Delaware Business Litigation Report

Supreme Court Affirms the Credible Basis Rule

Seinfeld v. Verizon Communications Inc., C.A. No. 624 (Del. Supr. September 25, 2006). The Delaware Supreme Court has affirmed that the "credible basis" test applies to determine if a stockholder is entitled to inspect corporate records to investigate alleged wrongdoing. The stockholder argued that Delaware should permit his records inspection even if he lacked enough facts to convince the trial court that he had a credible basis to believe that the corporation was paying three top officers inappropriate compensation. He asserted that to require any real proof of his claims before inspection was an insurmountable burden. Both the Court of Chancery and now the Supreme Court rejected his argument and noted that there is considerable precedent granting inspection rights to show that this remedy is available in the right circumstances. This decision is a good source of Delaware precedent in inspection litigation. The opinion reflects the Court's balanced approach that respects the corporate right to be free of fishing expeditions and the stockholders' right to police their investment. Share