Law Articles
2022-09-19
MLM
Direct Sales Ownership Transfers and Inheritance? What does the law say? (Part 2)
Charlotte Wu, Partner Lawyer, Zhong Yin Law Firm
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
In the previous article, we explored the connotation of direct marketing franchise and recognized that direct marketing franchise is "the original and complete qualification, status, and all rights and obligations derived from such qualification and status of the participant in the contractual transfer" (in this article, we also tentatively use the term "direct marketing franchise" as a descriptive approach) and a direct marketing franchise may be the subject of a transfer or inheritance when it reveals its property nature. In this article, we will continue to discuss the scope of the transfer or inheritance of a direct marketing franchise, the considerations of the stakeholders in the transfer or inheritance, and how the law can reconcile the interests of the stakeholders.
The transfer or inheritance of a direct selling franchise involves a number of interested parties, including the direct selling business, the transferor, and the transferee. The transfer or inheritance of a direct selling franchise is a flexible way for both the transferor and transferee to "get in" and "get out" of the direct selling business. In the case of a transfer, the transfer of a direct selling franchise can be a mutually beneficial transaction for both parties. For the transferee, it is not necessary for the transferee to join a new direct selling organization and start from scratch, but rather to stand on the shoulders of giants to continue to develop his or her business.
However, for the direct selling industry, there may be an unrelated third party who enters into the direct selling organization through the transfer or inheritance of the right to operate the direct selling business. At this time, there may be no trust relationship between the third party and the organization and the third party may not be familiar with the culture of the organization, or even with the products or services, etc. All these may result in the weakening of the centripetal force of the organization, which may ultimately lead to a decline in the development of the organization, and even worse, may result in the abuse of the system by those who are interested in abusing the system to rob the line and manipulate the results. Worse still, it may lead to abuse of the direct selling system by those who are interested in abusing the system to rob lines and manipulate performance, which may further kill or injure the fair competition among other distributors [1].
In the face of the above issue, the first thing that should be recognized is the assignment or inheritance and how the law should evaluate it. Firstly, it may be a civil law assignment[2], which connotes the transfer of a specific debt to a third party, rather than a generalized assignment of the rights and obligations arising from the contract to a third party, who has not acquired the status of a party to the contract by the assignment of the debt, and therefore may not exercise the formative rights such as the right of termination and the right of release in relation to the existence or abolition of the contract[3].
However, this kind of mere transfer of a specific part of the creditor's rights to a third party should not be the usual expectation of the market for transferring or inheriting the direct marketing right, which is that the transferee obtains all the rights and obligations of the original transferee based on the participation in the contract, as well as the fruits of the transferee's investment in the operation (i.e., what is referred to in this article as direct marketing right of business operation). Therefore, there are some commentaries[4] that it is more in line with the reality of the transaction, and that the mode of the transfer should be in the form of contractual assumption, that is to say, one of the parties will, by the contract, generally assign to the third party to bear the rights and obligations arising out of the contract. One of the parties to the rights and obligations arising from the contract, and the third party to bear a general transfer, which is different from a simple assignment of credit, according to the Supreme Court, the contractual commitment is not recognized by the other party, then not effective against the other party [5]. Therefore, it is common in the market for direct marketers to transfer their products to a third party only with the consent of the direct marketer, which is in line with the reality of the transaction and the interests of the direct marketer, the transferor, and the transferee.
As mentioned above, since the interests of the transferor, transferee, and the direct marketing business owner may affect each other, some commentators believe that the proper intervention of the direct marketing business owner should be emphasized and affirmed in the transfer or inheritance of the participation contract, which takes into account the nature of nature of the person and the nature of the property [6]. The so-called appropriate intervention pattern can be roughly divided into two categories, one to ensure that the direct selling business right transferred or inherited has the nature of property, and become the subject of transfer or inheritance, such as the direct selling industry on the transfer or inheritance of the conditions set, including the need to achieve a specific level of employment, a specific performance, and so on.
Another means of ensuring that the proprietary nature of the direct selling franchise is not seriously overlooked and that the development of the organization is not adversely affected may include imposing conditions on the transferee, such as testing the transferee's understanding of the culture of the direct selling organization, his or her ability to promote the organization and his or her past experience, or providing for a right of first refusal to other distributors who satisfy certain conditions, or providing for the transferee to be certified as a direct selling agent through a training mechanism. The assignee may be certified as a direct selling distributor through a training program. For example, some companies in the industry have proposed a retirement succession plan, whereby direct marketers who have reached the age of retirement and wish to transfer their direct marketing franchise will counsel their transferees, so that the business principles and spirit of the direct marketing industry will be passed on to the transferees through such counseling, thus completing the succession of generations. The organization will continue to grow without the risk of losing organizational cohesion.
With respect to the inheritance of the direct marketing right, as mentioned above, the law recognizes that the direct marketing right can be the subject of inheritance because of its property nature. However, according to Articles 1147, 1148, and 1151 of the Civil Code, succession begins upon the death of the decedent, and the decedent's property is subject to all rights and obligations of the decedent unless there is an exclusive right and obligation to the decedent, and in the event that there are several decedents, the decedents are entitled to the entire estate in community of laws prior to the division of the estate. In a general succession situation, the direct selling business owner may not be able to know or determine the quality of the successor, which may lead to instability in the operation of the organization after the occurrence of the inheritance, and it may be difficult to determine how the direct selling business right should be valued as a part of the estate and how much it is worth. In terms of institutional arrangements, whether the arrangement of the direct selling franchise is to be transferred to the transferee's death as a condition of cessation of the transferee's death as a gift [7]or part of a will is also an issue that should be recognized legally, and if it is a will, whether or not the content of the will involves infringing on the special rights of other successors is an issue that should be carefully considered by the direct selling industry before planning the system.
The transfer or inheritance of the right to operate a direct selling business has been developed through the intervention of direct sellers. However, how the law evaluates the reasonableness of this pattern, or how to avoid disputes between the direct selling industry and the direct sellers through the existing law, is still waiting for the industry and the judicial practice to accumulate and develop gradually. Some commentators believe that if the law is amended to provide for the transfer of the right to operate direct marketing and the intervention of direct marketers, this is not only technically difficult to achieve, but also interferes with the autonomy of private law, and proposes a middle-of-the-road approach to formulate a stereotypical model contract to provide reference to the direct marketing business, and to produce a substantive binding effect [8]. The author agrees with the above suggestions, however, the form of the stereotyped contract example may still depend on the development of the industry, and different conditions are developed by different industries based on different concepts, which will serve as a reference for the supervisory authority to shape a system that meets the market demand and balances the interests of all parties.
As mentioned at the beginning of this article, the direct selling industry has been deeply rooted in Taiwan for more than 40 years, and has created the conditions and needs for generational change. Direct sellers should consider their own organizational cultures and governance policies as soon as possible, and design a system for transferring or inheriting direct selling management rights that meets their own costs and needs.
如您對上述的內容有任何意見或有興趣進一步瞭解，歡迎您聯繫我們。
Charlotte J.H. Wu 吳婕華律師
charlotte.wu@zhongyinlawyer.com.tw
TEL +886 2 2377 1858 EXT 8888
[1] Lin Tiancai, editor, 2015, "Direct Selling Law,(直銷法律學)" Wu-Nan (五南) Publishing.
[2] Article 294 of the Civil Code: "A creditor may assign the claim to a third party. However, the following claims are exempt from this limitation: 1. Claims that, by their nature, cannot be assigned. 2. Claims that cannot be assigned according to the special agreement between the parties. 3. Claims that are prohibited from attachment."
[3] Refer to the Supreme Court Civil Judgment No. 2445 of the 106th Year for interpretation.
[4] Lin Tiancai, 2017, "A Study on the Current Status and Theoretical Breakthrough of the Transfer of Direct Selling Rights(傳銷權轉讓之現況探討與理論突破)—Focusing on Distinguishing Direct Selling Rights from Participation Contract Rights," The Taiwan Law Review” magazine, Issue 270, pp. 141-159.
[5] See the Supreme Court Civil Judgment No. 1573 of the 73rd Year.
[6] Same as note 3, Lin Tiancai's text.
[7] Civil Code Article 406: "A gift is a contract in which the parties agree that one party gratuitously transfers their property to the other party, who accepts it."
[8] Same as note 3, Lin Tiancai's article in " The Taiwan Law Review” magazine.