Burger King trapped in complex legal net, prevents Russia's exit |  BreakingNews.ie

Burger King trapped in complex legal net, prevents Russia’s exit | BreakingNews.ie

For at least a decade, Burger King’s formula for European expansion has relied on a joint venture partnership, including a master franchisee, to open and operate new locations.

But now the fast food chain has a big problem in Russia. It has not been able to leave its partnership or close its approximately 800 franchise sites following Russia’s February invasion of Ukraine.

Burger King stopped corporate support for its locations in Russia in March. The parent company Restaurant Brands International Inc (RBI) QSR.TO, which was formed in 2014 when Burger King merged with Tim Hortons, said on March 17 that it was trying to sell its stake in the joint venture.

But restaurants are still open and thrive in places like central Moscow where queues have become the norm. Demand has been helped by rival McDonald’s, which is currently closed for reopening under a new brand later this month.

“I usually go to Burger King, I do not care about McDonald’s,” said university teacher Elena Aleksandrova, 37, as she picked up a Whopper and soft drink at a Burger King on Friday in an underground mall just outside the Kremlin.

McDonald’s reached an agreement last month to sell its Russian business to one of its local franchisees, and retain an option to buy back the business within 15 years. Burger King’s exit turns out to be much more problematic.

Current sanctions from Western countries against Russia severely limit the pool of potential buyers, said a person familiar with the matter.

Reuters could not determine the status of any negotiations.

A Burger King sign in Moscow. Image: Getty Images

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 the sale of Whopper burgers without the risk of using its equity.

Unlike rival McDonald’s Corp. MCD.N, which owned the vast majority of its seats in Russia, Burger King’s Toronto-based parent owns none of its own restaurants in Russia.

“It’s just a really complex contractual and legal atmosphere right now that gives franchisees and franchisors in Russia no good option,” said Liz Dillon, partner at Lathrop GPM in Minneapolis.

According to an open letter on March 17 to employees of RBI International President David Shear, RBI owns 15 percent of the shares in Burger King Russia Ltd, its Russian joint venture.

Additional partners are Russia’s state-owned bank VTB, which has been sanctioned by the US and the EU, and the Kyiv-based private equity and asset management company Investment Capital Ukraine (ICU), Shears’ letter states.

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

The RBI accused Kolobov of refusing to close restaurants, according to Shear’s letter. But Kolobov then told Reuters that he had never had full operational control and lacked the authority to close restaurants without the agreement of all joint ventures.

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

A franchisor “cannot physically or legally stop a franchisee from working if they want to” in the current situation, says Lee Plave, a franchise attorney at Plave Koch PLC in Virginia. “The remedies available take time, and even if you pursue them, you would still end up in a Russian courtroom to enforce a decision, which is an unlikely prospect right now.”

Franchising

To be sure, some lawyers told Reuters that it was unfair to force franchisees to close their seats to ordinary Russian people who had nothing to do with the government’s decision to invade Ukraine. “The franchisees in Russia are not the ones who are fighting against Ukraine. The customers who go into these stores are not the ones who are fighting,” says Beata Krakus, franchise lawyer at Greensfelder in Chicago.

Leaving Russia also potentially exposes companies to a new law being developed there that would allow the government to seize local assets from Western companies that leave – increasing the pressure on companies to stay.

Burger King’s parent company and other US-based companies will soon be subject to a new rule from the Biden Administration – which takes effect on June 7 – limiting their ability to provide “management consulting services” to anyone in Russia.

Some lawyers believe that the rule can be read to cover services that brands normally provide to franchisees, including purchasing products, management techniques, inventory checks, location selection, operating manuals and even just calling to seek advice.

“It puts a lot of pressure on these companies,” says Erik Wulff, partner at DLA Piper in Washington, which specializes in franchise rights for global consumer products, clothing and footwear companies.

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

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