In January, the Delaware Court of Chancery ordered Papa John’s International, Inc. to permit founder, director, and former chairman and CEO John Schnatter to inspect certain of the company’s books and records under Section 220 of the Delaware General Corporation Law, including emails and text messages from the personal accounts and devices of the company’s directors and officers. The Delaware Court of Chancery is widely regarded as the nation’s preeminent forum for corporate and commercial disputes, and Delaware corporate law is viewed as the standard for corporate law developments worldwide. This decision sheds light on specific actions that companies and their directors and officers can take to make it less likely that information in personal email accounts and devices must be produced in response to books and records demands.
During an earnings call, Schnatter opined that the NFL’s failure to resolve the dispute between players and owners regarding the national anthem protests had negatively impacted sales at Papa John’s, which at that time was the NFL’s official pizza sponsor. Schnatter’s comments evoked a firestorm of criticism from the media. Soon afterwards, Schnatter resigned as CEO. Some months later, a Forbes article reported that Schnatter had used a racial slur during a company training exercise. At the request of the company’s board of directors, Schnatter resigned as chairman of the board later that day. Schnatter, however, declined the board’s request to resign as a director. A newly formed special committee of the board also abruptly terminated agreements that the company had with Schnatter. Papa John’s stock price declined significantly in the wake of these events.
In his capacity as a director, Schnatter requested books and records from the company under Section 220 for investigating possible mismanagement by the other directors. Section 220 grants stockholders and directors of Delaware corporations the right to inspect company books and records if certain conditions are met. The company largely rejected Schnatter’s information request, prompting Schnatter to initiate litigation.
After a one-day trial, the court issued an opinion ordering the company to produce certain categories of books and records to Schnatter. The court held that the directors and officers who were designated as document custodians had to provide emails and text messages from their personal accounts and devices to the company for review and possible production to Schnatter if they used those mediums to communicate about the possibility of changing Schnatter’s relationship with the company. While stating that there is no bright-line rule, the court noted several factors that influenced its decision. First, the company’s directors did not have company email addresses. Second, the company did not 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.”
Several practical pointers can be gleaned from this opinion. To protect information on directors’ and officers’ personal devices and accounts from books and records requests, companies should consider (1) providing company email addresses and cell phones or other mobile devices to directors and officers on which to communicate regarding company business and (2) adopting a policy restricting the company’s access to such personal accounts and devices. Although Chancellor Bouchard’s analysis was limited to the books and records context, taking these actions might also make it less likely that a court orders production of information on directors’ and officers’ personal accounts and devices in discovery in plenary litigation. Directors and officers should endeavor to conduct company business only on their company accounts and devices and not on their personal accounts and devices. Once it is established that a director or officer uses a personal email account or device to conduct company business, those personal accounts or devices will likely be subject to discovery, which could result in sensitive or embarrassing personal information being collected, searched, reviewed, and produced in litigation. Although the court made clear that the determination whether to order production of emails and text messages from personal accounts and devices is a highly factual inquiry, taking these precautionary steps can make it less likely that such personal information must be produced in response to books and records requests.
Aaron R. Sims is an associate at Potter Anderson & Corroon LLP in Wilmington, Delaware.
Copyright © 2019, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).