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Tuesday
Nov202007

Inspection Rights and Shareholders: $200 Million in Compensation Not Enough to Establish a Proper Purpose

In Seinfeld v. Verizon, 2006 Del. LEXIS 492 (Del. Sept. 25, 2006), Plaintiff, a shareholder, sought to invoke inspection rights to obtain books and records relating to the executive compensation of three officers who allegedly received more than $200 million over three years. Plaintiff asserted that the amount was excessive.

In denying access, the Court concluded that to meet the requirement of "proper purpose" found in the statute, "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 opinion did not explain why allegations of excessive compensation were not enough. Nor did the opinion explain how putative plaintiffs would obtain such information. Finally, the opinion did not explain how the "credible basis" language was justifiable given the language of the statute.

The Court justified the standard by demonstration under a cost-benefit analysis: "The only way to reduce the burden of proof further would be to eliminate any requirement that a stockholder show some evidence of possible wrongdoing. That would be tantamount to permitting inspection based on the 'mere suspicion' standard that Seinfeld advances in this appeal. However, such a standard has been repeatedly rejected as a basis to justify the enterprise cost of an inspection." The statute, on the other hand, does not condition invocation of inspection rights based upon the costs but upon reason given by shareholders.

The primary materials for this case can be retrieved from the DU Corporate Governance website.

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