Private Equity

Private equity deal professionals frequently serve on the boards of the portfolio companies in which their fund invests.  And many of those portfolio companies are incorporated under Delaware law.  The role of the private equity professional as a board member of a Delaware corporation is fundamentally different than the role of the private equity professional acting on behalf of the fund as a shareholder. One of the most well-known of those differences is that the private equity professional, while acting as a director, typically has individual fiduciary duties (at least in the corporate context) to the portfolio company and its shareholders as a whole. A less well-known difference is the fact that, unlike communications among the private equity firm’s professionals concerning the status and performance of its investment in a portfolio company, communications among two or more board members serving on behalf of a private equity firm regarding their actions as board members may constitute “books and records of the company” for which any other director may, with a proper purpose, demand the right to inspect under Section 220 of the Delaware General Corporation Law (the “DGCL”).  In this modern age, of course, those communications can include any of the various forms of electronic communications and social media now available, including text messages (by mobile carriers or via social media) and emails.  And it matters not that those communications may have been sent through your or your firm’s phone, or on your firm’s email server or your private email account. Understanding this fact may cause some pause before pressing send on a text message to your colleague and fellow board member concerning another board member’s approach or competence in considering an appropriate course of action for the company.

A recent Delaware Court of Chancery decision, Schnatter v. Papa John’s, C.A. No. 2018-0542-AGB, 2019 WL 194634 (Del Ch. Jan. 15, 2019), illustrates this issue and its potential reach.  This case arose out of the well-publicized issues surrounding John Schnatter’s resignation as the Chief Executive Officer and Chairman of the Board of Papa John’s International, Inc. (the “Company”) following intense public scrutiny and negative publicity. Arguing that the Company mismanaged the situation that led to his resignation, Schnatter made a Section 220(d) demand, in his capacity as a director, to inspect the books and records of the Company, which included communications of the other directors from their personal emails and devices, referring to or relating to him. The Company declined, and Schnatter filed a complaint with the Delaware Court of Chancery.

Under Section 220(d) of the DGCL, a director has the right to examine the corporation’s books and records for a proper purpose—that is, a purpose which is reasonably related to the director’s position as a director. And, unlike a stockholder who, in addition to showing that her demand is proper (i.e., reasonably related to her interests as a stockholder), must also show that the documents she seeks are necessary and essential to satisfy her stated purpose, a director who has a proper purpose has virtually unfettered rights to inspect books and records.

In Schnatter v. Papa John’s, the court ruled that Schnatter stated a proper purpose, as he demanded to inspect the books and records to investigate mismanagement of the Company by other members of the Board. Although the Company argued that Schnatter’s purpose was not reasonably related to his position as a director but rather his individual status as John Schnatter, on the ground that he was seeking mostly documents about himself in order to clear his name, the court ruled that, because Schnatter was the founder and largest stockholder of the Company, who had been the public face of the Company over the course of his 34-year career with the Company, personal elements of his purpose did not negate the legitimate corporate purpose he had as a director.            

But do the books and records of the Company include emails and text messages from personal accounts and stored on personal devices? According to the court, if directors use personal accounts and devices to communicate about matters affecting the corporation’s rights, duties and obligations, they should expect to produce such information to the Company when needed.

The lesson, then, is that whatever means of communication a person uses serving as a director to discuss corporate matters—texts, emails, Snapchat, Instagram messages, Facebook messages, or whatever, such communications could be deemed part of the corporate books and records that she has an obligation to produce to the company. And that includes the emails and texts you send and receive on your firm’s email server or phone, or through your private email account or phone. Think before you hit send.