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Can Papa John’s move on now?

The departure of John Schnatter from its board removes a distraction, but it could put more pressure on management to turn things around, says RB’s The Bottom Line.
Photograph: Shutterstock

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Earlier this week, John Schnatter announced an agreement with Papa John’s that paves the way for his departure from the company’s board.

It was the last formal role he had with the company he founded. Schnatter had been chairman, CEO, primary spokesman and largest shareholder in November 2017 when he blamed NFL player protests for the league’s weakening ratings and his own chain’s weakening same-store sales.

Since then, Schnatter’s role has gradually diminished. He left as CEO in December 2017, stepped down as chairman in July after acknowledging using a racial slur during a conference call. The board ended his founder’s agreement and removed him from its marketing.

But Schnatter filed lawsuits against the company over documents and a “poison pill” the board swallowed after ending his agreement—a pill aimed at keeping Schnatter from amassing much more than the 30% of company stock he owned.

(It’s now down to an estimated 26% following the $200 million investment in Papa John’s by Starboard Value, which made its CEO, Jeff Smith, chairman.)

Schnatter’s fight against the company, which included some pointed criticism against a management team he largely chose, was something of a distraction as the chain worked to reverse a suddenly ugly set of sales and store closure circumstances.

The end of the fight should put that distraction to rest and enable the company to move forward with its turnaround strategy.

“I’m happy that we were able to enter into this agreement and allow the new leadership being implemented by Jeff Smith and Starboard to help Papa John’s regain its strength and market position,” Schnatter said in his statement announcing the agreement.

But Schnatter isn’t completely going away. Papa John’s can’t make him sell that stock, after all. And the agreement will keep up pressure on management to make the right moves, because the agreement gives both Schnatter and Starboard more power should that turnaround go off the rails.

Schnatter still has the right to file further lawsuits if he sees any “wrongdoing” regarding his dismissal. He also won concessions from the company on the poison pill, which could enable Schnatter to work with other shareholders to solidify his effective control of the company.

“I founded Papa John’s, built it from the ground up and remain its largest shareholder,” he said.

So, while he is going away from the board, there will always remain the potential that he comes back and pushes against management if plans don’t work.

And then there is the fact that Papa John’s agreed to a provision requiring Starboard to vote its shares in favor of company-nominated directors.

Such provisions tend to keep an activist at bay, but in removing that provision, Starboard potentially gets more teeth.

To be sure, Smith is the chairman and already has plenty of teeth in that position.

Still, the agreement essentially means that Papa John’s will have to reverse a sales slide and keep operators from closing more of their restaurants and fight in an ultra-competitive market with a pair of watchdogs standing nearby.

One of those watchdogs is the company’s largest shareholder and its founder. The other is an activist investor that once overturned the entire board at Darden Restaurants.

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