles in other companies.
• The main products or services offered by those businesses.
• Involvement with other brands through licensing, agency or franchise agreements.
• Plans to open new businesses during the franchise term.

Distinguish between passive ownership and day-to-day management on the form, but do not conclude that either is necessarily exempt. This information helps a lawyer assess the actual circumstances; it does not replace legal interpretation.

Explain why the information is being collected and restrict access to the staff handling the review and the relevant advisers. Avoid requesting comprehensive family information without a clear reason. First establish what information is genuinely relevant to the ownership structure and statutory obligations.

If there is a potential overlap, defer the appointment decision until the matter has been clarified. Record the information reviewed, any outstanding questions and who is responsible for obtaining clarification.

Distinguish contractual clarification from permission to make exceptions

The franchise agreement should explain the obligations in understandable language. Section 18 of the Franchise Act 1998 requires franchise agreements to be in writing and to contain the prescribed mandatory provisions. Competition-related clauses should be reviewed in the context of the agreement as a whole and the Act.

For example, an applicant who operates a drinks shop may apply for a café franchise. The recruitment team should not immediately say that the existing business is permitted simply because its brand name or main menu differs. Instead, obtain details of its operations and refer the matter for assessment.

A franchisor's commercial consent does not necessarily override statutory obligations. Do not issue exemption letters or give verbal assurances without legal advice. A side letter is not a shortcut to changing the effect of a statutory provision either.

If the proposed solution involves selling a business interest or stepping down from management, establish what evidence is required. A resignation letter alone may not resolve every question about ownership or actual involvement.

Any material amendment to a registered franchise agreement should also be assessed for any requirement to notify or obtain approval from the Registrar of Franchises. Do not amend individual clauses simply to speed up an applicant's acceptance.

Maintain records throughout the relationship and after it ends

An initial declaration alone is not a sufficient management control. Business interests can change when franchisees acquire other companies, bring in investors or take on additional management roles.

As a management practice, establish a channel through which franchisees can report relevant changes. Arrange for information to be reconfirmed at reasonable intervals. Make clear that these periodic reviews are an internal process, not a claim that the Act imposes new reporting obligations.

Keep declarations, supporting documents, legal advice and decisions in an organised filing system. If a complaint arises, verify the facts before making allegations. Similar product names or photographs on social media alone do not necessarily establish the full picture.

When the relationship ends, record the effective date of expiry or termination and provide a written reminder of any continuing obligations. Obtain a lawyer's review before taking enforcement action.

Practical step: before accepting your next franchisee, prepare a declaration of interests form and establish a process for referring issues for legal advice. The aim is to ensure that obligations are understood from the outset, rather than springing surprises on franchisees after they have invested.