John Hewitt got pushed out of a company he’d founded once. So when he started Liberty Tax, he wanted to make sure it didn’t happen again. He almost succeeded.
A sex scandal prompted the board to fire Hewitt from his role as chief executive officer in September, but his shares gave him continued control of the firm. Shareholders sued, executives resigned in protest, two separate independent auditors ended relationships with the company and the stock plummeted.
It took ten months, financial disarray and ultimately, Nasdaq’s credible threat to delist the firm, before Liberty Tax said Tuesday that Hewitt had agreed to leave the board, sell his controlling stake and walk away.
The long, costly fight for control at Liberty Tax illustrates just how hard it can be for businesses to sever ties with founders who don’t want to go. It’s also a potent warning to directors at companies like Papa John’s International Inc., who are gearing up for their own fight.
In a year marked by public reckoning for a wide swath of bad behaviors, 53 company founders have been accused of personal misconduct, according to data collected by crisis PR firm Temin & Co. Hewitt is now among the 35 who ultimately stepped down, but not without a bitter fight. Nearly a third of founders facing accusations remain in place, and some of those who have officially departed have still managed to stay involved.
John Schnatter, the founder and face of Papa John’s, abruptly quit as CEO in January and recently resigned as chairman of the board amid accusations of racism; he denies them and remains on the pizza company’s board. Paul Marciano of Guess? Inc. intends to leave the board in January following sexual harassment allegations ( he denies them), though there’s no word on whether he’ll sell the 15 percent of shares he owns. National Beverage Corp. chairman and founder Nick Caporella is staying and has held on to the CEO role, denying the recently revealed accusations of sexual harassment.
Legal Protections
Historically, many founders are able to keep control of a company after they take it public by retaining a block of shares that confer more voting power than the stock that’s available to the public. It’s a common structure, also embraced by tech companies including Google parent Alphabet Inc., Facebook Inc., and Snap Inc. in order to concentrate decision-making power in the hands of founders and early investors. In the case of Snap, public shareholders don’t have any voting rights at all.
That kind of structure also insulates founders from public pressure. For disgruntled investors, there’s very little legal recourse. “It’s pretty much impossible to make a controlling shareholder sell if he doesn’t want to,” said John Reed, partner at law firm DLA Piper, in Wilmington, Delaware.
Liberty Tax shareholders tried. Seven months ago, a pension fund asked a Delaware judge to force Hewitt to relinquish his controlling stake in the company, claiming he’d breached his legal duties to shareholders. The company declined to comment at the time, and the case was still pending when Hewitt agreed Tuesday to sell his shares.