Delaware Court of Chancery Grants Section 220 Demand By Director And Former CEO For Documents Related To His Ouster From The Company
On January 15, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted a former director’s petition under 8 Del. C. § 220, demanding that Papa John’s International Inc. (the “Company”) hand over various documents, including text messages and personal emails among board members, pertaining to plaintiff’s removal as a director and ouster as CEO of the Company. Schnatter v. Papa John’s Int’l Inc., C.A. No. 2018-0542 (Del. Ch. Jan. 15, 2019). Following allegedly racially tinged commentary on an earning’s call, plaintiff was asked to step down as CEO and later resigned as chairman of the board and was terminated as spokesman. In granting the 220 demand, the Court rejected the Company’s arguments that the demand was personally motivated and was not reasonably related to plaintiff’s position as a director of the Company.
Plaintiff first courted controversy in 2017, when he blamed the Company’s disappointing sales numbers on the NFL’s handling of players’ protests during the playing of the national anthem. Plaintiff resigned from his position as CEO following these remarks, but he remained a director and Company spokesman. In July 2018, after Forbes reported that he used a racial slur during company sensitivity training, plaintiff resigned as chairman of the board and was terminated as spokesman (notwithstanding that he is the titular “Papa John”). Plaintiff refused to resign as a director and filed a 220 demand, seeking documents allegedly pertinent to investigating whether other board members had breached their fiduciary duties with respect to their actions vis-a-vis plaintiff. Plaintiff sought a broad range of documents, including traditional books and records, as well as personal communications among directors. Shortly after filing the 220 demand, plaintiff filed a derivative lawsuit against the company as a stockholder.
Defendants argued that plaintiff’s 220 demand was improper because the documents sought pertained to matters personally related to plaintiff and because plaintiff’s actual motivation was to further his stockholder suit. The Court rejected these arguments, concluding that even though there was overlap between personal matters and plaintiff’s concerns as a director, due to “the unique public role [plaintiff] has played at the company for many years,” the Company could not establish that plaintiff’s actual purpose was “not reasonably related to his position as a director.” Chancellor Bouchard also distinguished between a 220 demand brought by a director and one brought by a stockholder, finding no Delaware authority for denying a director 220 demand on the basis that the same person had filed a derivative suit. Accordingly, the Court granted plaintiff’s demand and directed defendants to turn over (i) communications between counsel and company officers and directors, (ii) communications among directors, (iii) communications from personal devices, and (iv) certain privileged communications, all subject to confidentiality restrictions (including a prohibition from using the documents in the derivative suit).