Burger King has a huge problem as it seeks to leave Russia

Part of the problem, lawyers said this week, is the complexity of its joint-venture-style master franchise agreement, which allows Burger King to profit from Whopper burger sales without risking using its own capital.

Unlike rival McDonald’s, which owned the vast majority of its locations in Russia, Toronto-based parent company Burger King does not own any of its own restaurants in Russia. “There is a very complex contractual and legal atmosphere right now that gives franchisees and franchisors in Russia no good options,” said Liz Dillon, partner at Lathrop GPM in Minneapolis.

According to a March 17 open letter to employees of RBI International President David Shear, RBI owns a 15% stake in Burger King Russia, its Russian joint venture.

McDonald’s reached an agreement last month to sell its Russian business to one of its local franchisees, retaining an option to buy the business within 15 years. Burger King’s exit proves to be much more problematic.Credit:PA

The other partners are Russian state-owned bank VTB, which has been sanctioned by the United States and the European Union, and Kyiv-based private equity and asset management firm Investment Capital Ukraine (ICU), the agency says. letter from Shear.

And Alexander Kolobov, Burger King’s master franchisee in Russia, owns 30% of the joint venture, Kolobov told Reuters in an email in March.

RBI accused Kolobov of refusing to close restaurants, according to Shear’s letter. But Kolobov told Reuters at the time that he never had full operational control and had no authority to close restaurants without the agreement of all joint venture partners.

“A franchisor cannot physically or legally prevent a franchisee from operating if they so choose.”

Lee Plave, franchise attorney

A spokesman for Kolobov said by email that he declined to say whether he was in talks to buy RBI’s stake in the joint venture. RBI referred Reuters to Shear’s letter. VTB could not be reached for comment.

A franchisor “cannot physically or legally prevent a franchisee from operating if they choose” in the current situation, said Lee Plave, franchise attorney at Plave Koch in Virginia. “The available legal remedies take time, and even if you pursue them, you would still find yourself in a Russian courtroom to enforce an order, which is unlikely at present.”

Certainly, some lawyers told Reuters that forcing franchisees to close their stores is unfair to ordinary Russians who have nothing to do with the government’s decision to invade Ukraine.

“The franchisees in Russia are not the ones who are waging war on Ukraine. The customers who walk into these stores are not the ones who are waging war,” said Beata Krakus, franchise attorney at Greensfelder in Chicago.

Leaving Russia also potentially exposes companies to a new law advancing there that would allow the government to seize the local assets of exiting Western companies – adding pressure on companies to stay.

Burger King’s parent company and other U.S.-based companies will soon be subject to a new rule from the Biden administration, taking effect June 7, that limits their ability to provide “management consulting services” to anyone in Russia.

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Some lawyers believe the rule could be interpreted to cover services brands normally provide to franchisees, including product sourcing, management techniques, inventory controls, site selection, operations manuals and even just take a call asking for advice.

“It puts a lot of pressure on these companies,” said Erik Wulff, a partner at DLA Piper in Washington, who specializes in franchise law for global consumer products, apparel and footwear companies.

“What will likely happen in a number of these situations is that the American partner will be bought out,” Wulff said. “At this point, it’s a distressed sale.”

Reuters

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