Franchising in Nigeria
With a population of approximately 170 million, business opportunities are constantly emerging in Nigeria, and there is a strong demand for international brands. The result has been a significant increase in the number of foreign franchises in Nigeria, especially in the fast food sector.
There currently is no legislation dealing specifically with franchising in Nigeria. Entry into Nigeria is not for the faint of heart, however, given the regulatory purview of the National Office for Technology Acquisition and Promotion (NOTAP) pursuant to the National Office for Technology Acquisition and Promotion Act Cap. N62 Laws of the Federation of Nigeria 2004 (Act).
NOTAP is charged with registering all contracts for the transfer of foreign technology to Nigerian parties. The categories of contracts that must be registered is extremely broad and includes all contracts whose “purpose or intent is, in the opinion of the National Office, wholly or partially for or in connection with” the use of trademarks or patents or supplying technical assistance, detailed engineering drawings, machinery, or operating staff.
Since the license of a trademark is a key component of all franchise systems, franchise agreements will almost always need to be registered. NOTAP will not register an agreement unless it complies with the requirements stipulated in the Act. Those include:
- The technology to be transferred must not be freely available in Nigeria.
- The price paid must be commensurate with the technology being acquired.
- The agreement must not give the franchisor powers to regulate or intervene in the franchisee's organization.
- The agreement must not contain any obligation on the franchisee to assign to the franchisor system improvements created by the franchisee.
- The agreement must not impose limitations on technological research or development by the franchisee.
- The agreement must not contain an obligation on the franchisee to acquire equipment, tools, parts, or raw materials exclusively from the franchisor or another designated supplier.
- The agreement must not prohibit or unreasonably restrict the transportation of the franchisee's products or contain an obligation on the franchisee to sell the products manufactured by it exclusively to the franchisor or any other person or source designated by the franchisor.
- The agreement must not prohibit the franchisee from using complementary technologies.
- The agreement must not compel the franchisee to purchase products from the franchisor or suppliers designated by the franchisor.
- The agreement must not require the franchisee to appoint the franchisor as the exclusive sales agent or representative in Nigeria or elsewhere.
- The agreement must not exceed a 10-year or other unreasonable term.
- The agreement must not require the franchisee to obtain the consent of the franchisor before any modification to products, processes, or plants can be effected;
- The agreement must not impose an obligation on the franchisee to introduce unnecessary design changes.
- The franchisor must not impose, by means of quality controls or prescription of standards, unnecessary and onerous obligations on the franchisee.
- The agreement must not provide for payment in full by the franchisee for unexploited transferred technology.
- The agreement must not require the franchisee to accept additional technology or other matter that the franchisee does not need to operate its business.
- The franchisee must not be obligated to submit to a foreign jurisdiction in any controversy arising from the Nigerian agreement.
NOTAP's ability to regulate the monies paid to a franchisor has been particularly troubling since NOTAP severely limits the amount of fees it will approve. In addition to limiting the initial fees to a “reasonable” amount, NOTAP generally will not approve an agreement that requires a royalty fee greater than 2% or a marketing fee greater than 1%.
While the Director of NOTAP has discretion under the Act to register an agreement that does not conform to the above requirements if it is in the “national interest” to do so, in most cases, NOTAP will require that the agreements comply. That is problematic for most franchisors since their agreements typically contain many of these banned provisions.
Nigerian law ensures compliance with the Act and registration with NOTAP since the Act (and the Foreign Exchange Manual issued by the Central Bank of Nigeria) prohibits any payments being made to any person outside Nigeria unless a certificate of registration issued by NOTAP is presented by the party, together with a copy of the agreement certified by NOTAP.
Application for registration of a franchise agreement must be made to the Director General of NOTAP within 30 days after the effective date of the agreement. Failure to timely present the agreement to NOTAP will result in the payment of a penalty fee. It typically takes about one month to receive a response from NOTAP. NOTAP also may seek additional information and/or perform an inspection of an applicant's premises prior to granting approval of an agreement. If NOTAP decides to do an inspection, that will delay approval at least one month, if not more.
In light of these requirements, a franchisor who decides to enter Nigeria must have an effective strategy. From the perspective of the franchisor, registration with NOTAP leaves a franchisor with a watered down agreement that provides a small royalty stream. It is our understanding that, in order to achieve economic objectives, some franchisors register their agreements with NOTAP but also enter into a side agreement with the franchisee that reinstates many of the prohibited provisions and requires that the difference in fees be paid from outside of Nigeria. The legality of this approach, however, is questionable.
Since NOTAP's jurisdiction only extends to an agreement entered into with a Nigerian party, we understand that another approach used by foreign franchisors is to enter into a master franchise agreement with a non-Nigerian entity who, in turn, will license a Nigerian entity (that is a wholly-owned subsidiary) to operate. This structure permits the foreign franchisor to avoid the ceiling on fees and the other limits on repatriation since all payments will originate from outside of Nigeria. While this is a more cumbersome structure, it may offer a better opportunity than a side agreement for a franchisor to expand its system in Nigeria.
Onyinyechi Nwanna is an associate in the Lagos, Nigeria office of Aelex. Onyinyechi acts for many Nigerian and international franchise systems and regularly advises about international expansion to Nigeria. Robert A. Smith is a partner and chair of the Franchise Group at Wiley Rein LLP. Maureen A. O'Brien is special counsel at Wiley Rein LLP.
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