John Schnatter v. Papa John's International, Inc.
This text of John Schnatter v. Papa John's International, Inc. (John Schnatter v. Papa John's International, Inc.) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN SCHNATTER, ) ) Plaintiff, ) ) v. ) C.A. No. 2018-0542-AGB ) PAPA JOHN’S INTERNATIONAL, INC., ) ) Defendant. )
MEMORANDUM OPINION
Date Submitted: November 30, 2018 Date Decided: January 15, 2019
Peter B. Ladig, Brett M. McCartney, and Elizabeth A. Powers, BAYARD, P.A., Wilmington, Delaware; Garland A. Kelley, GLASER WEIL LLP, Los Angeles, California, Attorneys for Plaintiff. Blake Rohrbacher, Robert L. Burns, Brian F. Morris, and Kevin M. Regan, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Defendant.
BOUCHARD, C. In November 2017, John Schnatter, the founder of Papa John’s International,
Inc., criticized the National Football League’s handling of the dispute between NFL
players and owners over national anthem protests during a call held to report the
company’s earnings. Some in the media portrayed Schnatter’s comments about the
NFL as racial in nature. In July 2018, Forbes reported that Schnatter used a racial
slur during an internal diversity training exercise at the company in May 2018.
On the same day the Forbes article was published, the company’s board asked
Schnatter to resign as its Chairman, which he did. Over the next few days, the board
also asked Schnatter to resign as a director of the company, which he declined to do.
The board then established a special committee to investigate all of the company’s
relationships with Schnatter. Within three hours of its formation, the special
committee decided to terminate two agreements the company had with Schnatter.
In the wake of these events, Schnatter made a demand under 8 Del. C. § 220
in his capacity as a director of the company to inspect seventeen categories of
documents. Perplexed about why the company made no effort to defend him as the
founder and longstanding public face of the company from what he believes was
unfair treatment by the media, and why the company instead seemed intent on
abruptly cutting ties with him without investigating the matter, Schnatter questions
whether his fellow directors fulfilled their fiduciary obligations.
1 The parties have resolved their disputes concerning thirteen of the seventeen
categories of documents sought in Schnatter’s demand. In this post-trial decision,
the court concludes that the company failed to prove that Schnatter’s purpose for
seeking to inspect the remaining four categories of documents is improper and that
he therefore is entitled to inspect these documents subject to certain limitations.
I. BACKGROUND
The facts recited in this opinion are the court’s findings based on the testimony
and documentary evidence presented at a one-day trial held on October 1, 2018. The
record includes stipulations of fact made in the Pre-trial Stipulation and Order
(“PTO”), over 100 trial exhibits, and testimony from one fact witness: John
Schnatter. Although the company bore the burden of proof to show that Schnatter’s
purpose was improper, it did not call any other witnesses to testify at trial.
A. The Parties
Schnatter is the founder of Papa John’s International, Inc. (“Papa John’s” or
the “Company”).1 Since around 1993, Schnatter has served as a member of the
Company’s board of directors (the “Board”).2 Until recently, Schnatter served as
the Company’s Chairman of the Board, Chief Executive Officer, and spokesman.3
1 PTO ¶ 12 (Dkt. 47). 2 PTO ¶ 13. 3 PTO ¶¶ 21, 26; JX 2. 2 He is the Company’s largest stockholder, owning approximately 30% of the
outstanding shares.
Papa John’s is a Delaware corporation and currently the third-largest pizza
delivery and take-out company in the world.4 Its Board currently consists of six
members, including Schnatter. The other five directors are Mark S. Shapiro, Sonya
Medina, Olivia Kirtley, Christopher Coleman, and Laurette Koellner.5 Since
January 1, 2018, Steve Ritchie has served as the Company’s President and CEO.6
B. Schnatter Comments on the NFL and Resigns as CEO
On October 31, 2017, the Company announced that it had hired Laundry
Service, a marketing agency, as its new creative agency of record to handle the
creative aspects of the Company’s marketing and some of its purchases of
advertising time.7 Ritchie, the Company’s Chief Operating Officer at the time, was
responsible for hiring Laundry Service.8
On November 1, 2017, Schnatter participated in a call to report on the
Company’s earnings (the “Earnings Call”). At the time, the Company was the
4 PTO ¶ 14. 5 PTO ¶ 15. 6 PTO ¶ 17. 7 JX 4 at 1; Tr. 22. 8 Tr. 10, 20. 3 official pizza sponsor of the National Football League.9 On the Earnings Call,
Schnatter made the following comments:
Now to the NFL. The NFL has hurt us. And more importantly, by not resolving the current debacle to the player and owners’ satisfaction, NFL leadership has hurt Papa John’s shareholders. Let me explain. The NFL has been a long and valued partner over the years, but we are certainly disappointed that [the] NFL and its leadership did not resolve the ongoing situation to the satisfaction of all parties long ago. This should have been nipped in the bud 1.5 years ago. Like many sponsors, we are in contact with [the] NFL. And once the issues [are] resolved between the players and the owners, we are optimistic that [the] NFL’s best years are ahead, but good or bad, leadership starts at the top. And this is an example of poor leadership.10
These comments were part of a script for the call that was reviewed by Lance
Tucker, the Company’s then-Chief Financial Officer, and Steve Ritchie.11 Ritchie
asked Schnatter not to make comments regarding the NFL during the call but,
according to Schnatter, Ritchie lacked the authority to prevent him from doing so.12
Later in the call, Ritchie told an analyst that “the NFL situation” was applying
“pressure” to the Company’s sales.13 He also told another analyst that Schnatter’s
9 PTO ¶ 20. 10 Tr. 8-9; JX 6 at 5. 11 Tr. 10. 12 Tr. 10-11, 47, 171-72. 13 JX 6 at 8. 4 contention about the NFL “controversy” hurting the Company’s business was a
“great point.”14
Schnatter’s comments during the Earnings Call were the subject of significant
public criticism. Forbes reported that Papa John’s “received significant flak after
Schnatter declared on an earnings call that national anthem protests in the National
Football League were partially to blame for slow sales at the company.”15 Yahoo!
Finance wrote that Schnatter’s comments on the Earnings Call were seen as “a
desperate effort to find someone else to blame” and “sparked a backlash.”16
Schnatter testified that the media took his comments “so far out of context so
quickly” that the reaction appeared “premeditated.”17 Schnatter spoke to Company
personnel, including Ritchie, about clarifying what he had said during the Earnings
Call. According to Schnatter, Ritchie advised him to “lay low” and not “do
anything,” and the Company made minimal effort to change the public’s perception
of what he had said, instead blaming its declining sales on Schnatter’s comments for
the next two months.18
14 JX 6 at 19; Tr. 172-73. 15 JX 8 at 2. 16 JX 11 at 3. 17 Tr. 16. 18 Tr. 18-20. 5 On December 31, 2017, Schnatter resigned as CEO of the Company. 19 On
February 27, 2018, the NFL terminated its sponsorship with Papa John’s. The next
day, the NFL announced that Pizza Hut would be its new pizza sponsor. Papa John’s
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN SCHNATTER, ) ) Plaintiff, ) ) v. ) C.A. No. 2018-0542-AGB ) PAPA JOHN’S INTERNATIONAL, INC., ) ) Defendant. )
MEMORANDUM OPINION
Date Submitted: November 30, 2018 Date Decided: January 15, 2019
Peter B. Ladig, Brett M. McCartney, and Elizabeth A. Powers, BAYARD, P.A., Wilmington, Delaware; Garland A. Kelley, GLASER WEIL LLP, Los Angeles, California, Attorneys for Plaintiff. Blake Rohrbacher, Robert L. Burns, Brian F. Morris, and Kevin M. Regan, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Defendant.
BOUCHARD, C. In November 2017, John Schnatter, the founder of Papa John’s International,
Inc., criticized the National Football League’s handling of the dispute between NFL
players and owners over national anthem protests during a call held to report the
company’s earnings. Some in the media portrayed Schnatter’s comments about the
NFL as racial in nature. In July 2018, Forbes reported that Schnatter used a racial
slur during an internal diversity training exercise at the company in May 2018.
On the same day the Forbes article was published, the company’s board asked
Schnatter to resign as its Chairman, which he did. Over the next few days, the board
also asked Schnatter to resign as a director of the company, which he declined to do.
The board then established a special committee to investigate all of the company’s
relationships with Schnatter. Within three hours of its formation, the special
committee decided to terminate two agreements the company had with Schnatter.
In the wake of these events, Schnatter made a demand under 8 Del. C. § 220
in his capacity as a director of the company to inspect seventeen categories of
documents. Perplexed about why the company made no effort to defend him as the
founder and longstanding public face of the company from what he believes was
unfair treatment by the media, and why the company instead seemed intent on
abruptly cutting ties with him without investigating the matter, Schnatter questions
whether his fellow directors fulfilled their fiduciary obligations.
1 The parties have resolved their disputes concerning thirteen of the seventeen
categories of documents sought in Schnatter’s demand. In this post-trial decision,
the court concludes that the company failed to prove that Schnatter’s purpose for
seeking to inspect the remaining four categories of documents is improper and that
he therefore is entitled to inspect these documents subject to certain limitations.
I. BACKGROUND
The facts recited in this opinion are the court’s findings based on the testimony
and documentary evidence presented at a one-day trial held on October 1, 2018. The
record includes stipulations of fact made in the Pre-trial Stipulation and Order
(“PTO”), over 100 trial exhibits, and testimony from one fact witness: John
Schnatter. Although the company bore the burden of proof to show that Schnatter’s
purpose was improper, it did not call any other witnesses to testify at trial.
A. The Parties
Schnatter is the founder of Papa John’s International, Inc. (“Papa John’s” or
the “Company”).1 Since around 1993, Schnatter has served as a member of the
Company’s board of directors (the “Board”).2 Until recently, Schnatter served as
the Company’s Chairman of the Board, Chief Executive Officer, and spokesman.3
1 PTO ¶ 12 (Dkt. 47). 2 PTO ¶ 13. 3 PTO ¶¶ 21, 26; JX 2. 2 He is the Company’s largest stockholder, owning approximately 30% of the
outstanding shares.
Papa John’s is a Delaware corporation and currently the third-largest pizza
delivery and take-out company in the world.4 Its Board currently consists of six
members, including Schnatter. The other five directors are Mark S. Shapiro, Sonya
Medina, Olivia Kirtley, Christopher Coleman, and Laurette Koellner.5 Since
January 1, 2018, Steve Ritchie has served as the Company’s President and CEO.6
B. Schnatter Comments on the NFL and Resigns as CEO
On October 31, 2017, the Company announced that it had hired Laundry
Service, a marketing agency, as its new creative agency of record to handle the
creative aspects of the Company’s marketing and some of its purchases of
advertising time.7 Ritchie, the Company’s Chief Operating Officer at the time, was
responsible for hiring Laundry Service.8
On November 1, 2017, Schnatter participated in a call to report on the
Company’s earnings (the “Earnings Call”). At the time, the Company was the
4 PTO ¶ 14. 5 PTO ¶ 15. 6 PTO ¶ 17. 7 JX 4 at 1; Tr. 22. 8 Tr. 10, 20. 3 official pizza sponsor of the National Football League.9 On the Earnings Call,
Schnatter made the following comments:
Now to the NFL. The NFL has hurt us. And more importantly, by not resolving the current debacle to the player and owners’ satisfaction, NFL leadership has hurt Papa John’s shareholders. Let me explain. The NFL has been a long and valued partner over the years, but we are certainly disappointed that [the] NFL and its leadership did not resolve the ongoing situation to the satisfaction of all parties long ago. This should have been nipped in the bud 1.5 years ago. Like many sponsors, we are in contact with [the] NFL. And once the issues [are] resolved between the players and the owners, we are optimistic that [the] NFL’s best years are ahead, but good or bad, leadership starts at the top. And this is an example of poor leadership.10
These comments were part of a script for the call that was reviewed by Lance
Tucker, the Company’s then-Chief Financial Officer, and Steve Ritchie.11 Ritchie
asked Schnatter not to make comments regarding the NFL during the call but,
according to Schnatter, Ritchie lacked the authority to prevent him from doing so.12
Later in the call, Ritchie told an analyst that “the NFL situation” was applying
“pressure” to the Company’s sales.13 He also told another analyst that Schnatter’s
9 PTO ¶ 20. 10 Tr. 8-9; JX 6 at 5. 11 Tr. 10. 12 Tr. 10-11, 47, 171-72. 13 JX 6 at 8. 4 contention about the NFL “controversy” hurting the Company’s business was a
“great point.”14
Schnatter’s comments during the Earnings Call were the subject of significant
public criticism. Forbes reported that Papa John’s “received significant flak after
Schnatter declared on an earnings call that national anthem protests in the National
Football League were partially to blame for slow sales at the company.”15 Yahoo!
Finance wrote that Schnatter’s comments on the Earnings Call were seen as “a
desperate effort to find someone else to blame” and “sparked a backlash.”16
Schnatter testified that the media took his comments “so far out of context so
quickly” that the reaction appeared “premeditated.”17 Schnatter spoke to Company
personnel, including Ritchie, about clarifying what he had said during the Earnings
Call. According to Schnatter, Ritchie advised him to “lay low” and not “do
anything,” and the Company made minimal effort to change the public’s perception
of what he had said, instead blaming its declining sales on Schnatter’s comments for
the next two months.18
14 JX 6 at 19; Tr. 172-73. 15 JX 8 at 2. 16 JX 11 at 3. 17 Tr. 16. 18 Tr. 18-20. 5 On December 31, 2017, Schnatter resigned as CEO of the Company. 19 On
February 27, 2018, the NFL terminated its sponsorship with Papa John’s. The next
day, the NFL announced that Pizza Hut would be its new pizza sponsor. Papa John’s
stock price declined significantly when this news was announced.20
C. Schnatter Resigns as Chairman After the Training Exercise
On May 14, 2018, Schnatter attended a meeting with Laundry Service in New
York to discuss the creative plan it was proposing for the Company. 21 One of the
proposals Laundry Service “was adamant” about was to put Kanye West in ads for
Papa John’s with Schnatter.22 A few days later, Schnatter told Laundry Service he
was not comfortable with this proposal after he did some research and learned that
Kanye West used the N-word in his lyrics.23
On May 22, 2018, Schnatter, Ritchie, and two others participated from the
Company’s corporate offices in a telephonic media training exercise about diversity
that was held with executives from Laundry Service (the “Training Exercise”).24
Schnatter was not informed before the call that he would be asked questions about
19 PTO ¶ 21. 20 JX 10 at 1. 21 Tr. 23-24. 22 Tr. 24-25. 23 Tr. 25-26; see also JX 23 at 1. 24 Tr. 165-66; PTO ¶ 23. 6 race.25 The Training Exercise began with a handout of questions that were not
provided to Schnatter in advance, the first of which was: “Are you a racist?”26 After
about forty minutes of questioning, including questions Schnatter viewed as
insinuating that his comments about the NFL were racial in nature, Schnatter used
the N-word during the Training Exercise. As he recounted at trial: “Well, I said,
‘Colonel Sanders uses the N-word. I don’t use the N-word, and we’re not going to
use the N-word.’”27 The next day, Papa John’s and Laundry Service mutually agreed
to terminate their relationship.28
On July 11, 2018, Forbes published an article about the Training Exercise,
entitled “Papa John’s Founder Used N-Word on Conference Call” (the “Forbes
Article”).29 The Forbes Article reported that Schnatter was engaged in a role-playing
exercise in which he “was asked how he would distance himself from racist groups
online” following his comments about the NFL.30 According to the Forbes Article,
Schnatter tried to downplay the significance of his NFL comments by saying (using
the entire racial slur) that “Colonel Sanders called blacks n-----s” yet “never faced
25 Tr. 27. 26 Tr. 27-28. 27 Tr. 28-29. 28 PTO ¶ 24. 29 PTO ¶ 25; JX 12. 30 JX 12 at 1-2. 7 public backlash.”31 The Forbes Article also reported that Schnatter wrote in an
emailed statement on the afternoon of July 11 that “reports attributing the use of
inappropriate and hurtful language to me during a media training session regarding
race are true. Regardless of the context, I apologize. Simply stated, racism has no
place in our society.”32
Later on July 11, after the Forbes Article came out, Schnatter resigned as
Chairman of the Board at the request of the Board.33 Within a few days after the
Forbes Article was published, some professional sports teams and organizations cut
ties with Papa John’s.34
On July 13, 2018, during a radio interview, Schnatter reportedly asserted that
“he was pressured to use the N-word during the” Training Exercise: “The agency
was promoting that vocabulary . . . . They pushed me. And it upset me.”35 The next
day, on July 14, Schnatter sent a letter to the Board disputing the Company’s
portrayal of his comments from the Training Exercise.36 According to Schnatter, the
31 JX 12 at 2 (internal quotation marks omitted); Tr. 29. 32 JX 12 at 2. 33 PTO ¶ 26; Tr. 37. 34 See JX 15, 18, 21. 35 JX 17 at 2. 36 PTO ¶ 29. 8 Company did nothing “to set forth the truth so that the press could correctly report
what occurred[.]”37
On July 15, 2018, Kirtley, the Company’s lead director, requested that
Schnatter also resign as a director but he declined to do so.38 Kirtley told Schnatter
that he was not “designated or authorized to speak or make appearances on behalf
of the Company.”39
At around this time, Schnatter sent a letter to the other Board members in
which he asserted that the Forbes Article “mischaracterized” what happened during
the Training Exercise, that his use of the N-word was “in no way racist,” and that
the Company “completely mishandled the NFL situation.”40 He further asserted that
Laundry Service had engaged in an “extortion attempt” to extract $1.2 million from
the Company when its contract was terminated, that it was a “mistake” for him to
resign as Chairman, and that “corporate governance experts” believed the Board had
acted improperly in asking him to step down as Chairman and as a director “without
any investigation.”41
37 Tr. 37. 38 PTO ¶ 27; JX 36; Tr. 38. 39 PTO ¶ 28. 40 JX 23 at 1. 41 JX 23 at 1-2. 9 D. The Board Forms a Special Committee
On July 15, 2018, before a Board meeting scheduled for later that day,
Schnatter learned that the Board might form a special committee when he received
an updated agenda for the meeting.42 Schnatter’s counsel (Glaser Weil LLP) wrote
to the Board before the meeting, asserting that the Board “has no authority to remove
Mr. Schnatter as a director” under Delaware law, that the Board had failed to act in
the best interests of the Company by allowing Schnatter’s comments to be
misconstrued, and that its failure to conduct a full investigation could result in the
Board breaching its fiduciary duties.43
The Board meeting on July 15 (the “July 15 Meeting”) began at around 8:15
p.m.44 About fifteen minutes later, the Board approved a set of resolutions
establishing a special committee (the “Special Committee”) consisting of all the
directors other than Schnatter, i.e., Shapiro, Medina, Kirtley, Coleman, and
Koellner.45 The Special Committee was given “exclusive power and authority” to
review, and make determinations about, all of the relationships between Schnatter
and the Company.46 Akin Gump Strauss Hauer & Feld LLP was retained as the
42 Schnatter Dep. 223-24. 43 JX 26 at 1-2. 44 PTO ¶ 30. 45 PTO ¶¶ 31, 16. 46 PTO ¶ 32; JX 25 at 3-5. 10 Special Committee’s counsel.47 The Company contacted Akin Gump two days
earlier, on July 13, to discuss its representation of the not-yet-formed Special
Committee, and formally authorized the representation on July 15, 2018.48 It is
unclear what, if anything, Akin Gump did during that two-day window in connection
with its representation.
The Special Committee met later on the evening of July 15.49 At
approximately 11:23 p.m., a lawyer with a law firm representing the Company
(Hogan Lovells US LLP) emailed Schnatter notices of the Company’s intent to
terminate two agreements it had with Schnatter: (1) an Agreement for Service as
Founder (the “Founder’s Agreement”) and (2) a Sublease Agreement governing
Schnatter’s use of some office space at the Company’s headquarters (the “Sublease
Agreement”).50
After the July 15 meetings, counsel for Schnatter and Papa John’s exchanged
letters. On July 16, 2018, Akin Gump wrote to Glaser Weil, explaining that “neither
the Board nor the Special Committee has taken any action to remove Mr. Schnatter
as a member of the Board” and that “all actions taken by the Special Committee in
47 PTO ¶ 18. 48 JX 80 at 8. 49 PTO ¶¶ 30-33. 50 PTO ¶ 34; JX 2; JX 3. 11 this matter . . . have been in the best interests of the Company and its shareholders.”51
The letter also stated that “the Special Committee will oversee an external audit and
investigation of the Company’s existing processes, policies and systems related to
diversity and inclusion, supplier and vendor engagement and the Company’s
culture.”52 Glaser Weil replied on July 18, 2018, arguing that the Company’s
purported termination of the Founder’s and Sublease Agreements violated the terms
of those agreements and stating that “we fully expect that as part of the review
conducted by the Special Committee, it will interview Mr. Schnatter.”53
E. Schnatter Makes a Section 220 Demand and Files Suit
On July 18, 2018, Schnatter delivered to the Company and its registered agent
a demand under 8 Del. C. § 220(d) (the “Demand”) to inspect the following
seventeen categories of the Company’s books and records:
1. Communications with and between Counsel to the Company and any officer or director of the Company from October 31, 2017 through the formation of the Special Committee at the July 15, 2018 meeting of the Board of Directors (the “July 15 Meeting”) referring or relating to me. For purposes of this Demand, Counsel shall mean any outside counsel to the Company, including without limitation, Hogan Lovells US LLP, Gibson Dunn & Crutcher, LLP, in- house counsel to the Company, and any counsel representing any director in connection with such director’s service on the Board of Directors (the “Board”).
51 JX 30 at 1. 52 JX 30 at 2. 53 JX 37 at 3. 12 2. Communications between or among directors, and/or any director and Counsel from October 31, 2017 through the July 15 Meeting relating to the article on Forbes.com’s website published on or about 5:00 a.m. on July 11, 2018 referring to me (the “Forbes Article”).
3. Communications between or among directors, and/or any director and Counsel from October 31, 2017 through the July 15 Meeting referring or relating to me.
4. Communications between or among directors and Counsel from October 31, 2017 through the July 15 Meeting referring or relating to Schnatter Group Arrangements as that term is defined in the resolutions adopted at the July 15 Meeting appointing the Special Committee (the “July 15 Resolutions”).
5. Documents reflecting notice to me that the Independent Directors had retained separate legal representation in connection with their service on the Board. For purposes of this Demand, the term Independent Directors means Olivia F. Kirtley, Christopher L. Coleman, Laurette T. Koellner, Sonya E. Medina, and Mark S. Shapiro.
6. Communications between or among directors or officers, Counsel and/or Akin Gump LLP prior to the July 15 Meeting, including without limitations all drafts of the July 15 Resolutions and the Special Committee Charter.
7. Any engagement letter between the Independent Directors and Akin Gump LLP prior to formation of the Special Committee.
8. The engagement letter between the Special Committee and Akin Gump.
9. The minutes of all meetings of the Board and any committees thereof from October 31, 2017 through and including the July 15 Meeting.
10. All materials provided to the Independent Directors in connection with the July 15 Meeting.
13 11. The minutes of any meeting of the Special Committee.
12. All materials provided to the Special Committee in connection with the meeting of the Special Committee held on or about July 15, 2018.
13. Communications between or among directors and Counsel referring to [sic] relating to my membership on the Board from October 31, 2017 to the present.
14. All documents referring or relating to any allegations of sexual harassment or other sexual misconduct and innuendo by any member of the Board or any Section 16 officers including without limitation all communications received or sent by the Company or any officer or director of the Company referring or relating to such allegations.
15. All documents referring or relating to the Company’s relationship with Laundry Service, including without limitation all communications between the Company, Laundry Service, Casey Wasserman, and/or any companies (including their employees) affiliated with Casey Wasserman and any engagement letter between the Company and Laundry Service.
16. Any contracts, agreements or understandings between me and any of my affiliates and the Company.
17. Any settlement agreements or non-disclosure agreements involving me or my affiliates in the possession, custody or control of the Company.54
Regarding his purpose for making the Demand, Schnatter wrote: “The purpose of
my demand is to inform myself so that I may fulfill my fiduciary duties and ensure
54 JX 35 at 1-3. 14 that the other members of the Board are fulfilling their fiduciary duties as well.”55
On July 25, 2018, the Company sent a response that largely rejected the Demand.56
F. The Conflict Between Schnatter and the Company Continues
On July 27, 2018, counsel for the Papa John’s Franchisee Association wrote
to the Board to officially complain about Schnatter’s use of the N-word. The letter
asserted that this was “not the first time Mr. Schnatter has engaged in offensive and
damaging behavior,” noting the NFL-related comments and comments pertaining to
the Affordable Care Act.57
In August 2018, Schnatter created a website—savepapajohns.com—where he
posts information, including filings in this action, about what he views as the
Company’s unfair efforts to marginalize him.58
On August 5, 2018, the New York Post published an article describing the
relationship between Schnatter and Ritchie.59 The article describes how Schnatter
was complimentary of Ritchie when Ritchie was named as CEO on January 1, 2018,
but that his confidence in Ritchie changed six months later, after two disappointing
55 JX 35 at 3. 56 PTO ¶ 37; JX 53. 57 JX 32 at 1. 58 PTO ¶ 39. 59 JX 66. 15 quarters.60 The article goes on to suggest that Ritchie organized a coup to oust
Schnatter from the Company after he learned that Schnatter had prepared a negative
performance review of him and that Schnatter was planning to recommend to the
Board that he be removed from the CEO position.61 According to the article, one of
the reasons Schnatter filed his Section 220 action was to “prove Ritchie got hold of
his evaluation.”62 Schnatter testified that “Steve knew that [the] evaluation was
going to be subpar and that [he] was going to terminate him.”63
On August 7, 2018, the Company issued its second-quarter earnings report,
“which revealed a 25% decline in earnings per share over last year’s numbers and
falling sales both domestically and abroad.”64 That same day, Schnatter released a
public statement saying he was concerned about the Company’s sales and the
“direction the Company [is] headed under the stewardship of Steve Ritchie and the
current board of directors.”65
On August 17, 2018, Schnatter wrote a letter to the Company’s Senior Vice
President for Global Human Resources with the subject line “Inappropriate Conduct
60 JX 66 at 2. 61 JX 66 at 2. 62 JX 66 at 2. 63 Tr. 184. 64 JX 71 at 1. 65 PTO ¶ 41. 16 By Members of the Company’s Leadership Team.”66 In the letter, Schnatter asserts
that a “‘fraternity’-like environment” exists at the Company and that Ritchie is
primarily responsible for creating it.67 The letter includes five exhibits, which are
mainly notes and letters created by Company employees that describe a range of
inappropriate conduct by Ritchie, Mark Shapiro (a director), and others.68
On August 28, 2018, Schnatter gave an interview with CNN’s business
division. In discussing Papa John’s recent poor financial performance, Schnatter
stated that “[y]ou can’t blame everything on two comments. I wish I had that kind
of power, but I don’t.”69 Schnatter further commented that the Company needed
“new leadership” because Ritchie was “struggl[ing] as a CEO.”70 At trial, Schnatter
presented a graph that purports to correlate the Company’s declining financial
performance with Ritchie’s tenure as CEO.71
On August 29, 2018, the Special Committee issued a press release stating that
Schnatter “has demonstrated a continued pattern of ignoring decisions of the Board,
both in his role as CEO and as non-executive Chairman of the Board.”72 The Special
66 PTO ¶ 42; JX 76. 67 JX 76 at 1. 68 JX 76 at 5-61. 69 JX 88 at 1. 70 JX 88 at 1. 71 JX 202. 72 JX 90 at 1. 17 Committee provided several examples, including that the “Board specifically
directed John Schnatter not to talk about the NFL controversy related to the National
Anthem” but he did so anyway, and that Schnatter “misinformed the Board about
the circumstances surrounding the termination of the Company’s relationship with
Laundry Service.”73
On September 12, 2018, Schnatter publicly accused the Company of “hiding
documents that, we believe, will disclose the actual facts as to what is occurring here,
including use of Mr. Schnatter as a scapegoat to cover up their own shortcomings
and failures.”74 Schnatter also testified that a fellow director, Mark Shapiro, has
benefitted from the Company’s efforts to cut ties with him because a company
Shapiro owns is now doing advertising business with Papa John’s, which Schnatter
would not have permitted.75
G. Schnatter Files a Derivative Complaint
On August 30, 2018, Schnatter filed a second action in this court against
Ritchie and the five members of the Board who serve on the Special Committee,
asserting five claims for breach of fiduciary duty, four derivatively (Counts I-IV)
and a fifth directly (Count V) (the “Fiduciary Action”). Count I asserted that Ritchie
73 JX 90 at 1. 74 PTO ¶ 44. 75 Tr. 76, 182-83. 18 breached his fiduciary duty of loyalty as an officer of the Company by launching “a
false and defamatory campaign against Mr. Schnatter, falsely accusing him of
racism, after Mr. Ritchie learned that he was going to lose his job.”76 Counts II-IV
asserted that the members of the Special Committee breached their fiduciary duties
of care or loyalty in various ways.77 Count V asserted that the Special Committee
defendants breached their fiduciary duties by adopting a shareholder rights plan in
July 2018.78
On September 21, 2018, Schnatter amended his complaint in the Fiduciary
Action to drop the claim against Ritchie. Schnatter later stated his intention to amend
his complaint a second time to withdraw the three claims asserted against the Special
Committee defendants (Counts II-IV), but he has not yet sought to do so.79
II. PROCEDURAL HISTORY
On July 26, 2018, after the Company had largely rejected his Demand,
Schnatter filed this action. The Complaint contains a single claim seeking an order
requiring the Company to permit inspection of the books and records sought in the
Demand. On September 4, 2018, the Company moved to dismiss the Complaint for
failure to state a claim for relief, which the court denied on September 20.
76 JX 92 ¶ 74. 77 JX 92 ¶¶ 77-99. 78 JX 92 ¶¶ 100-06. 79 Def.’s Reply Br. Ex. B (Dkt. 58). 19 Following a one-day trial held on October 1, 2018, the court heard post-trial
argument on November 16, 2018. Based on various positions the parties advanced
during the argument suggesting that their disputes had been narrowed, the court
asked the parties to meet and confer to explore a resolution. On November 30, 2018,
the parties informed the court that they had resolved the open issues concerning
thirteen of the seventeen categories of documents requested in the Demand and that
the only issues that remain unresolved pertain to Requests Nos. 1-4.80 The court has
only a partial understanding of how the parties resolved the issues concerning the
thirteen categories of documents no longer in dispute.
III. ANALYSIS
The Delaware General Corporation Law provides that a “director shall have
the right to examine the corporation’s . . . books and records for a purpose reasonably
related to the director’s position as a director.”81 “A director who has a proper
purpose . . . has virtually unfettered rights to inspect books and records,” which
afford “access at least equal to that of the remainder of the board.”82 “The public
policy underlying that rule is plain: a director charged with fiduciary obligations to
80 Dkt. 63. 81 8 Del. C. § 220(d). 82 Chammas v. NavLink, Inc., 2016 WL 767714, at *6 (Del. Ch. Feb. 1, 2016) (citations and internal quotation marks omitted). 20 protect and preserve a corporation must have access to the corporation’s books and
records if he reasonably can be expected to perform his duties.”83
A “director seeking inspection of books and records makes out a prima facie
case when he shows that he is a director, he has demanded inspection and his demand
has been refused.”84 At that point, the “defendant corporation bears the burden of
proving that any such inspection is for an improper purpose.”85 The burden of proof
under Section 220 is a “preponderance of the evidence.”86 “[P]roof by a
preponderance of the evidence means that something is more likely than not.”87
A director’s purpose is not automatically rendered improper “because of the
possibility that he may abuse his position as a director and make information
available to persons hostile to the Corporation or otherwise not entitled to it. If [a
director] does violate his fiduciary duty in this regard, then the Corporation has its
remedy in the courts.”88 If it is established, however, that a director’s “motives are
83 Bizzari v. Suburban Waste Servs., Inc., 2016 WL 4540292, at *8 (Del. Ch. Aug. 30, 2016). 84 Id. (citation and internal quotation marks omitted); see also Holdgreiwe v. Nostalgia Network, Inc., 1993 WL 144604, at *3 (Del. Ch. Apr. 29, 1993) (same). 85 Chammas, 2016 WL 767714, at *6. 86 Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006) (defining burden of proof as preponderance of evidence for 220(b) proceedings); see also Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 567 (Del. 1997) (same). 87 Physiotherapy Corp. v. Moncure, 2018 WL 1256492, at *3 (Del. Ch. Mar. 12, 2018) (citation and internal quotation marks omitted). 88 Henshaw v. Am. Cement Corp., 252 A.2d 125, 129 (Del. Ch. 1969). 21 improper, or that they are in derogation to the interest of the corporation, then his
right to inspect ceases to exist.”89
The following analysis proceeds in three parts. The court begins by
determining the propriety of Schnatter’s purpose for seeking inspection of
documents. After concluding that the Company has failed to prove by a
preponderance of the evidence that his purpose is improper, the court considers the
appropriate scope for Schnatter’s inspection of documents. Finally, the court
addresses the Company’s arguments to impose conditions on the production of
documents to Schnatter.
A. The Propriety of Schnatter’s Purpose for the Demand
The record plainly shows that Schnatter is a director of the Company, that he
made the Demand to inspect books and records of the Company under Section
220(d), and that the Company largely rejected his Demand.90 As such, because the
Company challenges the propriety of Schnatter’s purpose for making the Demand,
the Company bears the burden of proving by a preponderance of the evidence that
Schnatter’s purpose is not “reasonably related to [his] position as a director.”91
89 Holdgreiwe, 1993 WL 144604, at *3 (citation omitted). 90 See JX 35 (demanding production of seventeen categories of documents); JX 53 at 1-2 (stating that “the Company would be justified in rejecting the Demand in its entirety” and offering significantly fewer categories of documents than were requested). 91 8 Del. C. § 220(d). 22 1. Schnatter’s Stated Purpose for Making the Demand
The stated purpose for which Schnatter made his Demand has been the subject
of some confusion. In his Demand, Schnatter stated: “The purpose of my demand
is to inform myself so that I may fulfill my fiduciary duties and ensure that the other
members of the Board are fulfilling their fiduciary duties as well.”92 The use of the
introductory phrase “[t]he purpose” suggests that Schnatter has a single purpose.
One reasonably could read the balance of the sentence, however, to describe two
potentially distinct purposes: first, to ensure that Schnatter is fulfilling his own
fiduciary duties, and second, to ensure that the other directors have fulfilled their
fiduciary duties.
In response to an interrogatory, Schnatter stated that “his only purpose is set
forth in the Demand: to investigate whether members of the Board have breached
their fiduciary duties to the Company and its stockholders.”93 Shortly before trial,
Schnatter purported to amend this interrogatory response to state that, “consistent
with his Demand and his deposition testimony, his purposes are to inform himself
so that he may fulfill his fiduciary duties and ensure that the other members of the
Board are fulfilling their fiduciary duties as well.”94
92 JX 35 at 3. 93 JX 79 at 13. 94 JX 201 at 6. The Company requests that the court strike Schnatter’s amended interrogatory response given that he reconfirmed his original response at trial and no 23 At trial, Schnatter stood by his original interrogatory response when asked
about the purpose of his Demand.95 Schnatter then elaborated on redirect that “to
investigate” in this context means to “gain knowledge, to inform yourself, to have
insight. I mean, investigate means to get to the bottom of something and know
what’s going on.”96 By post-trial argument, Schnatter’s counsel took the position
that the two purposes apparent in the Demand “are one and the same, and they both
seek to investigate potential mismanagement.”97
In sum, although Schnatter’s explanations of his purpose have varied, I find
that the stated purpose for his Demand boils down to a single purpose: to investigate
mismanagement of the Company by the other members of the Board. Both parties
now agree on this.98 “It is well established that investigation of mismanagement is
a proper purpose for a Section 220 books and records inspection.”99
testimony was elicited at trial about his amended response. Def.’s Opening Br. 24. Given that the amended response is referenced only for purposes of background, this request is denied. 95 Tr. 66-67. 96 Tr. 182. 97 Post-Trial Tr. 70. 98 See Post-Trial Tr. 70, 110. 99 Sec. First Corp., 687 A.2d at 567. 24 2. The Company Has Failed to Prove that Schnatter’s Purpose Is Not Reasonably Related to His Position as a Director
The Company argues that “Schnatter is not seeking documents for a purpose
reasonably related to his position as a director” on the theory that he actually “is
seeking documents that relate to his individual status as John Schnatter—founder
and stockholder and former Chairman and CEO of the Company.”100 In other words,
according to the Company, Schnatter’s stated purpose for the Demand is a pretext
and his actual purpose is personal and thus improper.
The Company gives four reasons in support of this contention: (1) Schnatter’s
Demand seeks “mostly documents about himself;”101 (2) his Complaint concedes
that he “sought to inspect documents because of the unexplained and heavy-handed
way in which the Company has treated him since the publication of” the Forbes
Article;102 (3) he conceded at trial that he wants to “get hold of documents he feels
will clear him and his reputation;”103 and (4) he “appears to be seeking documents
to further his current fiduciary suit or to pursue another fiduciary suit.”104 The court
will address the first three reasons together and then turn to the fourth reason.
100 Def.’s Opening Br. 17. 101 Def.’s Opening Br. 17. 102 Compl. ¶ 1 (Dkt. 1). 103 Tr. 77-79. 104 Def.’s Opening Br. 18. 25 a. The Company Has Failed to Prove that Schnatter’s Purpose Is Improper Because It Is Personal
The first three reasons fundamentally say the same thing: Schnatter’s actual
purpose for making the Demand is personal and therefore improper under Section
220. Although Schnatter’s interests as a director and as an individual often overlap
because of the unique public role he has played at the Company for many years, the
Company has failed in my opinion to meet its burden of showing that Schnatter’s
actual purpose for making the Demand is personal and thus not reasonably related
to his position as a director.
Schnatter is the founder and largest stockholder of the Company. Over the
course of his thirty-four-year career with the Company, he held virtually every
position—from cook and dishwasher to CEO—and, critically, he became the public
face of the Company in its marketing efforts on television and in print.105 Given his
unique role as the Company’s longstanding public spokesman, Schnatter’s concerns
that the Company made no effort to defend him in response to the controversies
arising from his comments about the NFL and the publication of the Forbes Article,
and that the Company instead appeared intent on abruptly severing ties with him, are
relevant concerns that any director, including Schnatter, would have about the
Company’s management and oversight.
105 Tr. 6-7. See JX 2 at 1 (Founder’s Agreement stating that Schnatter “will,” among other things, “participate in commercials and other high profile public relations events”). 26 Additionally, having listened carefully to Schnatter’s testimony about how
these events unfolded and having observed his demeanor at trial,106 I find that
Schnatter’s Demand arose from a genuine desire to investigate whether the other
members of the Board had fulfilled their fiduciary obligations in handling the
controversies during the period leading up to the July 15 Meeting.107 Schnatter
testified, for example, that he was taken aback by the swiftness of the media to
portray his comments about the NFL as racial in nature, and that he felt ambushed
and pressured during the Training Exercise, which led to the Forbes Article.
Whether or not Schnatter’s perceptions of those events are accurate, he testified
credibly that he had those perceptions, which lends credence to his concern that it
was inappropriate for the Board to ask him to resign as Chairman and as a director
within a few days of the publication of the Forbes Article and before the Board had
conducted an investigation or interviewed him.
106 See supra Section I.B-C. 107 The Company argues that “Schnatter must show ‘ample evidence that [he] has a bona fide need to inspect the corporate records in order to ensure that [management] has not engaged in any mismanagement of [the Company].’” Def.’s Opening Br. 25 (quoting Holdgreiwe, 1993 WL 144604, at *4). This quotation of Holdgreiwe mischaracterizes its holding. Although the court in Holdgreiwe noted as a factual matter that there was “ample evidence” the director in question had a bona fide need to inspect corporate records, it did not hold as a legal matter that the director bore the burden of showing ample evidence of mismanagement to justify his inspection. Such a proposition would be at odds with the burden of proof the statute places on the corporation when a director makes an inspection demand. See 8 Del. C. § 220(d) (“The burden of proof shall be upon the corporation to establish that the inspection such director seeks is for an improper purpose.”). 27 To be sure, there is a personal element to the concerns Schnatter testified about
because they also pertain to his reputation as an individual. But that fact does not
negate that these concerns are legitimate corporate concerns, particularly given that
Schnatter’s image and standing has been inextricably intertwined with the
Company’s public persona for decades. In short, I find that the Company has failed
to prove that Schnatter’s purpose for the Demand is not reasonably related to his
position as a director. I reject the Company’s theory that his actual purpose is to
obtain documents to advance his personal interests, although I recognize that the
documents sought in the Demand may be important to him personally as well.
b. The Company Has Failed to Prove that Schnatter’s Purpose Is Improper Based on His Filing of the Fiduciary Action
The fourth reason the Company cites to prove that Schnatter’s purpose is
improper is that he “appears to be seeking documents to further his current fiduciary
suit or to pursue another fiduciary suit.”108 Delaware courts have recognized that a
stockholder who files a plenary action asserting claims of mismanagement undercuts
his alleged need to obtain documents under Section 220 to investigate the same
alleged acts of mismanagement.109
108 Def.’s Opening Br. 18. 109 Bizzari, 2016 WL 4540292, at *6 (holding that need for documents sought in inspection demand to investigate mismanagement and wrongdoing was undercut by filing of pending plenary action challenging same conduct); Cent. Laborers Pension Fund v. News Corp., 2011 WL 6224538, at *2 (Del. Ch. Nov. 30, 2011) (holding that stockholder was “unable 28 The rationale for this rule was most recently explained in Bizzari v. Suburban
Waste Services, Inc.110 In that case, Louis Bizzari, the founder of Suburban Waste
Services, Inc. and its parent company, Felt Properties, LLC, made a demand to
inspect documents of both entities in two different capacities: (1) as a stockholder
of Suburban and as a member of Felt, and (2) as a director and a manager of those
companies, respectively. Recognizing that the standards governing his demands
varied depending on Bizzari’s capacity, the court was careful to analyze Bizzari’s
“demand as a stockholder/member separately from his demand as a
director/manager.”111
In analyzing Bizzari’s demand as a stockholder and member, the court noted
that, after trial in his inspection action, Bizzari had filed a plenary action concerning
efforts to remove him as a director and manager and to sell certain assets of Suburban
to tender a proper purpose for pursuing its efforts to inspect” books and records given that its “currently-pending derivative action necessarily reflects its view that it had sufficient grounds for alleging both demand futility and its substantive claims without the need for the assistance afforded by Section 220”); see also King v. VeriFone Hldgs., Inc., 12 A.3d 1140, 1148 (Del. 2011) (acknowledging that dismissal of later-filed Section 220 action was proper when the “stockholder-plaintiff’s plenary derivative complaint was still pending and the plenary court had not granted the plaintiff leave to amend”); Baca v. Insight Enters., Inc., 2010 WL 2219715, at *4 (Del. Ch. June 3, 2010) (“[A] stockholder does not act with a proper purpose when the stockholder attempts to use Section 220 to investigate matters that the same stockholder already put at issue in a plenary derivative action.”); Taubenfeld v. Marriott Int’l, Inc., 2003 WL 22682323, at *3 (Del. Ch. Oct. 28, 2003) (noting that filing a derivative complaint “was a certification under Rule 11 that the plaintiffs had enough information to support their allegations”). 110 2016 WL 4540292. 111 Id. at *4. 29 without his consent. The court concluded that Bizzari had “failed to meet his burden
of establishing a credible basis to investigate possible mismanagement or
wrongdoing.”112 With respect to the subject matter of the plenary action, the court
reasoned that, by filing the plenary action, “Bizzari and his counsel presumably
concluded they possessed sufficient information under Rule 11 to file the complaint
without first inspecting books and records.”113 Thus, as the court further explained,
Bizzari “effectively conceded that the books and records he seeks are not necessary
or essential to his stated purpose of investigating mismanagement or wrongdoing
with respect to the removal or asset sale issues.”114
In analyzing Bizzari’s demand as a director and manager, the court made no
mention of Bizzari’s filing of his plenary action or the impact that filing could have
on obtaining documents in his capacity as a director and manager. The court instead
focused on evidence showing that “Bizzari’s conduct during the last year had been
entirely inconsistent with [Suburban’s] interests.”115 In particular, the court found
that Bizzari “demonstrated a willingness to compete directly with Suburban” and
“remains motivated to do so as a result of his extreme anger and resentment of
112 Id. at *6. 113 Id. 114 Id. 115 Id. at *8. 30 [Suburban’s] other two principals.”116 Relying on this evidence, the court concluded
that Suburban had carried its “rather substantial burden of proving that [Bizzari’s]
demand to inspect books and records in his capacity as a director and manager is not
motivated by a proper purpose.”117
Here, in challenging the propriety of Schnatter’s purpose based on his filing
of the Fiduciary Action, the Company focuses on one aspect of one claim in the
Fiduciary Action where Schnatter alleges that the members of the Special
Committee breached their fiduciary duty of care by terminating the Founder’s and
Sublease Agreements almost immediately after the Special Committee was formed.
The core supporting allegation appears in Count II of the original complaint in the
Fiduciary Action. It states, in relevant part:
In violation of this duty of care, the Special Committee acted within less than three hours of its formation to terminate two Schnatter-related agreements. The Board could not have possibly met its obligation to consider all information reasonably available before invalidly terminating those agreements. Nor has the Board cured this flaw in its decision-making process.118
116 Id. at *8-9. 117 Id. at *1. 118 Derivative Compl. ¶ 79 (C.A. No. 2018-0646) (Dkt. 1). The Company makes no argument that the other matters raised in the five claims of the original complaint concern the same subject matter as Requests Nos. 1-4. 31 In my opinion, the Company has not met its burden to prove that Schnatter’s purpose
for seeking the documents described in Requests Nos. 1-4 is improper based on the
assertion of this narrow claim in the Fiduciary Action for two reasons.
First, there are fundamental differences between inspection demands made by
stockholders and those made by directors. A stockholder seeking to inspect books
and records (other than a stock ledger or list of stockholders) not only bears the
burden of proving that her demand is proper, i.e., reasonably related to her interests
as a stockholder,119 but also must demonstrate that the documents she seeks are
“necessary and essential to satisfy [her] stated purpose.”120 As Bizzari explains, a
stockholder seeking documents under Section 220 to investigate claims of
mismanagement undercuts her ability to make the second showing by asserting
claims in a plenary action challenging the same alleged acts of mismanagement.
By contrast, a director “who has a proper purpose is entitled to virtually
unfettered access to the books and records of the corporation,”121 and it is the
119 8 Del. C. § 220(c). 120 Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 816 (Del. Ch. 2007) (emphasis added); see also Polygon Glob. Opportunities Master Fund v. West Corp., 2006 WL 2947486, at *3 (Del. Ch. Oct. 12, 2006) (finding stockholder plaintiff stated proper purpose of valuing its shares but denying inspection because it had “all ‘necessary and essential’ information from public filings”); Marathon P’rs, L.P. v. M&F Worldwide Corp., 2004 WL 1728604, at *4 (Del. Ch. July 30, 2004) (“The scope of inspection should be circumscribed with precision and limited to those documents that are necessary, essential and sufficient to the stockholder’s purpose.”). 121 McGowan v. Empress Entm’t, Inc., 791 A.2d 1, 5 (Del. Ch. 2000) (Jacobs, V.C.). 32 corporation’s burden to prove that the director’s purpose is improper, i.e., not
“reasonably related to the director’s position as a director.”122 And, importantly,
standing to bring a claim on behalf of the corporation has not been extended to a
director under Delaware law.123 Thus, if Schnatter obtains documents in response to
the Demand, he may use them internally at the Company to advance his point of
view, but he may not use them to pursue a derivative claim unilaterally. Presumably
recognizing this limitation, Schnatter has represented he will not use any documents
produced in response to the Demand to assert a claim as a stockholder without first
obtaining the Company’s consent to do so.124
No authority has been brought to the court’s attention in which a director’s
right to access books and records under Section 220(d) has been denied based on his
filing of a plenary claim as a stockholder. Bizzari is not that case. Given (i) the lack
of any such authority, (ii) the significant differences in our law between inspection
demands made by stockholders and those made by directors, (iii) the fact that a
director lacks standing to assert derivative claims in that capacity, and (iv) the fact
that Schnatter has agreed not to use any documents produced in response to the
Demand to file a claim as a stockholder without the Company’s consent, I see no
122 8 Del. C. § 220(d). 123 Schoon v. Smith, 953 A.2d 196, 199 (Del. 2008). 124 See Post-Trial Tr. 72, 110-11, 119-20. 33 basis to deny Schnatter access to the documents described in Requests Nos. 1-4
based on his filing of the Fiduciary Action.
Second, even if one were to ignore the distinctions discussed above
concerning inspection demands made by directors as opposed to stockholders, it
would not be appropriate in my view to deem Schnatter’s filing of a claim
challenging the Special Committee’s exercise of its duty of care in a very limited
respect—i.e., its alleged failure to inform itself during the three hours after it was
formed—to be a concession that Schnatter does not need the documents sought in
Requests Nos. 1-4 to investigate mismanagement. Each of those requests only seeks
documents pertaining to a time period before the Special Committee was formed,
i.e., from November 1, 2017 until the July 15 Meeting. And even if such documents
were relevant to Schnatter’s due care claim (e.g., by showing that the directors had
become informed about the Sublease and Founder’s Agreements before the Special
Committee was formed), Schnatter has not asserted a loyalty claim relating to the
termination of those agreements and thus could not be said to have conceded that he
has sufficient information to do so. In short, the Company has not proven that the
acts of mismanagement Schnatter seeks to investigate through his Demand
necessarily concern the same conduct he put at issue in the Fiduciary Action.
34 c. The Company Has Failed to Prove that Schnatter’s Purpose Is Improper Based on His Alleged Lack of Familiarity with the Demand
Apart from the four reasons already discussed, the Company contends that
Schnatter’s purpose is improper because he “had no idea” why he is seeking many
of the documents requested in the Demand.125 For support, the Company relies on
Wilkinson v. A. Schulman, Inc.126 In that case, the court found that a stockholder
who had served as a plaintiff for an “entrepreneurial law firm” in at least seven
lawsuits did not have a proper purpose for inspecting a corporation’s books and
records.127 The court reasoned that “the purposes for the inspection belonged to” the
law firm, which (i) initiated the process, (ii) drafted “a demand to investigate
different issues than what motivated the stockholder to respond to the law firm’s
solicitation,” and (iii) pursued the inspection and litigation “with only minor and
non-substantive involvement from the ostensible stockholder principal.”128
125 Def.’s Opening Br. 20. The Company also contends that Schnatter’s “varying sworn testimony” concerning the stated purpose for his Demand proves that he has no proper purpose. Id. 22-24. I disagree. As discussed above (see supra Section III.A.1), there was some confusion about Schnatter’s stated purpose, but the asserted variations in Schnatter’s testimony are overblown and largely explainable by the reality that, in order to investigate mismanagement by others, a director must first become informed himself about the underlying facts and circumstances. 126 2017 WL 5289553 (Del. Ch. Nov. 13, 2017). 127 Id. at *2-3. 128 Id. 35 This case bears no resemblance to Wilkinson. Here, a director of a corporation
with a presumptive right to access corporate books and records made an inspection
demand in response to a specific sequence of events, i.e., the Company’s handling
of the fallout from the Earnings Call and Forbes Article. The record here does not
support the conclusion that Schnatter was so disengaged from the process that the
actual purpose for the Demand was to benefit his counsel.129
*****
For the reasons explained above, the court finds that the Company has failed
to prove that Schnatter’s purpose for making the Demand is not reasonably related
to his position as a director of the Company. The court turns next to determining the
appropriate scope of the inspection to which Schnatter is entitled.
B. Scope of Production
“If [a director’s] inspection of [a corporation’s] records is to effectuate its
purpose of enabling him to determine whether management wrongdoing has
occurred, his access to [the corporation’s] records must necessarily be broad and
unrestricted.”130 At the same time, even a director “must direct the Court to specific
129 Contrary to the Company’s portrayal, Schnatter was conversant in many details about the Demand. See, e.g., Schnatter Dep. 62 (explaining why date range in Demand was chosen); Schnatter Dep. 105 (explaining why he seeks certain documents related to formation of Special Committee). Holdgreiwe, 1993 WL 144604, at *7 (granting plaintiff-director’s requests “fully and 130
completely”). 36 books and records related to the [director’s] proper purpose. Without such direction,
the Court is unable to direct production of an appropriate set of documents, and
unwilling to burden the corporation to search for the same.”131
As discussed previously, only Requests Nos. 1-4 remain in dispute. To
reiterate, those requests seek:
1. Communications with and between Counsel to the Company and any officer or director of the Company from October 31, 2017 through the formation of the Special Committee at the July 15, 2018 meeting of the Board of Directors (the “July 15 Meeting”) referring or relating to me. For purposes of this Demand, Counsel shall mean any outside counsel to the Company, including without limitation, Hogan Lovells US LLP, Gibson Dunn & Crutcher, LLP, in- house counsel to the Company, and any counsel representing any director in connection with such director’s service on the Board of Directors (the “Board”).
2. Communications between or among directors, and/or any director and Counsel from October 31, 2017 through the July 15 Meeting relating to the article on Forbes.com’s website published on or about 5:00 a.m. on July 11, 2018 referring to me (the “Forbes Article”).
3. Communications between or among directors, and/or any director and Counsel from October 31, 2017 through the July 15 Meeting referring or relating to me.
4. Communications between or among directors and Counsel from October 31, 2017 through the July 15 Meeting referring or relating to Schnatter Group Arrangements as that term is defined in the resolutions adopted at the July 15 Meeting appointing the Special Committee (the “July 15 Resolutions”).
131 Chammas, 2016 WL 767714, at *8 n.98. 37 Although the term “Counsel” is defined in the Demand to include any personal
counsel “representing any director in connection with such director’s service” on the
Board, Schnatter no longer seeks such communications and their production will not
be required.132 Schnatter also has limited the potential custodians to the following:
the other directors, Ritchie, and Caroline Oyler, the Company’s General Counsel.133
This list is reasonable. I also find that the time period covered by Requests Nos. 1-
4 is reasonable. Each request covers a limited period of less than nine months that
begins with the Earnings Call, when the concerns to which Schnatter testified began
to arise, and ends with the formation of the Special Committee.
As stated, however, Requests Nos. 1-4 are overbroad relative to the attested
purpose for the Demand in one key respect. For example, to the extent those requests
seek communications “referring or relating” to Schnatter without further
qualification (e.g., Requests Nos. 1 and 3), they are not sufficiently related to
Schnatter’s purpose of investigating mismanagement and must be narrowed. In my
opinion, Schnatter is entitled to the communications sought in Requests Nos. 1-4
only to the extent such communications reflect any consideration of changing
Schnatter’s relationship with the Company, which would include assessments of his
132 Post-Trial Tr. 78. 133 See Dkt. 63 at 2; Post-Trial Tr. 84-85. 38 behavior or performance in his various roles at the Company (e.g., as a director,
officer, or spokesman), during the specified time period.
Two issues remain concerning the scope of production: (i) Schnatter’s request
to obtain emails and text messages from personal accounts and devices, and (ii)
privileged communications. These issues are addressed, in turn, below.
1. Production of Emails and Text Messages from Personal Accounts and Devices
Schnatter requests access to emails and text messages from personal accounts
and stored on personal devices. In Indiana Electrical Workers Pension Trust Fund
IBEW v. Wal-Mart Stores, Inc., a stockholder sought to inspect emails and other
documents stored on the directors’ personal devices concerning the board’s handling
of a bribery scandal involving Wal-Mart’s Mexican division.134 Then-Chancellor
Strine ordered production, observing that a director usually owes an obligation to
the corporation “to share that information with the company when the company
needs it.”135 Subsequently, this court has both granted and denied access to personal
email accounts and devices of directors and officers in Section 220 actions.136
134 C.A. No. 7779-CS, at 81, 97 (Del. Ch. May 20, 2013) (Strine, C.) (TRANSCRIPT). 135 Id. at 98. 136 Compare Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 792-93 (Del. Ch. 2016) (granting access to CEO’s personal email account), with In re Lululemon Athletica Inc. 220 Litig., 2015 WL 1957196, at *6-7 (Del. Ch. Apr. 30, 2015) (denying access to directors’ personal email accounts). 39 In opposing Schnatter’s request for emails and text messages from personal
accounts and devices, the Company relies on Chammas v. NavLink, Inc.137 In that
case, two directors of NavLink who suspected that other board members had been
meeting without them sought access under Section 220(d) to certain communications
between or among management, the board Chairman, and/or any of the other board
members during a defined period.138 In rejecting this request, the court explained:
Mere suspicions of pre-meeting collusion among board members or board members and management, in the context of a Section 220 action, is insufficient to compel the production of private communications between such officers and directors, even to the extent that such communications are stored on the defendant company’s servers. While directors’ access to company books and records is broader than that of stockholders, the requested information itself must qualify as a book or record of the company before the Court will order its production.139
The Chammas court then articulated a three-part test for determining when a
request for communications among corporate directors and officers may be produced
in response to a Section 220 demand:
The Court notes that while this holding is not to be interpreted as a blanket prohibition against inspection of private communications among directors, subjecting Section 220 proceedings to such broad requests, even by directors, runs contrary to the ‘summary nature of a Section 220 proceeding.’ As such, any request for communications among corporate directors and officers must (1) state a proper purpose, (2) encompass communications constituting books and records of the corporation, i.e., those that affect the corporation’s rights, duties, and
137 2016 WL 767714. 138 Id. at *6. 139 Id. at *7 (internal citations omitted). 40 obligations, and (3) be sufficiently tailored to direct the Court to the specific books and records relevant to the director’s proper purpose.140
With respect to the second element, the court cited Estate of Polin v. Diamond State
Poultry Co. for the proposition that “documents subject to a Section 220 request are
limited to ‘those which were intended to reflect on the business, condition or legal
rights of the corporation.’”141
Focusing on the second element of the Chammas test, the Company resists the
production of emails and text messages from personal accounts and devices, arguing
that “Schnatter is just curious about what his fellow fiduciaries were saying about
him.”142 The Company would have a point if the custodians were required to
produce documents referring to Schnatter without qualification. As discussed above,
however, the court has limited the scope of the Company’s production in response
to Requests Nos. 1-4 to communications reflecting any consideration of changing
Schnatter’s relationship with the Company, including assessments of Schnatter’s
behavior or performance in his various roles at the Company, during the specified
time period. Modified in this way, Requests Nos. 1-4 seek documents that satisfy
the definition suggested in Chammas and the earlier precedent on which it relies for
what constitutes books and records of a corporation for purposes of Section 220.
140 Id. at *8 (internal citations omitted). 141 Id. at *8 n.97 (quoting Polin, 1981 WL 7612, at *3 (Del. Ch. Apr. 14, 1981)). 142 Def.’s Opening Br. 33. 41 A further word is in order regarding emails and text messages from personal
accounts and devices. The reality of today’s world is that people communicate in
many more ways than ever before, aided by technological advances that are
convenient and efficient to use. Although some methods of communication (e.g.,
text messages) present greater challenges for collection and review than others, and
thus may impose more expense on the company to produce, the utility of Section
220 as a means of investigating mismanagement would be undermined if the court
categorically were to rule out the need to produce communications in these formats.
Accordingly, I decline to adopt that approach.
In my view, consistent with the sentiments then-Chancellor Strine expressed
in Wal-Mart, if the custodians identified here—the Company’s other directors, CEO,
and General Counsel—used personal accounts and devices to communicate about
changing the Company’s relationship with Schnatter, they should expect to provide
that information to the Company.143 That would apply not only to emails, but also
to text messages, which in the court’s experience often provide probative
information. In so holding, I do not mean to suggest any form of a bright-line rule.
143 According to Schnatter’s counsel, the Company’s directors do not have Company email addresses. Post-Trial Tr. 79. The Company has not suggested otherwise. Nor did the Company introduce at trial a policy indicating that it views any information from the personal accounts or on the personal devices of its directors or officers to be “personal unrestricted information” outside the control of the Company. See Wal-Mart, C.A. No. 7779-CS, at 97-98. 42 To the contrary, when considering requests for information from personal accounts
and devices in Section 220 proceedings, the court should apply its discretion on a
case-by-case basis to balance the need for the information sought against the burdens
of production and the availability of the information from other sources, as the
statute contemplates.144
2. Privileged Communications
It is well-established under Delaware law that, subject to certain recognized
limitations, a “director’s right to information extends to privileged material.”145
Here, with one possible exception, no argument has been made that, to the extent the
court finds that Schnatter is entitled to inspect books and records of the Company,
his entitlement would not extend to privileged communications to which his fellow
directors were privy.
The possible exception concerns documents involving communications with
Akin Gump during the two-day period between July 13, 2018, when the firm was
contacted to represent the yet-to-be-formed Special Committee, and the July 15
Meeting, when the Special Committee formally was established. This issue was the
144 8 Del. C. § 220(d) (“The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper.”); see also id. § 220(c) (substantively identical provision for stockholder inspection demands). 145 In re CBS Corp. Litig., 2018 WL 3414163, at *4 (Del. Ch. July 13, 2018) (quoting Kalisman v. Friedman, 2013 WL 1668205, at *4 (Del. Ch. Apr. 17, 2013)). 43 subject of briefing, but it is unclear to the court whether the parties resolved the
matter in reaching a resolution of Requests Nos. 5-17 of the Demand, which include
a series of requests concerning the Special Committee. If the parties have not
resolved this issue, they should so inform the court in connection with submitting a
proposed form of order to implement this decision. Subject to this caveat, privileged
communications responsive to Requests Nos. 1-4, as modified by the court, to which
other directors of the Company were privy shall be produced to Schnatter.
C. Conditions on Production
The Company argues that any production of documents to Schnatter that
results from this action should only be made subject to entry of an order containing
three conditions: that Schnatter be (1) required to comply with the Board’s
confidentiality policy; (2) prohibited from using any such documents in his
Fiduciary Action or a future fiduciary action; and (3) prohibited from sharing any
such documents with his counsel in this action.
With respect to the first proposed condition, the Company acknowledges that
“Delaware law has long suggested that directors need not sign confidentiality
agreements to obtain documents under Section 220.”146 Rather, there is a
“presumption that the production of nonpublic corporate books and records to a
146 Def.’s Opening Br. 47. 44 stockholder making a demand pursuant to Section 220 should be conditioned upon
a reasonable confidentiality order.”147 This distinction is logical because directors,
unlike stockholders, are fiduciaries who owe the corporation a duty to protect its
information.148 Given that Schnatter already is obliged as a fiduciary to protect the
Company’s information, and given that he confirmed during his trial testimony that
he would abide by the Board’s confidentiality policy with respect to any documents
provided to him in this action,149 I decline the Company’s first request.150
With respect to the second proposed condition, as discussed above,
Schnatter’s counsel represented during post-trial argument that Schnatter would not
use any documents produced in response to the Demand to assert a claim as a
stockholder without first obtaining the Company’s consent to do so. For the sake of
clarity, the court will require that the parties include a provision formally
documenting this representation in the implementing order.
147 Disney v. Walt Disney Co., 857 A.2d 444, 447 (Del. Ch. 2004) (emphasis added). 148 See Edward P. Welch et al., 1 Folk on the Delaware General Corporation Law § 141.02[A], at 4-41 (6th ed. 2018) (“A director’s duties include a duty to protect corporate information.” (citing Shocking Techs., Inc. v. Michael, 2012 WL 4482838, at *9 (Del. Ch. Oct. 1, 2012))). 149 Tr. 147-48; see also JX 35; JX 100. 150 See Holdgreiwe, 1993 WL 144604, at *6 (commenting that conditioning a director’s right to inspect books and records “on his entry into an agreement binding him not to disclose any of the information he obtains to any third parties . . . seems to me to add little. He is already under an obligation to maintain the confidences of Nostalgia . . . . Disclosure of such information . . . is a violation of duty whether or not an undertaking is entered.”). 45 The last proposed condition concerns Schnatter’s counsel in this action:
Glaser Weil and his Delaware counsel, Bayard, P.A. Relying on this court’s
decisions in Henshaw v. American Cement Corp.151 and Holdgreiwe v. Nostalgia
Network, Inc.,152 the Company argues that both firms should be prohibited from
seeing any documents produced to Schnatter as a result of this action because those
firms also represent him in the Fiduciary Action. The Company further argues that
Glaser Weil should be prohibited in the same manner for the additional reason that
the firm represents two women who have made sexual harassment allegations
against Company management.153
In Henshaw and Holdgreiwe, the court barred a director from sharing
corporate books and records with other persons (including their lawyers) who had
interests adverse to the corporation.154 Here, by contrast, the Company seeks to bar
Schnatter from using his own lawyers to inspect the Company’s books and records.
I am not persuaded that Schnatter’s own counsel should be barred because of the
151 252 A.2d 125 (Del. Ch. 1969). 152 1993 WL 144604. 153 Tr. 153-54; JX 85. 154 See Henshaw, 252 A.2d at 130 (prohibiting a director (Henshaw) from conducting an inspection using (i) a law firm that represented another director (Caldwell) in a lawsuit against the corporation and (ii) Caldwell’s administrative assistant); Holdgreiwe, 1993 WL 144604, at *1, *7 (prohibiting a director (Holdgreiwe) from conducting an inspection using any professionals who had been employed by Concept Communications, Inc., which was engaged in a struggle for control of the corporation, or any of its affiliates “for any purpose other than this inspection of documents”). 46 pendency of the Fiduciary Action from reviewing documents Schnatter is entitled to
see himself as a director. Barring Schnatter’s lawyers from helping him with the
inspection would be prejudicial to Schnatter because it would require him to retain
new counsel to perform that task. Furthermore, the risk that the documents could be
used adversely to the Company can be mitigated by subjecting Schnatter’s lawyers
to the same use limitation to which he has consented, i.e., not to use the documents
to press a claim as a stockholder without first obtaining the Company’s consent.
With respect to Glaser Weil’s representation of the two alleged victims of
sexual harassment, there is insufficient information in the record to permit the court
to assess the nature and level of Glaser Weil’s potential adversity to the Company
based on this representation. The record also is insufficient to permit the court to
assess whether or not any alleged conflict could be handled—as Glaser Weil
contends it could—using ethical walls within the firm.155 As such, the court will not
bar Glaser Weil from assisting Schnatter based on its representation of these
individuals. Of course, it will be incumbent upon Glaser Weil to take whatever
measures are necessary to ensure compliance with its professional responsibilities.
155 See Post-Trial Tr. 105, 109-10. 47 IV. CONCLUSION
For the reasons explained above, Schnatter is entitled to inspect documents
responsive to Requests Nos. 1-4, as modified by the court, in accordance with this
opinion. The parties are directed to confer and submit an implementing order within
five business days.
IT IS SO ORDERED.
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Cite This Page — Counsel Stack
John Schnatter v. Papa John's International, Inc., Counsel Stack Legal Research, https://law.counselstack.com/opinion/john-schnatter-v-papa-johns-international-inc-delch-2019.