A ruling delivered by an influential court in a case involving pizza chain Papa John's International is a cautionary tale for directors who share board matters via personal email.
Clearly, the job of director is anything but easy today. Boards are continually inundated with significant amounts of information that they are expected to process both before and between meetings, and they also are expected to be able to react to this information with thoughtful questions and insightful commentary to management and their fellow directors.
Of course, these communications are almost always electronic, typically by email. And this is where problems can arise. According to a 2017 survey of directors of publicly traded companies, the vast majority of directors preferred to use their personal email accounts for these communications. Although convenient, this can place a director in a difficult and potentially embarrassing position.
Some of the risks that directors face when using personal email to conduct board activities were highlighted in a case that was decided earlier this year in Delaware. A contentious dispute involving statements made by the controversial founder and chairman of Papa John's, John Schnatter, had spilled over into litigation between the founder and the other members of the company's board of directors.
As part of the litigation, the founder, who was also a substantial stockholder, demanded inspection of a broad range of documents from the board and a special committee that had been established to address the controversy and, ultimately, his departure. These included communications among the directors, and between directors and members of senior management.
In Schnatter v. Papa John's Int'l, Inc., the Delaware Court of Chancery upheld the plaintiff director's demand for production of emails and text messages from the personal accounts and devices of his fellow board members. In this case, the Court of Chancery found that since the demand for information came from a stockholder who was also a director, they permitted broad access to the board's personal communications.
Section 220 of the Delaware General Corporation Law, like most state inspection statutes, gives stockholders a broad right to obtain corporate records so long as there is a "proper purpose" for doing so. In Schlatter, the founder's stated purpose for requesting emails and text messages was to investigate alleged mismanagement of the company by the other members of...