Law firm giants leave mini-firms behind with Moscow spin-offs

Baker McKenzie offices in Washington, D.C. REUTERS/Andrew Kelly

(Reuters) – As major law firms shutter operations in Russia in response to the Ukraine invasion and Western sanctions, a handful of the largest are taking a different tack: spinning off their Moscow offices into separate, independent firms.

Baker McKenzie, Dentons and DLA Piper, three global law firms with U.S. roots and thousands of lawyers worldwide, and CMS, a UK-founded firm operating in 45 countries, said they are withdrawing from the Russian market by carving off their offices there into standalone firms.

Both Baker McKenzie and Dentons said they have more than 200 employees in Russia. CMS said it has more than 80 employees in its Moscow office, and there are 71 lawyers in DLA Piper’s Moscow and St. Petersburg locations, according to its website.

Transferring their business to a separate entity helps the firms navigate or avoid the complex web of sanctions that have led a wide swath of other Western companies to limit, suspend or exit their operations in Russia altogether, industry consultants said.

Dentons has represented gas pipeline operator Gazprom, while DLA Piper has represented Gazprom and Rosneft, the Russian oil giant, according to the firms’ websites. Both Gazprom and Rosneft have been hit with restrictions over the Ukraine invasion and the EU is set to implement new sanctions against them. Baker McKenzie has represented sanctioned Russian bank VTB.

The firms did not say how closely affiliated they would remain with their Russian spin-offs and declined to provide other details, such as any financial terms involved in the separations. Dentons said it would continue collaborating with its former Russian colleagues “to the extent we are lawfully able to do so.” The heads of the firms’ Moscow and St. Petersburg offices did not respond to requests for comments.

Baker McKenzie, Dentons and DLA Piper are each formed as Swiss vereins, a business structure in which largely separate legal entities can operate under a shared banner. Profit sharing is limited, but so is tax exposure across international jurisdictions.

“It’s a partnership of partnerships,” said David Barnard, a former partner at law firm Linklaters who now runs the consultancy Blaqwell Inc. CMS is structured as a European economic interest grouping, which is “not very different from a Swiss verein,” Barnard said.

It is easier to legally eject an entity from a verein than it is to kick partners out of a partnership, Barnard said, though it can be “destabilizing” and “emotionally difficult.” The firms spinning off their Russia operations all expressed support for their colleagues there, and Dentons held open the possibility of reuniting.

There are advantages and disadvantages to breaking off from a larger firm, industry consultants said. A spin-off firm can make its own decisions on everything from the legal work they do – including freedom from direct sanctions in the case of Russian firms – to how they pay their lawyers.

But that independence can swing both ways. The spin-off will no longer be supported by the broader firm and may lose out on new business and client referrals, consultants said.

Still, “the vereins have a great advantage” as law firms flee Russia, said Kristin Stark, a principal at law firm consultancy Fairfax Associates. “They can allow their partners to continue to operate in Russia without any material impact from the separation.”

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