On January 15, 2019, the Delaware Court of Chancery ruled that Papa John’s International, Inc. must allow its director John Schnatter access to materials responsive to his demand pursuant to the books and records inspection statute, 8 Del. C. § 220, subject to certain restrictions on use of the materials. Schnatter is Papa John’s founder, its largest stockholder and a director on its board. Until recently, he served as the company’s Chairman of the Board, CEO and spokesman. He resigned as Chairman and CEO following much publicized reports of his commentary on the NFL’s handling of player protests and his use of a racially charged term during a company training session. His spokesman role was terminated following recommendations by a special committee comprised of his fellow board members.
Schnatter contends that his resignations were forced and his company agreements were terminated as part of a coup orchestrated by others in management to scapegoat him for the company’s poor financial performance. Schnatter filed a derivative lawsuit in Delaware accusing the board and a company officer of breaching their fiduciary duties in a variety of ways related to their handling of the public backlash following his NFL comments and racially charged statement. At the same time, he sought the right to inspect seventeen categories of documents as a company director pursuant to Section 220. He reached an agreement with the company regarding inspection of all but four categories of documents. The Chancery Court’s January 15th decision addressed his right to inspect the disputed categories of documents. Although the decision relies upon established precedent, it provides guidance on a plethora of issues commonly arising in books and records inspection disputes, such as:
In conclusion, this decision served up a review of Section 220 inspection demands with all of the toppings. While the general principles discussed in the decision are a useful guide, analysis of Section 220 inspection demands are fact-intensive and contextual. It is therefore imperative that careful consideration be given when making or responding to an inspection demand after consultation with counsel familiar with these nuances.
Schnatter v. Papa John’s International, Inc., C.A. No. 2018-0542-AGB (Del. Ch. Jan. 15,2019).