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Under Delaware law, stockholders seeking inspection under Del. Code Ann. tit. 8, § 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.
The plaintiff-appellant, Frank D. Seinfeld, brought suit under section 220 of the Delaware General Corporation Law to compel the defendant-appellee, Verizon Communications, Inc. ("Verizon"), to produce, for his inspection, its books and records related to the compensation of Verizon's three highest corporate officers from 2000 to 2002. Plaintiff claimed that their executive compensation, individually and collectively, was excessive and wasteful. On cross-motions for summary judgment, the Court of Chancery applied well-established Delaware law and held that plaintiff had not met his evidentiary burden to demonstrate a proper purpose to justify the inspection of Verizon's records. According to the Court of Chancery, the settled law of Delaware required plaintiff 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. Plaintiff challenged the decision.
Under the circumstances, did plaintiff meet his evidentiary burden to demonstrate a proper purpose to justify the inspection of Verizon’s records?
The Appellate Court reaffirmed the rule that stockholders seeking inspection under Del. Code Ann. tit. 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. The Court noted that in his deposition, the plaintiff 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 plaintiff 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 plaintiff failed to state a reasonable ground for suspicion that the executives' compensation rose to the level of waste.