Seinfeld v. Verizon Communications, Inc.
25 I.E.R. Cas. (BNA) 656, 2006 Del. LEXIS 492, 909 A.2d 117 (2006)
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Rule of Law:
Under Delaware General Corporation Law § 220, a stockholder seeking to inspect corporate books and records to investigate mismanagement must present some evidence to establish a 'credible basis' from which a court can infer that wrongdoing may have occurred.
Facts:
- Frank D. Seinfeld was a beneficial owner of approximately 3,884 shares of Verizon Communications, Inc. stock.
- Seinfeld stated his purpose for seeking Verizon's records was to investigate mismanagement and corporate waste concerning the compensation of three top executives from 2000-2002.
- Seinfeld alleged the three executives were performing the same job and were paid amounts, including stock options, above their employment contracts.
- Based on his own computations, Seinfeld claimed the executives' compensation totaled an excessive $205 million over three years.
- During his deposition, Seinfeld admitted he had no factual support for his claim that mismanagement had occurred.
- Seinfeld conceded that the executives did not perform duplicative work and that he had no factual basis to allege they 'did not earn' their compensation.
- He also acknowledged 'there is a possibility' that his $205 million calculation was incorrect.
Procedural Posture:
- Frank D. Seinfeld brought suit against Verizon Communications, Inc. in the Delaware Court of Chancery (trial court) under Delaware General Corporation Law § 220.
- Seinfeld sought to compel Verizon to produce books and records related to executive compensation.
- The parties filed cross-motions for summary judgment.
- The Court of Chancery granted summary judgment for Verizon, holding that Seinfeld had failed to meet his evidentiary burden to demonstrate a proper purpose for inspection.
- Seinfeld, as the appellant, appealed the judgment to the Supreme Court of Delaware, with Verizon as the appellee.
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Issue:
Does a stockholder seeking to inspect a corporation's books and records under § 220 satisfy their evidentiary burden by asserting mere suspicion of wrongdoing, or must they show some evidence establishing a credible basis to infer possible mismanagement?
Opinions:
Majority - Holland, Justice.
No. A stockholder must show some evidence establishing a credible basis to infer possible mismanagement. The court reaffirmed the well-established 'credible basis' standard, rejecting Seinfeld's argument that it should be lowered to allow inspection based on mere suspicion. The court reasoned that this standard strikes an appropriate balance between a stockholder's right to investigate legitimate concerns and the corporation's right to be free from 'indiscriminate fishing expeditions.' Requiring 'some evidence' prevents inspections based solely on curiosity while still allowing stockholders who can point to credible evidence of potential wrongdoing to access necessary information. The court held that the 'credible basis' standard is the lowest possible burden of proof that still requires an evidentiary showing, and Seinfeld failed to meet it, as his demand was based only on suspicion.
Analysis:
This decision solidifies the 'credible basis' standard as the definitive gatekeeper for stockholder inspection rights under Delaware's influential Section 220. By explicitly rejecting a lower 'suspicion' standard, the court reinforced the board of directors' managerial authority and protected corporations from burdensome and potentially harassing investigations. The ruling clarifies for future litigants that while Section 220 is a powerful 'tool at hand,' it cannot be wielded speculatively. This precedent ensures that to gain access to corporate records, shareholders must first do their homework and present tangible evidence—documents, testimony, or logical inferences from public data—that points to a legitimate issue of potential mismanagement.
