Papa John's Is Sued by Shareholder Over Executives' Behavior

(Bloomberg) -- Papa John’s International Inc. founder John Schnatter will be questioned by the pizza chain’s lawyers about his demand for internal files related to directors’ handling of his ouster from the company.

Schnatter sued last month in Delaware Chancery Court for access to the documents, calling his dismissal “unexplained and heavy handed.” He was ousted after news surfaced he used a racial slur during a training exercise.

Schnatter will be deposed beginning Sept. 7 at the office of lawyers representing the pizza firm and the deposition will “continue from day to day until completed,” according to a court filing Thursday.

Earlier Thursday, a shareholder sued the struggling pizza chain, claiming it misled investors by failing to disclose inappropriate behavior by its executives, including Schnatter’s.

The pizza chain is facing slowing sales following Schnatter’s resignation as chairman last month. Papa John’s shares have fallen 18 percent this year and 39 percent in the past 12 months. They fell 58 cents to $45.96 at 2:38 p.m. in New York trading.

Joanne E. Danker sued in Manhattan federal court, alleging that Louisville, Kentucky-based Papa John’s failed to tell investors that executives had engaged in sexual harassment and other inappropriate conduct -- and that company policies were inadequate to prevent the behavior.

"The forgoing conduct would foreseeably have a negative impact on Papa John’s business and operations, and expose Papa John’s to reputational harm, heightened regulatory scrutiny and legal liability," Danker said in the complaint.

Papa John’s shares spiked last week after Reuters reported the company hired Bank of American Corp. and Lazard Ltd. to help find ways to stabilize its operations.

Schnatter came under pressure after a July report that he used the racial slur and descriptions of violence against minorities on a call with a media agency. He acknowledged making the comments but said they were taken out of context. Last week, he took out a full-page ad in the company’s hometown newspaper urging employees to join him in a bid to bring in new leadership.

Madeline Chadwick, a spokeswoman for Papa John’s, declined to comment on the suit, as did Terry Fahn, a representative for Schnatter.

Papa John’s board adopted a poison pill last month designed to prevent Schnatter from adding to his roughly 30 percent stake in a bid to gain majority control. Chief Executive Officer Steve M. Ritchie and former Chief Financial Officer Lance F. Tucker are also named as defendants in the suit.

Danker is seeking to represent a class of all shareholders who were damaged by a "precipitous decline" in the market value of the company’s shares.

The investor suit is Danker v. Papa John’s International Inc., 18-cv-7927, U.S. District Court, Southern District of New York (Manhattan).

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