In response to our earlier post on the Papa Johns fight, a friend sent along three additional questions:
(1) Can the board exclude Schnatter from board meetings? (2) If the board can’t exclude Schnatter from attending meetings, can they (a) prevent him from attending with the assistance of his own legal counsel and other advisers; and/or (b) exclude him from meetings on which he is not a committee member? (3) What rights, if any, does Schnatter have to inspect corporate records?
To which I replied:
3 is easy. He would be entitled to the same rights as any other shareholder to inspection under DGCL 220. In addition, so long as he remains a director, "Under Delaware law, a director who has a proper purpose is entitled to virtually unfettered access to the books and records of the corporation.” McGowan v. Empress Ent., Inc., 791 A.2d 1, 5 (Del. Ch. 2000).
I am not aware off the top of my head of any Delaware law on points 1 and 2. My best guess would be (1) No. (2) (a) Maybe (b) Probably.
Update: A friend who is an outstanding lawyer sent along these thoughts:
The board can remove him as chairman. Not sure you need a citation - the chair role is not statutory, it's created by the bylaws.
The board also cannot exclude him from board meetings.
The more interesting question is whether they could form an executive committee consisting of everyone but him. This is an open issue in Delaware, but for helpful commentary, see J. Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 34 Bus. Law. 33, 57 (Winter 2014/2015). ("A largely uncharted area under Delaware law is the ability of a board to use a committee to isolate a blockholder director.... [T]he equitable limitations on this delegation have yet to be explored.").
OTK Associates, LLC v. Friedman, 85 A.3d 696 (Del. Ch. 2014), contains some helpful analysis, though not directly on point, of a dissident director's rights not to be misled and to access privileged advice to the company.
The Laster & Zeberkiewicz article also includes some discussion relevant to Question 2(a).
Consistent with their duty of care, directors must have an opportunity to review and consider all information material to the decision they are being asked to make. Thus, directors generally must have the right to consult with their own counsel and other advisors to assist in their evaluation of the materials presented to them by management or their fellow directors. While there are no clear Delaware cases on point, a strong argument may be made, by analogy to section 220(d) of the DGCL, that directors generally cannot be prevented from consulting with their own advisors in discharging their fiduciary duties. Even before the enactment of the current iteration of section 220(d), the Delaware courts had recognized an almost absolute right of directors to examine the corporation's books and records, and to rely on advisors in doing so. (Page 47)
It continues:
While not squarely addressing the issue of whether a director may have his attorneys present at a meeting of the board, this reasoning--that the director remains the responsible fiduciary and that the advisors serve to facilitate the director's fiduciary decision-making function--supports the argument that individual directors generally should be permitted to have their advisors present for board meetings to assist with the discharge of their duties on behalf of the corporation and all of its stockholders. There is arguably no principled distinction between what is necessary for a director to understand fixed information created in the past (i.e., books and records) as opposed to information being presented to the board in real time. By analogy, a director generally should be able to have a personal advisor present in the boardroom to assist the director in understanding the information being presented for the purpose of discharging his fiduciary duties to the corporation and all of its stockholders.
The idea that directors could bring personal advisors into the boardroom, however, is understandably not warmly received by management, corporate counsel, and other directors. There is a natural concern that if a director brings a lawyer or other advisors to the meeting, then those advisors will speak out and dominate the conversation. There is also an understandable concern that if one director retains and brings personal counsel or advisors, then other directors will feel the need to bring their own personal advisors. The number of people involved in the meeting could grow to the point where the meeting becomes dysfunctional.
As with many issues, there is a range of reasonable positions on the use of advisors, as well as points where a court would grant equitable relief, either to the director or to the remainder of the board. For example, the premise of board-centric governance is that the directors have the right to deliberate and share views at the meeting. If a director was using counsel or other advisors as his mouthpiece or to dominate a meeting or advocate an agenda that diverges from the director's duty to advance the interests of the corporation and all of its stockholders, a board would have stronger grounds to regulate the involvement of those advisors. A line could be drawn between having the advisors present so they could hear the proceedings and assist the director versus allowing the advisors to participate actively in the meeting. By contrast, if management was making a presentation about a highly technical issue and the director wanted the assistance of a technical expert who could question management, then a restriction barring the advisor from participating may be more difficult to justify. Reflecting the need for case-by-case balancing, a leading treatise states that “[a]s a general rule, directors may be allowed to have their own counsel present, but a board of directors may be able to exclude a director's personal lawyer.”68 The same treatise suggests that the certificate of incorporation and bylaws may restrict the presence of non-directors at board meetings.69 How a court rules in a particular dispute involving a director's personal advisors will likely depend heavily on the facts and equities of the case and whether the respective parties involved appear to have acted reasonably.(Pages 48-49)
FYI: The treatise they cite is R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, DELAWARE LAW OF CORPORATIONS & BUSINESS ORGANIZATIONS § 4.8[B], at 4-25 (Supp. 2014).
