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Papa John’s turmoil now features poison pill defense strategy

The term “poison pill” is certainly evocative, isn’t it? In fact, it invites immediate speculation as to its meaning and the context to which it applies.

A James Bond movie, perhaps? A classic Cold-War espionage thriller?

How about Papa John’s pizza?

Let’s backtrack for a moment.

That large and nationally known chain eatery is currently featured in the news in a manner that has its executives and company board members cringing. Company founder John Schnatter (you’ve likely seen him in scores of television commercials) was forced to step down last month as chairman after reports emerged that he had used a racial slur.

That was obviously a big deal. Schnatter is Papa John’s largest shareholder, owing 30 percent of the company’s stock.

Papa John’s board can live with that. It is determined to keep Schnatter from ever acquiring enough shares in the future to regain control over company operations, though.

Its strategy for avoiding that is the above-cited poison pill, a business ploy used by boards to ensure that attempts to increase company control are consistently diluted. Papa John’s executives formally announced a poison-pill defense scheme late last month to ensure their continued control of the pizza chain during an obviously tumultuous time.

The defense works like this: Any attempt by Schnatter to increase his company control even marginally (that is, by even a single percentage point) will be met by a company sale of additional shares to other shareholders at a discount. Such a sale will also occur whenever any party (e.g, an affiliate acting on Schnatter’s behalf) seeks to buy a requisite amount of company shares absent board approval.

Employment of the poison pill strategy ensures that Schnatter will not regain a controlling interest in the company he established.

Pizza intrigue will assuredly continue despite the poison pill, though. A spokesperson for Schnatter says that he “is not going to go quietly into the night.”

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