Seinfeld v. Verizon Comm., Inc. 909 A.

2d 117 (2006)

Facts:
Frank D. Seinfeld (plaintiff) is a beneficial owner of stock in Verizon Communications, Inc.
(Verizon) (defendant). Seinfeld sued in the Court of Chancery to compel Verizon to allow
inspection of books and records on the basis of possible corporate mismanagement and
waste stemming from the compensation packages of three executives.
Seinfeld could provide no evidence of any wrongdoing. The court concluded that Seinfeld
had not met his burden of showing a proper purpose for demanding inspection and granted
summary judgment in favor of Verizon. Seinfeld appealed to the Delaware Supreme Court.
The appellate court reaffirmed the rule that stockholders seeking inspection under Del.
Code Ann. title 8, § 220, had to present some evidence to suggest a credible basis from
which a court could infer that mismanagement, waste, or wrongdoing may have occurred. In
his deposition, the stockholder acknowledged he had no factual support for his claim that
mismanagement had taken place. He admitted that the three executives did not perform
any duplicative work. The stockholder also admitted there was a possibility that the
executive compensation amount he calculated was wrong. The appellate court agreed with
the trial court that the stockholder failed to state a reasonable ground for suspicion that the
executives' compensation rose to the level of waste.

Issue:
Whether a stockholder seeking inspection under section 220 be entitled to relief
without being required to show some evidence to suggest a credible basis for wrongdoing.
No

Ruling:
The settled law of Delaware required Seinfeld to present some evidence that established
a credible basis from which the Court of Chancery could infer there were legitimate issues of
possible waste, mismanagement or wrongdoing that warranted further investigation.
Seinfeld argues that burden of proof "erects an insurmountable barrier for the minority
shareholder of a public company." We have concluded that Seinfeld's argument is without
merit.
We reaffirm the well-established law of Delaware that stockholders seeking inspection
under section 220 must present "some evidence" to suggest a "credible basis" from which a
court can infer that mismanagement, waste or wrongdoing may have occurred. The
"credible basis" standard achieves an appropriate balance between providing stockholders
who can offer some evidence of possible wrongdoing with access to corporate records and
safeguarding the right of the corporation to deny requests for inspections that are based
only upon suspicion or curiosity.

Doctrine: There must be a “credible basis” from which the court can infer that there is
possible mismanagement or wrongdoing such that further investigation is in order.