Burger King caught in complex legal web

Burger King has relied on a joint venture agreement, which includes a master franchisee, to open and operate new shops in Europe for at least a decade.

However, the fast-food company is currently facing a major issue in Russia. Following Russia’s invasion of Ukraine in February, it has been unable to terminate its agreement or close its roughly 800 franchised sites.

In March, Burger King’s corporate backing for its Russian stores was discontinued. Parent company Restaurant Brands International (RBI), 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.

However, current Western sanctions on Russia have severely limited the pool of potential purchasers, according to one source familiar with the situation.

Reuters was unable to obtain information on the status of any negotiations.

Lawyers indicated this week that part of the problem is the complication of Burger King’s joint-venture-style master franchise agreement, which allows the company to profit from Whopper burger sales without risking its own capital.

Burger King’s parent company, based in Toronto, does not own any restaurants in Russia, unlike rival McDonald’s, which owns the great majority of its outlets and wants to sell them to an existing franchisee

“Right now, there’s just a tremendously complicated contractual and regulatory environment in Russia that gives franchisees and franchisors no good option,” said Liz Dillon, a partner at Lathrop GPM in Minneapolis.

According to RBI International President David Shear’s open letter to staff dated March 17, RBI owns a 15% share in Burger King Russia Ltd, the company’s joint venture in Russia.

According to Shear’s letter, other partners include Russia’s state-owned bank VTB, which has been sanctioned by the US and the EU, and Kyiv-based private equity and asset management firm Investment Capital Ukraine (ICU).

In addition, Burger King’s master franchisee in Russia, Alexander Kolobov, owns 30% of the joint venture, according to an email from Kolobov to Reuters in March.

According to Shear’s letter, the RBI criticised Kolobov for refusing to close restaurants. However, at the time, Kolobov told Reuters that he had never had complete operational control and lacked the right to close restaurants without the consent of all joint venture partners.

Kolobov’s representative declined to comment on whether he was in talks to buy RBI’s part in the joint venture through email. The RBI directed Reuters to Shear’s letter. VTB was unavailable for comment.

In the current circumstances, a franchisor “can’t physically or legally stop a franchisee from operating if they want to,” according to Lee Plave, a franchise attorney at Plave Koch PLC in Virginia. “The various legal remedies take time, and even if you pursue them, you’ll still end up in a Russian courtroom to enforce an order, which is an improbable possibility at this time.”

To be sure, some lawyers told Reuters that requiring franchisees to close their sites is unfair to ordinary Russians who had no involvement in the government’s decision to attack Ukraine. “It is not the franchisees in Russia who are waging war on Ukraine. Customers who shop in those stores aren’t fighting,” he explained.

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Burger King’s parent company, as well as other U.S.-based businesses, will soon be subject to a new rule from the Biden Administration, which will limit their ability to provide “management consulting services” to anyone in Russia and will take effect on June 7.

Some attorneys say the rule might be interpreted to cover services that brands often provide to franchisees, such as product procurement, management strategies, inventory controls, site selection, operations manuals, and even simply taking a call for assistance.

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

“In a number of these cases, the US partner will very certainly be bought out,” Wulff said.