(Partially) withdrawing from Russia – how to structurally approach making this complex decision

Every company with operations in Russia is confronted with the dilemma of whether or not to continue those operations in the face of the Russian war of aggression against Ukraine. From a legal standpoint, the question is easy to answer if specific operations being conducted by a company are prohibited under applicable sanctions law. If the company's operations fall outside the scope of the mandatory sanctions regime, taking a decision on what to do with those operations going forward is more difficult. While management boards do have discretion, they must adhere to the principles of the business judgment rule. Before they can take any definite decision, they need to answer three questions:

• What are the available options?

• What are the main objectives when taking the decision?

• What factors need to be considered when determining whether the objectives have been achieved?

Usually, companies do not have just the two alternatives of continuing their Russian operations as they are versus withdrawing from the country entirely. In fact, companies may also opt to gradually scale back or suspend their operations in Russia, for example by

• refraining from making investments, engaging in marketing activities or acquiring new business while continuing to honour existing contracts;

• suspending their B2B relationships while continuing their B2C business or at least the sale of essential goods;

• just stopping the sale of products which can potentially be used for military purposes or in support thereof.

Companies opting to end their active presence in the market should weigh whether to leave their operations merely "dormant" without laying off staff or giving up their operating facilities, or to make a full withdrawal from Russia. If they decide to do the latter, they have to consider whether to implement the withdrawal by selling their operations to a third party or by simply discontinuing their business activities.

What should the main objectives and intentions be when taking the decision?

Management boards are obliged to base their decisions on what is in their company's best interests, which includes, in any case, preserving and optimising the company's net assets, financial position and results of operations. Especially in cases where companies are considering a withdrawal from Russia, they are faced with the question of whether also ethical or political aspects can be taken into account, even if taking a specific measure would be detrimental in business terms. The trend among companies is moving in the direction, and quite rightly so, of allowing this in a much greater scope than was accepeted in the past. Applicable law provides sufficient grounds to assume that lawmakers did not have a focus on pure shareholder value in mind and the mission statement of all companies is that of a good corporate citizen. It goes without saying that there are limits to ethical, environmental or other politically motivated decisions that are not "worth it". In particular, a company's existence must not be put at risk as a result of such decisions. But even if a management board observes these limits, its discretion is still fairly broad.

If and to the extent that a management board voluntarily takes into account ethical or political considerations as well, it is key for the board to precisely define the objectives that it intends to achieve: when debating an exit from Russia, the question to be answered is whether the withdrawal (merely) serves to prevent the company's products from being misused for military purposes or to make a political statement, and, if so, whether the aim is to generally dissociate the company from Russian aggression or to put pressure on the Russian people to work towards political change. Only after the objectives have been clearly defined can a management board assess the suitability of the measures to be taken.

With that in mind, there comes the question of what factors need to be taken into account when determining whether objectives have been achieved. There is a multitude of factors to consider, all of which have to be analysed regardless of whether a management board intends to act purely based on business interests or also out of ethical/political considerations. These factors include in particular:

• an analysis of the legal framework, including current sanctions and (assessing) expected additional sanctions of Western countries, as well as Russian countermeasures;

• an assessment of the impact of the various options on the company's business operations in Russia and other countries, including any possible supply-chain disruptions;

• the impact on existing contracts and agreements, including delivery obligations and risks of incurring damages;

• an analysis of the impact on the company's net assets, financial position and results of operations, specifically the impact of scaling down the business activities on sales and revenues and on the need for write-downs on account of any decommissioning or expropriation of facilities and/or assets, along with any subsequent financial burdens, such as risks of incurring obligations to compensate damages and compensation payments to be made to employees;

• the impact on the company's financial KPI and ratings;

• the impact on the company's IT and data security;

• the impact on contracts and agreements of the German holding company, such as loan agreements;

• the impact on personnel in Russia;

• the impact on the company's reputation;

• the risk of any expropriation by the Russian government and the associated involuntary assistance of the Russian government.

Without a thorough analysis of these example factors in particular for each of the different available avenues, a carefully considered decision is hardly possible.

As the situation is evolving rapidly, our assessment of this issue might change. For any further questions or information please feel free to contact our experts.