Bloomberg reports that:
Papa John's International Inc.’s embattled founder John Schnatter plans to reach out to shareholders to rally support as he tries to avoid being banished from the company's board, according to a person familiar with the matter.
Schnatter, who resigned as chairman recently after coming under fire for using a racial slur, ... is determined to hold onto his board seat even as the company tries to distance itself from its controversial founder ....
The board announced a so-called poison-pill plan on Sunday, July 22, to fend off any attempt by Schnatter to gain a controlling interest in the company. The former chief executive officer, who left that role in December, is concerned that the board is planning to call a special meeting of shareholders to vote him off the board, the person said.
What a great issue spotter exam question!
- Schnatter "voluntarily" resigned a chairman. Suppose he had not done that (memo to law students: do NOT do this on an actual exam; fighting the hypothetical will only annoy the professor and discussing irrelevant legal issues will not win you points). Could the board have removed him as chairman?
- I am quite confident act, under Delaware law, the board may remove its chairman from that office. But I cannot lay my hands on the source at the moment. (Anybody got one? If so, send me an email.)
- Papa John's bylaws provide that the Chairman of the Board shall be considered an officer of the corporation (art. IV, sec. 1). They further provide that "Any officer of the Corporation may be removed, either with or without cause, at any time, by the Board of Directors." (art. iv; sec. 3)
- So, yes, the board could remove Schnatter from his post as chairman.
- Could the Papa John's board remove Schnatter from the board itself; in other words, remove him as a director?
- No. There is no provision under Delaware law for the board of directors to remove one of its members. Indeed, there is case law specifically holding that the board lacks power to remove one of its own members. See, e.g., Dillon v. Berg, 326 F. Supp. 1214 (D. Del. 1971).
- Under Delaware General Corporation Law § 141(k) only shareholders are authorized to remove a board member.
- Could the board call a special meeting and ask the shareholders to vote to remove Schnatter?
- Yes. DGCL 211(d) provides that "Special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or by the bylaws."
- Papa John's bylaws provide that "a special meeting of stockholders, unless otherwise required by statute, may be called at any time only by (a) the Board of Directors, (b) the Chairman of the Board of the Corporation, or (c) the holders of not less than 60% of the shares entitled to vote at the special meeting."
- Hence, the board could call a special shareholder meeting even over Schnatter's objection. Interestingly, however, Schnatter also could have unilaterally called such a meeting if he had remained chairman of the board.
- Could the board use written consents to obtain shareholder approval of removing Schnatter from the board without calling a special meeting?
- Yes. DGCL section 228(a) provides: "any action ... which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted."
- If the board simply waits until the end of the company's fiscal year and then chooses not to nominate Schnatter for reelection as a board member, does he have any entitlement to be nominated?
- No. The board could simply wait him out (although for PR reasons it may not want to do so).
- The outgoing board of directors nominates a slate of directors to be elected at the next annual meeting of the shareholders. A simple majority is all that's required.
- No provision of Delaware law entitles a sitting director to be nominated for reelection.
- If the board gets shareholder approval to remove Schnatter or simply fails to renominate him at the end of his current term, is there anyway Schnatter can get back on the board over the other directors' objection?
- Sure. He could run a proxy contest asking the shareholders to elect him.
- The interesting strategic question would be whether Schnatter runs alone, as part of a short slate, or as part of a full slate seeking to oust the board members who ousted him.
- Can the board act against Schnatter's interests with impunity?
- No. The case that comes to mind (although it's not on all fours) is Mendel v. Carroll, 651 A.2d 297 (Del. Ch. 1994).
- It held that, absent very unusual circumstances involving some sort of serious overreaching by the majority, a board may not act to undermine the majority's control (as by making a dilutive stock issuance).
- Schnatter is not a majority shareholder (he probably isn't even a controlling shareholder under Delaware's restrictive test), but the idea that boards have duties to a company's large shareholders as well as their small ones still holds true.
- Is this one of those unusual circumstances? Schnatter's continued involvement with the company may have a negative impact on revenues, but what I think Mendel had in mind were cases like Perlman v. Feldmann, in which the controlling shareholder got a benefit from which the minority shareholders were excluded at which came at their expense.
- Why don't you think Schnatter is a controlling person?
- Under Delaware law, a shareholder is deemed to have control if the shareholder either owns a majority of the voting stock or exercises control over corporate decision making. See, e.g., Solomon v. Armstrong, 747 A.2d 1098, 1116 n. 53 (Del.Ch.1999)(“Under Delaware law, the notion of a ‘controlling’ stockholder includes both de jure control and de facto control.”).
- If the shareholder owns less than 50 percent of the voting stock, plaintiff must show evidence of actual control of corporate conduct. See, e.g., Emerald Partners v. Berlin, 726 A.2d 1215, 1221 n. 8 (Del.1999). Similar standards have been adopted in other jurisdictions, as well. See, e.g.,Locati v. Johnson, 980 P.2d 173, 176 (Or.App.1999)(“In order to be a controlling shareholder who owes fiduciary duties a shareholder must either be (1) an individual who owns a majority of the shares or who, for other reasons, has domination or control of the corporation or (2) a member of a small group of shareholders who collectively own a majority of shares or otherwise have that domination or control.”).
- Given the board's demonstrated antagonism to Schnatter and its demonstrated ability to take major actions contrary to his wishes and interests--most notably adopting the poison pill, which is plainly aimed at him--I see no evidence of the requisite de facto control.
- Papa John's board has adopted a poison pill.
- According to the company press release: "Under the Rights Plan, the rights generally would become exercisable only if a person or group (including a group of persons who are acting in concert with each other) acquires beneficial ownership of 15% or more of Papa John’s common stock in a transaction not approved by the Papa John’s Board of Directors. In that situation, each holder of a right (other than the acquiring person or group, whose rights will become void and will not be exercisable) will have the right to purchase, upon payment of the exercise price and in accordance with the terms of the Rights Plan, a number of shares of Papa John’s common stock having a market value of twice such price. In addition, if Papa John’s is acquired in a merger or other business combination after an acquiring person acquires 15% or more of Papa John’s common stock, each holder of the right would thereafter have the right to purchase, upon payment of the exercise price and in accordance with the terms of the Rights Plan, a number of shares of common stock of the acquiring person having a market value of twice such price. The acquiring person or group would not be entitled to exercise these Rights."
- It further states that "Schnatter and his affiliates and associates who currently beneficially own shares of common stock in excess of 30% have been grandfathered under the Rights Plan but will become an acquiring person upon their acquisition of 31% or more of our outstanding shares of common stock, subject to certain exceptions as described in the Rights Plan."
- In other words, the company wants to prevent Schnatter from getting control of any additional shares. Why? Because someone who controls 50%+1 of a company's voting shares (absent cumulative voting or dual class stock) gets to elect the entire board of directors even if the holders of all the other shareholders are opposed. If Stinter and his associates already control 30% of the voting stock, they are already well within striking distance of the minimum. (Note that the minimum is actually lower than 50% of the outstanding shares because many shareholders don't vote.) People holding much less than a 30% stake have prevailed in proxy contests. but people holding more than 30% have an even higher chance of success. So the board wants to freeze Schnatter at his present ownership level.
Update: Still more Q&A