Category Archives: Corporate Commercial

Таны Монгол компанид дотоод хяналт болон аудитын шаардлага



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Өмчийн бүх хэлбэрийн аж ахуйн нэгж, байгууллага нь төрийн хяналт шалгалтын шаардлагыг дагаж мөрдөх ёстой. Компанийн дотоод үйл ажиллагааны хяналтыг хариуцсан ажилтангаас бүрдсэн дотоод хяналт шалгалтын эсвэл аудитын хороог аж ахуйн нэгж бүр байгуулах шаардлагатай. Тухайн аж ахуйн нэгж нь дотоодын эсвэл гадаадын хөрөнгө оруулалттай, эсвэл уул уурхайн салбарт ажилладаг, эсвэл үйлдвэрлэл эрхэлдэг, эсвэл үйлчилгээ үзүүлдэг эсэхээс үл хамааран дотоод хяналт шалгалтын нэгжийг байгуулах ёстой.

Дотоод хяналт болон аудитын хороо нь компанийн дотоод хяналттай холбоотой асуудлыг хариуцдаг бөгөөд тухайн аж ахуйн нэгж, байгууллагын хуулиар хүлээсэн үүргийн хэрэгжилтэд хяналт тавьдаг. Хяналтын хороо нь байгаль орчинд үзүүлэх нөлөөлөл болон хамгаалах үүрэгт; бараа, бүтээгдэхүүн, ажил, үйлчилгээний чанарт; хөдөлмөрийн нөхцөл, аюулгүй ажиллагаа, эрүүл ахуйн шаардлагад; өмчийн бүртгэл тооцоо, ашиглалт, хадгалалт, хамгаалалт болон санхүү бүртгэлийн үйл ажиллагаанд хяналт тавьж ажиллана.

Хэрвээ таны Монгол дахь компаниийн дотоод хяналт шалгалтын үйл ажиллагаа Монголын улсын хууль тогтоомжид нийцэж байгаа эсэхэд эргэлзэж байгаа бол зөвлөгөө өгдөг Монголын хуулийн зөвлөхдөө хандаарай.

Хөдөлмөрийн гэрээ, түүний төрлүүд



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Саяхан байнгын үйлчлүүлэгчдийн маань нэг бидэнд хандан ажлаа хангалтгүй гүйцэтгэсэн ажилтныг ажлаас халахад Хөдөлмөрийн тухай хуульд ямар үндэслэл заасан байдаг вэ гэж асуусан юм. Энэ асуултанд хариулт өгөхөөс өмнө эхлээд ажилтантай ямар төрлийн хөдөлмөрийн гэрээ байгуулсан бэ гэдгийг тодруулах нь зүйтэй. Учир нь бүх ажилтантай ижил төрлийн хөдөлмөрийн гэрээ байгуулахыг хууль шаарддаггүй байна. Хөдөлмөрийн тухай хуульд заасны дагуу хоёр төрлийн хөдөлмөрийн гэрээ байдаг ба тэдгээрийг цуцлах журам нь өөр өөр байдаг.

Хөдөлмөрийн хуульд заасны дагуу хоёр төрлийн хөдөлмөрийн гэрээ байдаг: (1) хөдөлмөрийн гэрээ болон (2) хөдөлмөрийн контракт. Эдгээр хоёр төрлийн хөдөлмөрийн гэрээний зохицуулалт хоорондоо ялгаатай.

Хөдөлмөрийн харилцаанд орохдоо ажил олгогч иргэнтэй ихэвчлэн хөдөлмөрийн гэрээ байгуулна. Хөдөлмөрийн гэрээнд хуульд заасан үндсэн нөхцлүүдийг заасан байх шаардлагатай.

Харин ажил олгогч нь иргэний гоц буюу ховор авьяас, өндөр ур чадварыг үнэлэн ажилд авах тохиолдолд түүнтэй хөдөлмөрийн контракт байгуулж болно. Хөдөлмөрийн хуульд заасны дагуу хөдөлмөрийн контракт байгуулж иргэнийг авч ажиллуулж болох ажил, албан тушаалын жагсаалтыг 2000 онд Эрүүл мэнд, нийгмийн хамгааллын сайд 93 тоот тушаалаараа баталсан. Уг тушаалд аж ахуйн нэгж, байгууллагын захирал, гүйцэтгэх захирал, ерөнхий менежер, алба, хэлтэс, тасгийн менежер, аж ахуйн нэгж, байгууллагын доторх нэгж, хэсгийн удирдах албан тушаалд иргэнийг авч ажиллуулахдаа хөдөлмөрийн контракт байгуулж болохоор заасан байна.

Хөдөлмөрийн гэрээ болон хөдөлмөрийн контракт нь хоорондоо хэд хэдэн ялгаатай. Байнгын ажлын байранд хөдөлмөрийн гэрээг хугацаагүй, эсвэл талууд харилцан тохиролцсоноор хугацаатай байгуулж болно. Хөдөлмөрийн гэрээг хугацаатай байгуулсан тохиолдолд гэрээний хугацаа дуусмагц талууд түүнийг цуцлах санал тавиагүй бөгөөд ажилтан ажлаа гүйцэтгэсээр байгаа бол хөдөлмөрийн гэрээг анх заасан хугацаагаар сунгагдсанд тооцно.

Харин хөдөлмөрийн контрактыг таван жил хүртэл хугацаатай байгуулна. Талууд хөдөлмөрийн контракт байгуулах үедээ контрактыг дүгнэх журмыг дэлгэрэнгүй, тодорхой заасан байх шаардлгатай байдаг. Ингэснээр контрактыг дүгнэх үед ажилтан үүргээ зохих ёсоор биелүүлсэн эсэхийг тогтооход хялбар байх юм. Контрактыг дүгнэх үед ажилтан үүргээ зохих ёсоор биелүүлсэн гэж ажил олгогч үзвэл контрактыг цаашид сунгаж болно.

Түүнчлэн талууд хөдөлмөрийн контракт байгуулах үедээ ажил олгогчийн өмнө хүлээх ажилтны үүрэг, ажилтанд олгох урамшуулал, хангамж, хөнгөлөлт, ажилтны мэдэлд олгож буй хөрөнгийн хэмжээ, түүнийг эзэмших, ашиглах, захиран зарцуулах журам, ажилтны гүйцэтгэх ажлын эцсийн үр дүн, үйл ажиллагааны хүрсэн үр дүн, ашгаас ажилтанд олгох хувь хэмжээ болон түүнд хүлээлгэх хариуцлагыг тодорхой заасан байх шаардлагатай. Ажил олгогч нь ажилтны гоц буюу ховор авьяас, өндөр ур чадварыг үнэлэн түүнийг ажиллуулж байгаа учраас хөдөлмөрийн контрактаар ажиллаж байгаа ажилтан нь хөдөлмөрийн гэрээгээр ажиллаж байгаа ажилтнаас илүү их үүрэг, хариуцлага хүлээж тэр хэмжээгээрээ илүү их эрх, урамшуулал, хангамж, хөнгөлөлт эдэлдэг байна.

Үнэт цаасыг анх удаа нийтэд санал болгох буюу IPO хийх



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Сүүлийн жилүүдэд дотоодын хэд хэдэн компани IPO хийж хувьцаагаа нийтэд амжилттай арилжиж хувьцаат компани болсон. Энэ нь компаниуд болон олон нийт (хөрөнгө оруулагчид)-ийн IPO-н талаарх мэдлэг болон сонирхол ихэсэж байгааг харуулж байна.

IPO (Initial Public Offering) буюу үнэт цаасаа нийтэд санал болгох гэдэг нь хөрөнгийн анхдагч зах зээлд компани үнэт цаасаа (хувьцаагаа) арилжаалж/худаддаж улмаар санхүүжилт татан төвлөрүүлэх процесс юм. IPO-г голдуу үйл ажиллагаа нь өргөжин тэлж байгаа компаниуд хөрөнгө санхүүжилт татан төвлөрүүлэх зорилгоор хийдэг. Түүнчлэн хөлөө олсон томоохон компаниуд (ХХК) нээлттэй хувьцаат компани болох зорилгоор мөн IPO хийх боломжтой юм. IPO хийхээс өмнө компани нь хязгаарлагдмал хариуцлагатай компанийн хэлбэртэй байх бөгөөд цөөн тооны хөрөнгө оруулагчтай байдаг. Тэдгээр нь ихэнхдээ компанийн үүсгэн байгуулагч хувьцаа эзэмшигчид болон мэргэжлийн хөрөнгө оруулагчид байдаг. Харин IPO хийсний дараа компани нь хувьцаат компани хэлбэртэй болж өөрчлөн байгуулагддаг бөгөөд компанийн хувьцаа эзэмшигчдийн тоо нэмэгддэг. IPO хийснээр компани хувьцаагаа нийтэд санал болгож, харин компанийн хувьцааг эзэмших хүсэлтэй аливаа хөрөнгө оруулагч (хувь хүн болон хуулийн этгээд) нь компанийн хувьцааг худалдан авахад нээлттэй байдаг. Үнэт цаасны зах зээлийн тухай хуулиар компани хувьцаагаа худалдахаар 50 ба түүнээс дээш тооны хөрөнгө оруулагчид танилцуулах, сурталчлах замаар санал болгох журамтай байдаг.

Компани буюу үнэт цаас гаргач нь IPO хийхдээ андеррайтерийн тусгай зөвшөөрөлтэй үнэт цаасны компанитай гэрээ байгуулж, тухайн андеррайтер нь нэгж хувьцааны үнэ, нийтэд санал болгон худалдах хувьцааны тоо, нийтэд санал болгох хугацааг тодорхойлох зэрэг компанийн үнэт цаасыг нийтэд санал болгон гаргахад мэргэжлийн үйлчилгээ үзүүлнэ. Компани нь IPO-г холбогдох эрх бүхий байгууллагаас баталсан журмын дагуу тодорхой дараалалтай хийнэ. Андеррайтер нь IPO хийх бүх үе шатанд компанид мэргэжлийн туслалцаа, үйлчилгээгээ үзүүлдэг. IPO хийхэд юуны түрүүнд хөндлөнгийн багийг бүрдүүлэх шаардлагатай. Үүнд анддеррайтер, хуулийн фирм, аудитын компани, үнэлгээний компани болон бусад шаардлагатай мэргэжилтэн, мэргэжлийн шинжээчид багтаж болно. Тус хөндлөнгийн баг нь компанийн санхүүгийн тайлан, мэдээлэл, хэтийн бизнес төлөвлөгөө, компанийн дүрэм, журам болон компанийн засаглалын баримт бичиг зэрэг компанийн бүхий л баримт бичиг, мэдээллийг цуглуулж, компанийн үнэт цаасны танилцуулга, холбогдох хуулийн, аудитын, хөрөнгийн үнэлгээний дүнгэлтүүд болон бусад шаардлагатай баримт бичгийг гүйцэтгэж, бүрдүүлж өгдөг байна. Тэдгээр үнэт цаасны танилцуулга болон бусад шаардлагатай баримт бичгийг Санхүүгийн Зохицуулах Хороо (СЗХ)-нд бүртгүүлнэ. СЗХ-нд бүртгүүлсний дараа компани хувьцаагаа нийтэд санал болгож худалдах боломжтой болдог.

IPO хийх нь компанийн хувьд санхүүжилт татан төвлөрүүлэх, түүнчлэн компанийн үйл ажиллагааны цар хүрээг тэлэх сайхан боломжийг олгодог. Гэхдээ үүнд өөрийн давуу тал болон дутагдлууд байдаг. Тиймээс IPO хийхээр сонирхож байгаа бол нэн тэргүүнд бүхий л шаардлагатай судалдаа, тооцоолол, дүн шилжилгээг хийх нь зүйтэй юм. Ингэхдээ СЗХ-ны тусгай зөвшөөрөлтэй андеррайтер, хуулийн фирм, аудитын компани болон үнэлтгээний компаниас мэргэжлийн зөвлөгөө, туслалцаа авахыг зөвлөж байна.

Манай хуулийн фирм нь СЗХ-нд бүртгэлтэй ба манай хуульчид СЗХ-ны тусгай зөвшөөрөлтэй болно. Манай хуульчид танд шаардлагатай хууль зүйн зөвлөгөө, туслалцааг үзүүлэх болно.

Basics of Initial public offering (IPO) in Mongolia



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In recent years several Mongolian private companies have gone public, or conducted an initial public offering (IPO), very successfully. This shows that interest and knowledge about IPO is growing both among companies (businesses) and public (investors).

As you may know, an IPO is when a private company or corporation raises investment capital by offering its stock (shares) to the public for the first time. Initial public offerings are often issued by growing companies seeking capital to expand, but they can also be done by large privately-owned companies or corporations looking to become publicly traded. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders) and professional investors. The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. The Law on Securities Market requires that to conduct an IPO the issuer must offer its stock to at least 50 and more investors.

In an initial public offering, the issuer, or company raising capital, procures the assistance of an underwriting firm (underwriter), to help determine the offering price, amount (number) of shares and timeframe for the market offering. When a company initiates the IPO process, a very specific set of events occurs. The chosen underwriter facilitates all of those steps. Primarily, an external IPO team is formed, consisting of an underwriter, law firm, audit company, appraiser company, and other experts if required. The external IPO team compiles information and documentation regarding the company (issuer), including financial performance and financial statements, expected future operations, corporate governance and corporate documents, and prepares IPO prospectus, legal opinion, audit report, asset valuation report and other necessary documents respectively that are to be filed to Financial Regulatory Commission of Mongolia (FRC). After the company files its prospectus and other necessary documents with the FRC, it sets a date for the offering.

Going public can be a great way to raise money, increase your company’s profile. However, there are number pros and cons in going public. So, when considering conducting an IPO, one must do all proper researches, calculations and analysis. In doing so we advise to seek professional advice and services from FRC listed underwriters, law firms, audit companies and appraiser companies.

Our law firm is FRC listed. Here at LehmanLaw we have FRC certified lawyers, who will provide you with qualified legal assistance.

Alternative Dispute Resolution: Finalizing Mediation



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In a recent post we have previously discussed the practical aspects of mediation in Mongolia. Mediation is one of the better alternative dispute resolution methods for those who are seeking short-term and inexpensive way to settle a dispute. In this article we’ll explore the closing of the mediation process and aftermath.

The mediation process is generally considered more prompt, inexpensive, and procedurally simple than formal litigation. It allows the parties to focus on the underlying circumstances that contributed to the dispute, rather than on narrow legal issues. The mediation process does not focus on truth or fault. Questions of which party is right or wrong are generally less important than the issue of how the problem can be resolved. Disputing parties who are seeking vindication of their rights or a determination of fault will not likely be satisfied with the mediation process.

Nonetheless, if in the mediation process a resolution is reached between parties, a written settlement agreement must be executed. Such settlement agreement is binding for all parties of dispute and considered enforceable contract. As mentioned in our previous post mediation centers operate at courts of first instance (court-based mediation centers), and may operate at government authorities, NGOs and professional associations (other mediation centers). Settlement agreements executed by mediators of a court-based mediation center become a sort of court judgement, as judge of corresponding court issues a court decision confirming such settlement agreement. And if parties fail to voluntarily perform their obligation under settlement agreement, it shall be enforced same as court decision. On the other hand, while settlement agreements executed by mediators of other mediation center are also binding for parties of dispute, these are not enforced same as settlement agreements executed by mediator of court-based mediation center. If parties fail to voluntarily perform their obligations under such settlement agreement, parties have the right to pursue their claims in other forms (such as litigation or arbitration).

However, if in the mediation process parties could not reach any resolution, or parties did not actively seek any resolution, or for other reasons the mediation process could not further proceed, the mediation process shall be terminated. At this point parties of dispute may decide to resolve their dispute through litigation or arbitration.

Franchising in Mongolia: Intellectual Property is More than Trademarks



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In the first part of this series we have discussed about trademarks as part of franchise system. In this part we will discuss about other elements of intellectual property that may be utilized in franchise system.

Other critical element of intellectual property in franchise systems are copyrights. Pursuant to law copyright protects the fixation of the expression of an idea in a tangible form, whether written, verbal, graphical or other objective forms. Copyright exists in a variety of items commonly used by a franchise: training videos, marketing material, ads, websites, music, logos and software. There is significant value to the copyright-protected materials incorporated into a franchise system and, like trademarks, these elements are licensed by the franchisor to the franchisee for use in the franchised business. And, unlike trademarks, copyrights do not have to be registered in order to be protected.

Trade dress is what makes a franchise system unique and distinctive from others, including the overall visual look, feel and impression of a location. Some part of trade dress may be protected by copyrights.

Not all franchises involve trade secrets (i.e. confidential information), but it is typical to see franchise systems maintaining some aspects of their operations as strictly confidential and maintained as trade secrets. In Mongolia there is no law that regulates specifically trade secrets or business aspects of trade secrets. However pursuant to Law on Corporate secret, any corporate information, document, research, method, solution, project and etc. which holds economic value may be considered confidential corporate secret (trade secret) and may be protected from divulgence. In the context of the franchise arrangement, the need and desire to share information with franchisees competes with the legal necessity of limiting the distribution of true trade secret material. Reasonable steps to ensure the identification and protectability of trade secrets include: confidentiality or non-disclosure agreements and clauses; marking of claimed trade secret material, limiting the distribution to “need to know”, password protected computer systems and databases, and locks on cabinets and doors. In some cases, a franchisor’s trade secrets are not even divulged to the franchisee, such as the specific recipes or bulk ingredients required to create a quick-service restaurant chain’s signature sauces.

Patents are usually not included in franchise systems, but they can be. Patent registrations are intended to protect an inventor’s rights to specific inventions, such as a newly engineered product, medical device, drug or other innovation. Unless a franchise system has specifically developed its own equipment, it generally will not include any patents within its intellectual property.

It is very important for franchisor, as well as franchisee, to take the time to fully analyze and review any franchise agreement, disclosure document and respective attachments before signing them. While the above information serves as a general overview, as always, one should seek their own legal advice when reviewing a franchise agreement. Only then it is possible to obtain specific information and recommendations relevant to particular circumstances.

Establishing a Mongolian Franchise Business: Protect Your Intellectual Property



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In a recent blog post we discussed the franchise business model and it’s rapid growth in Mongolia. In a new three-part article series, we will dive deeper into franchise agreements in Mongolia and look at intellectual property, which is one of the most important aspects of a franchise system, and its importance.

Intellectual property law and business law have many areas that overlap. Franchising, in particular, is a unique business model, with the franchisor’s intellectual property at its core.

As such, intellectual property is one of the most important elements of any franchise. Within the franchise agreement, one of the core assets and rights that franchisor will be granting to franchisees will be a license permitting a franchisee to utilize their intellectual property and, in turn, franchisor is declaring to a franchisee that franchisor owns the intellectual property and will protect and defend it. So, it is important for franchisor to make sure that they actually own and can protect intellectual property that they are purportedly licensing to franchisees. Especially, when entering into a franchise agreement with franchisee, who will operate in another country.

These days most people are familiar with the term “intellectual property”, but not everyone understands the differences between various types of it. Intellectual property may include trademarks, copyrights, trade secrets, trade dress (i.e. the look, feel and distinctive elements of a franchise system, such as the interior design, layout and other visual aspects of a franchise location) and sometimes patents under which franchise businesses operate.

Trademarks are perhaps the most commonly recognized and well-known element of intellectual property. The Mongolia Law on Trademarks and Geographical Indications defines trademarks as expressions with distinction, which are used by legal entity or individual in order to distinguish their products or services from that of others. Trademarks can include business names, taglines, service names, logo designs and specific color or color combinations, etc. They are among the visual components of a franchise business.

Just because franchisor has used their trademark for many years it does not mean that trademark is legally protectable nor that they own it. First, franchisor needs to properly register their trademark with intellectual property authority. Secondly, if franchisor is entering into franchise agreement with franchisee, who will operate in another country, franchisor needs to register their trademark in the country where franchisee will operate as well. This way franchisor asserts their ownership of trademark and ensures protection of their trademark from other infringers (such as copycats and confusingly similar marks).

Mongolia’s Double Taxation Treaties



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Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxation.  Double taxation is the levying of tax by two or more jurisdictions on the same declared income, asset or financial transaction. Double liability is mitigated in a number of ways, for example:

  • the main taxing jurisdiction may exempt foreign-source income from tax,
  • the main taxing jurisdiction may exempt foreign-source income from tax if tax had been paid on it in another jurisdiction, or above some benchmark to not include tax haven jurisdictions,
  • the main taxing jurisdiction may tax the foreign-source income but give a credit for foreign jurisdiction taxes paid.

Another approach is for the jurisdictions affected to enter into a tax treaty which sets out rules to avoid double taxation. In the all over the world, over 3000 double taxation agreement (DTAs) are in effect.

Mongolia has entered into “The Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital” with other 25 jurisdictions as of 2017. Namely,

№ Country In force since
1 The People’s Republic of China Jan 01, 1993
2 The Republic of Korea Jan 01, 1993
3 The Federal Republic of Germany Jan 01, 1997
4 The Republic of India Jan 01, 1997
5 The Socialist Republic of Vietnam Jan 01, 1997
6 The Republic of Turkey Jan 01, 1997
7 The United Kingdom of Great Britain and Northern Ireland Jan 01, 1997
8 The Republic of Hungary Jan 01, 1997
9 Malaysia Jan 01, 1997
10 The Russian Federation Jan 01, 1998
11 The Republic of Indonesia Jan 01, 1998
12 The Republic of France Jan 01, 1999
13 Czech Republic Jan 01, 1999
14 The Kingdom of Belgium Jan 01, 1999
15 The Republic of Kazakhstan Jan 01, 2000
16 The Republic of Kyrgyz Jan 01, 2000
17 The Republic of Poland Jan 01, 2002
18 The Republic of Bulgaria Jan 01, 2002
19 The Swiss Confederation Jan 01, 2002
20 Ukraine Jan 01, 2003
21 Canada Jan 01, 2003
22 The Republic of Singapore Jan 01, 2005
23 The Democratic People’s Republic of Korea Jan 01, 2005
24 The Republic of Austria Jan 01, 2005
25 The Republic of Belarus May 28, 2001

Mongolia’s double tax treaties with United Arab Emirates and Kuwait were terminated from 1 January 2015 and 1 April 2015 respectively. Mongolia’s double tax treaties with Luxembourg and The Netherlands were terminated from 1 January 2014 due to failure to provide for the balance and equity rights of parties.

What You Need to Know About Registration of Foreign Pharmaceuticals in Mongolia



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Pharmaceuticals imported to be sold within Mongolia are required to be registered with the Ministry of Health prior to import. The law provides for an “Express” registration process, as well as a “Regular” track. Express registration includes a sub-track “A” and “B”.

To be eligible for Track A Express registration, a pharmaceutical product must already have approval from a national regulator from a country recognized internationally as having effective pharmaceutical review and control processes, and must be sold on the market in that country. Such recognized bodies include the FDA in the USA, The European Medicines Agency (EMA), European Free Trade Association (EFTA) and the Ministry of Health, Labour, and Welfare in Japan. Track A Express registration provides for formal registration of the product within 30 days of the filing of the application for registration.

Track B Express registration provides for formal registration within 60 days of the filing of the application for pharmaceuticals which have been previously approved by relevant authorities of states which are party to Pharmaceutical Inspection Convention and Pharmaceutical Inspection Co-operation Scheme–PIC/S.

If a pharmaceutical product does not meet the requirements for Express Track A or B, it will be required to proceed with a regular registration process. The regular approval process will take 3-5 months, however this time may be extended if required.

Applications for pharmaceutical approvals in Mongolia are submitted to the “Human Medicine Board” which will make a decision as to registration of the pharmaceutical for sale within Mongolia. Products approved under the Express process are granted approval for 3 years, while products registered via regular process will receive approval valid for 5 years, after which the registration is required to be renewed.

If you are seeking to import a medicine product to Mongolia, our Mongolian lawyers are able to assist with all required registration actions.

Franchising Proves Effective for Many Foreign Brands in Mongolia



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There are numerous tools a business may use to grow and expand, not just locally but also globally. Franchising is one of the many ways through which brand owners can rapidly grow their businesses and expand profits while delegating much of the cost and risk to a third party.

Franchising is commonly used in a wide variety of service oriented businesses, such as restaurants, hotels, health care, real estate and others, and is also used production and distribution of products. In Mongolia for example, over the last few years many global brands entered Mongolia via a franchise arraignment. Major brands to do so include Coca-Cola, Pepsi, Ramada Hotels, Shangri-La Hotels, Cosmopolitan, Re/max real estate, KFC, Burger King, Coffee Bean and Tea Leaf, Pizza Hut, Emart to name only a few. This strategy is chosen very deliberately due to the low risk of bankruptcy, and a higher chance of success for business to enter a franchising agreement. Research shows that an average consumer in the world spends one of every three dollars on product or service provided via a franchise model, demonstrating the economic significance of franchising.

In a franchise arrangement, the franchising party or Franchisor gives the Franchisee permission to not only use the Franchisor’s intellectual properties (trademarks, brand name, know how, goodwill, copyright, etc.) but also the Franchisor’s business operations system. In addition, Franchisees often benefit from the Franchisor’s distribution systems and marketing campaigns to sell the Franchisee’s products or services. In return, the Franchisee pays the Franchisor consistent fees and royalties, providing a steady stream of income for the Franchisor.

The franchise model provides several benefits for both the Franchisor and the Franchisee. Along with other benefits franchise agreements allow Franchisor companies to expand much more quickly than they could otherwise. A lack of funds and workers can cause a company to grow slowly. Through Franchising, a company invests very little capital or labor because the Franchisee supplies both. The Franchisor company experiences rapid growth with little financial risk.

The Franchisee also has numerous advantages that come from entering a franchising agreement. There is a low risk for the Franchisee due to the tried and tested formula. Franchisee gets the benefit of owning a proven business formula that has been tested and shown to work well in other locations. In addition, the Franchisee gets training and head office support from the Franchisor; this may be essential if the Franchisee is new to running a business and has no experience or business knowledge. And in a broader sense, global franchising is beneficial for the local government and economy as well, because jobs are created, and ownership remains local.

There are three major types of franchises – business format, product, and manufacturing – and each operates in a different way.

In business format franchises (which are the most common type), a company expands by supplying independent business owners with an established business, including use of its name and trademark. The Franchisor company generally assists the independent owners considerably in launching and running their businesses. In return, the business owners pay fees and royalties. In most cases, the Franchisee also buys supplies from the Franchisor. Fast food restaurants are good examples of this type of franchise. Prominent examples include KFC, Burger King, and Pizza Hut.

With product franchises, manufactures control how retail stores distribute their products. Through this kind of agreement, manufacturers allow retailers to distribute their products and to use the manufacturer’s name and trademarks. To obtain these rights, store owners must pay fees or buy a minimum amount of product for sale. In Mongolia there are several clothing retail stores that utilize this type of franchise, for example, United colors of Benetton stores, and Mango stores.

Through manufacturing franchises, a Franchisor grants a manufacturer the right to produce and sell products using its name and trademark. This type of franchise is common among food and beverage companies. For example, soft drink bottlers often obtain Franchise rights from soft drink companies to produce, bottle, and distribute soft drinks. For example, MCS Coca-Cola LLC obtained Franchise rights to produce, bottle and distribute soft drinks of the Coca-Cola company in Mongolia.

There are four basic types of franchise agreements: single-unit, multi-unit, area development and master franchising agreements.

A single-unit franchise agreement is the most common and is simply where a Franchisor grants a Franchisee rights to open and operate one single Franchise unit. In Mongolia, explicit examples are Caffé Bene, a coffeehouse chain, or Re/max, a real estate agency. All single units of these chains use the same trademark and same utilize the business operations system of the Franchisor. However, every single unit in Mongolia is owned by a different local company.

A multi-unit franchise agreement is where a Franchisor grants a Franchisee rights to open more than one franchise unit. For example, Tavan Bogd Foods LLC has multi-unit franchise rights to operate KFC restaurants in Mongolia, and Max Center LLC has multi-unit franchise rights to operate Burger King restaurants.

An area development agreement allows a Franchisee the right to open multiple units over an agreed amount of time within a specified geographic location and/or to own rights to their specific territory and earn money on each franchise sold in their territory through sharing of the franchise fee and ongoing royalties.

A master franchise agreement, also referred to as sub-franchising, gives a Franchisee the same rights as an area development agreement but also gives that Franchisee rights to establish franchises arrangements with other individuals or entities within the specified territory. A Master Franchisee assumes many of the tasks and obligations of the Franchisor such as training and support and receives a portion of the franchise fee and royalties. While technically there are significant differences there are times that master franchising and area development are used interchangeably.

The regulation of franchising varies country to country. While some countries have adopted separate franchising laws, many countries do not have a separate law that regulates franchising in its entirety. In most countries franchising is regulated in their commercial laws, commercial codes or civil codes, and in some countries it falls under regulation of several laws. In Mongolia franchise arrangements are regulated via Articles 333 – 338 of the Civil Code. The Civil Code provides the definition of a Franchise Agreement, and outlines the legal obligations and liabilities of the parties, terms of agreement, and non-competition terms. Intellectual property related aspects of a franchise agreement shall be regulated by relevant intellectual property laws.

It seems clear that franchising model in Mongolia is poised to continue to grow, as several global brands have announced their opening in Mongolia in the near future. Of course, prior to any franchise arrangement in Mongolia, a foreign business should seek out qualified advice from their Mongolian lawyer.