Court of Chancery Grants the Books and Records Demand of a Director Whose Ties With the Company Were Severed by the Board After His Allegedly Offensive Conduct—<em>Schnatter v. Papa John’s</em>

Court of Chancery Grants the Books and Records Demand of a Director Whose Ties With the Company Were Severed by the Board After His Allegedly Offensive Conduct—Schnatter v. Papa John’s


By: Andrew J. Colosimo, Warren S. de Wied, Steven Epstein, Christopher Ewan, Arthur Fleischer, Jr., Andrea Gede-Lange, David J. Greenwald, Randi Lally, Mark H. Lucas, Scott B. Luftglass, Brian T. Mangino, Philip Richter, Robert C. Schwenkel, David L. Shaw, Peter L. Simmons, Matthew V. Soran, Steven J. Steinman, Gail Weinstein, Maxwell Yim

In Schnatter v. Papa John's (Jan. 15, 2019), the Delaware Court of Chancery ruled that a director had the right, under DGCL Section 220, to inspect the corporate books and records that related to the board's determination to seek to sever ties with him based on his allegedly offensive conduct involving the use of racial slurs. The director was also the founder, largest stockholder, Chairman, recent CEO, spokesperson and longtime “public face” of the company. As discussed in the attached Briefing, the decision potentially has broad applicability in the current era of increased sensitivity to directors' misconduct related to sexual harassment or racism. Boards should expect that, when they seek to sever ties with a director based on offensive conduct, in addition to fiduciary, contractual and/or defamation claims, a books and records demand is likely to be made and may provide another tool available to the director to increase his or her leverage in the situation. In the Briefing, we analyze the decision and offer related practice points.

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