If the Hillary Clinton email scandal wasn’t a clear enough lesson that one should not conduct “official” work using personal electronic communication tools (be it personal email, texts or other methods), a number of recent court decisions have required executives to produce communications from their personal accounts and devices. Executives and advisors should not assume that communications using methods other than corporate email will somehow be protected or otherwise not find the light of day in the event of a dispute or investigation.
John Schnatter v. Papa John’s International, Inc.
During an earnings call in November 2017, John Schnatter (“Schnatter”), the founder of Papa John’s International, Inc. (the “Company”), criticized the National Football League’s handling of the dispute between players and owners regarding national anthem protests. Some months later, Forbes reported that Schnatter had used a racial slur during a Company diversity training exercise. Schnatter subsequently resigned as chairman of the Company’s board of directors (the “Board”) at the Board’s request, but declined to resign as a director. The Board then established a special committee which decided to terminate agreements that the Company had with Schnatter.
In the wake of these events, Schnatter requested books and records from the Company, including emails and text messages from personal accounts and devices of the Company’s executives.
On January 15, 2019, the Court ordered the Company to permit Schnatter to inspect the personal accounts and devices of certain executives that were used to communicate about the possibility of changing Schnatter’s relationship with the Company. Chancellor Bouchard stated that executives should expect to provide such information in litigation if they choose those mediums to discuss corporate matters. Although there is no bright-line rule with respect to the inspection of executive’s personal accounts and devices, Chancellor Bouchard noted several factors that influenced the Court’s decision, including:
- the Company’s directors did not have Company email addresses; and
- the Company did not introduce at trial “a policy indicating that it views any information from the personal accounts or on the personal devices of its directors or officers to be ‘personal unrestricted information’ outside the control of the Company.”
In re Appraisal of Kate Spade & Co.
In 2017, former shareholders of Kate Spade & Co. (“Kate Spade”) sought appraisal of their securities following Coach Inc.’s (“Coach”) acquisition of Kate Spade. In response to interrogatories, Kate Spade asserted that none of its executives engaged in communications over email or text from their personal accounts or devices concerning the negotiation of the transaction with any executives of Coach. However, documents produced by Kate Spade indicated the possible existence of text messages between two of the executives. The former shareholders then moved to compel the production of such communication arguing that some of the executives had prior social relationships that could have given Coach an advantage in the negotiation process.
In a transcript ruling, the Court ordered Kate Spade to produce the relevant text messages. Chancellor Bouchard took the opportunity to discuss the value that can be derived from text messages: “It has been my experience that text messages can be the source of a lot of probative information in cases, particularly when they’re covered with emojis and other things of that nature. … Maybe a text message will show a personal relationship. Maybe it won’t show that. But, frankly, just the precision of timing of exactly when certain things happened is extremely important in cases. … And so I have found, frankly, text messages to be probative in that regard.”
These cases should serve as a useful reminder that directors, officers and advisors should endeavor to conduct company business only on their company accounts and devices and not on their personal accounts and devices. Once it is established that an executive uses a personal email account or device to conduct company business, those personal accounts or devices will likely be subject to discovery, which could result in sensitive or embarrassing personal information being produced. Although these rulings are not binding on courts in Canada, it was not too long ago that the Ontario Superior Court of Justice allowed a tier-one Canadian bank to inspect the emails of its former executives in connection with their move to form a competing financial services firm.
In order to protect information on an executive’s personal devices and accounts, companies should consider: (1) providing company email addresses and devices to the exectuive on which to communicate regarding company business; and (2) adopting a policy restricting the communication of company business on personal accounts and devices.