Seinfeld v. Verizon Communications, Inc.

• Decision Date: 25 September 2006
• Docket Number: No. 2005.,No. 624.,624.,2005.
• Citation: 909 A.2d 117
• Parties: Frank D. SEINFELD, Plaintiff Below, Appellant, v. VERIZON COMMUNICATIONS, INC., Defendant Below, Appellee.
• Court: United States State Supreme Court of Delaware

909 A.2d 117

Frank D. SEINFELD, Plaintiff Below, Appellant, v. VERIZON COMMUNICATIONS, INC., Defendant Below, Appellee.

No. 624.

No. 2005.

Supreme Court of Delaware.

Submitted: July 19, 2006.

Decided: September 25, 2006.

Court Below—Court of Chancery of the State of Delaware, in and for New Castle County, C.A. No. 1100-N.

Upon appeal from the Court of Chancery. AFFIRMED.

Robert D. Goldberg, Esquire, Biggs and Battaglia, Wilmington, Delaware, and Irving Bizar, Esquire (argued) and Natalie Marcus, Esquire, Ballon, Stoll, Bader & Nadler, P.C. and A. Arnold Gershon, P.C., New York, New York, for appellant.

Edward P. Welch, Esquire (argued) and Michael A. Barlow, Esquire, Skadden, Arps, Slate, Meagher & Flom, LLP, Wilmington, Delaware, for appellee.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY, Justices, constituting the Court en Banc.

HOLLAND, Justice.

The plaintiff-appellant, Frank D. Seinfeld ("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. Seinfeld 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 Seinfeld had not met his evidentiary burden to demonstrate a proper purpose to justify the inspection of Verizon's records.

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.¹ Seinfeld argues that burden of proof "erects an insurmountable barrier for the minority shareholder of a public company."² 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.³ 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.⁴ Accordingly, the judgment of the Court of Chancery must be affirmed.

Facts

Seinfeld asserts that he is the beneficial owner of approximately 3,884 shares of Verizon, held in street name through a brokerage firm. His stated purpose for seeking Verizon's books and records was to investigate mismanagement and corporate waste regarding the executive compensations of Ivan G. Seidenberg, Lawrence T. Babbio, Jr. and Charles R. Lee. Seinfeld alleges that the three executives were all performing in the same job and were paid amounts, including stock options, above the compensation provided for in their employment contracts. Seinfeld's section 220 claim for inspection is further premised on various computations he performed which indicate that the three executives' compensation totaled $205 million over three years and was, therefore, excessive, given their responsibilities to the corporation.

During his deposition, Seinfeld 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. Seinfeld conceded he had no factual basis to allege the executives "did not earn" the amounts paid to them under their respective employment agreements. Seinfeld also admitted "there is a possibility" that the $205 million executive compensation amount he calculated was wrong.

The issue before us is quite narrow: should 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? We conclude that the answer must be no.

Stockholder Inspection Rights

Delaware corporate law provides for a separation of legal control and ownership.⁵ The legal responsibility to manage the business of the corporation for the benefit of the stockholder owners is conferred on the board of directors by statute.⁶ The common law imposes fiduciary duties upon the directors of Delaware corporations to constrain their conduct when discharging that statutory responsibility.⁷

Stockholders' rights to inspect the corporation's books and records were recognized at common law because "[a]s a matter of self-protection, the stockholder was entitled to know how his agents were conducting the affairs of the corporation of which he or she was a part owner."⁸ The qualified inspection rights that originated at common law are now codified in Title 8, section 220 of the Delaware Code, which provides, in part:

(b) Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose.

Section 220 provides stockholders of Delaware corporations with a "powerful right."⁹ By properly asserting that right under section 220, stockholders are able to obtain information that can be used in a variety of contexts. Stockholders may use information about corporate mismanagement, waste or wrongdoing in several ways. For example, they may: institute derivative litigation; "seek an audience with the board [of directors] to discuss proposed reform or, failing in that, they may prepare a stockholder resolution for the next annual meeting, or mount a proxy fight to elect new directors."¹⁰

Inspection Litigation Increases

More than a decade ago, we noted that "[s]urprisingly, little use has been made of section 220 as an information-gathering tool in the derivative [suit] context."¹¹ Today, however, stockholders who have concerns about corporate governance are increasingly making a broad array of section 220 demands.¹² The rise in books and records litigation is directly attributable to this Court's encouragement of stockholders, who can show a proper purpose, to use the "tools at hand" to obtain the necessary information before filing a derivative action.¹³ Section 220 is now recognized as "an important part of the corporate governance landscape."¹⁴

Seinfeld Denied Inspection

The Court of Chancery determined that Seinfeld's deposition testimony established only that he was concerned about the large amount of compensation paid to the three executives. That court concluded that Seinfeld offered "no evidence from which [it] could evaluate whether there is a reasonable ground for suspicion that the executive's compensation rises to the level of waste."¹⁵ It also concluded that Seinfeld did not "submit any evidence showing that the executives were not entitled to [the stock] options."¹⁶ The Court of Chancery properly noted that a disagreement with the business judgment of Verizon's board of directors or its compensation committee is not evidence of wrongdoing and did not satisfy Seinfeld's burden under section 220. The Court of Chancery held:

viewing the evidence in the light most favorable to Seinfeld, the court must conclude that he has not carried his burden of showing that there is a credible basis from which the court can infer that the Verizon board of directors committed waste or mismanagement in compensating these three executives during the relevant period of time. Instead, the record clearly establishes that Seinfeld's Section 220 demand was made merely on the basis of suspicion or curiosity.¹⁷

Evidentiary Barrier Allegation

In this appeal, Seinfeld asserts that the "Court of Chancery's ruling erects an insurmountable barrier for the minority shareholder of a public company."¹⁸ Seinfeld argues that:

This Court and the Court of Chancery have instructed shareholders to utilize § 220 as one of the tools at hand. Yet, the Court of Chancery at bar, in requiring evidence makes a § 220 application a mirage. If the shareholder had evidence, a derivative suit would be brought. Unless there is a whistle blower, or a video cassette, the public shareholder, having no access to corporate records, will only have suspicions.¹⁹

Seinfeld submits that "by requiring evidence, the shareholder is prevented from using the tools at hand."²⁰ Seinfeld's brief concludes with a request for this Court to reduce the burden of proof that stockholders must meet in a section 220 action:

Plaintiff submits that in a case involving public companies, minority shareholders who have access only to public documents and without a whistle blower or corporate documents should be permitted to have limited inspection based upon suspicions, reasonable beliefs, and logic arising from public disclosures.²¹

After oral arguments, this Court asked the parties for supplemental briefs that would address the following questions:

A. Should a stockholder with a proper purpose be entitled to inspect carefully limited categories of corporate books and records, pursuant to Section 220, upon a showing that the stockholder has a rational basis for the stated purpose and no other purpose that would militate against inspection?

B. If the standard in question "A" would not be appropriate, is there any reduced burden of proof under Section 220 that would improve stockholders' ability to obtain the "tools" to pursue derivative claims without disrupting corporations' orderly conduct of business and without inappropriately interfering with corporate decision-making? If so, articulate the reduced burden of proof. If not, explain why not.

We asked these questions in order to review the current balance between the rights of stockholders and corporations that...