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Business Litigation Alert: "Papa John’s Board Adds 'Poison Pill' As a New Pizza Topping on Its Menu"

Last week, Papa John’s announced that its board of directors voted to prevent the company’s founder and majority owner, John Schnatter, from taking control.  The board implemented what is known as a shareholder rights plan or “poison pill” in an effort to block Schnatter from acquiring more than 31% of Papa John’s stock. 

The board took this step after Schnatter was accused of using a racial slur and resigned from his position as chairman.  He remains on the board, however, and is now suing the company, alleging that the board staged a “coup” against him. 

Effect of the “Poison Pill”

Under the poison pill, if Schnatter goes out and buys more shares of Papa John’s stock and exceeds the 31% ownership threshold, all other Papa John’s shareholders – but not Schnatter – will be offered the opportunity to purchase additional Papa John’s shares at a 50% discount.  The result would be a drastic dilution of Schnatter’s interest in the company.

As Bloomberg reports, this poison pill also prohibits Schnatter from “acquiring any allies in his fight against the board.” The Papa John’s poison pill may be triggered if a shareholder “acting in concert” with Schnatter acquires additional shares, even if Schnatter himself does not personally acquire any additional stock. 

Shareholders vs. Board

While poison pills have certainly been used by boards in the past, the Papa John’s poison pill sharply highlights the tension between shareholders as those who “own” the company and the board as those who “oversee” its operation.  Bloomberg observes:

The shareholders have some claim to be the people who own and control the company. But the board has a lot of power to limit that control, not only by prohibiting the shareholders from buying more shares … but also by prohibiting the shareholders from talking to each other about how disgruntled they are with the board. When the board liked him, Schnatter could meet with shareholders all he wanted; he was after all the public face … of Papa John’s. But now that he’s on the outs, and he might want to meet with shareholders to force his way back in, the board can do what it likes to stop him.

In his lawsuit, Schnatter alleges the board overstepped its authority by targeting him, and he contends it may amount to a breach of the board’s fiduciary duty.  The Delaware Chancery Court will seemingly have the last word. 

Importance of Governing Documents

This is a developing story, and we will continue to watch it closely.    One immediate takeaway is that when your company’s board and its shareholders do not see eye-to-eye, litigation is sure to develop.  To try to prevent this, it is important that your business has organizational documents and governing documents that are well drafted and designed to anticipate as many potential points of conflict as possible.  Otherwise, you may not be in as much control of your company as you think you are. 

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