Sinclair Oil Corp. v. Levien

FACTS:  Sinclair (Defendant) was a holding company that marketed, produced, and explored for oil.  Sinclair owned 97% of the stock of Sinclair Venezuelan Oil Company (Sinven), a company engaged in petroleum operations in South America.  Levien (Plaintiff) owned about 3,000 of Sinven’s 120,000 publicly held shares.  Sinclair controlled the directors of Sinven.  From 1960 to 1966, Sinclair caused Sinven to pay out excessive dividends of $108,000,000, $38,000,000 above its earnings. In 1961, Sinclair created Sinclair International to coordinate Sinclair’s foreign operations, then caused Sinven to K to sell crude oil to International at specified rates and minimum quantities.  When International failed to live up to the K, Levien and other minority SH’s of Sinven brought this derivative action requiring Sinclair to account for damages sustained by Sinven as a result of the excessive dividends and causing Sinven not to enforce the K with International.  The court of Chancery found for Levien and Sinclair appealed.

ISSUE:  Does the BJR protecting fiduciaries from judicial scrutiny also protect a parent company where it exerts such complete control over its subsidiary that the parent receives a benefit at the subsidiary’s expense?

HOLDING:  No, under the BJR a court will not interfere w/a board of directors’ judgment unless there is a showing of gross and palpable overreaching.  But this rule does not apply to a situation where a parent company appears to have benefited from its control over a subsidiary to the detriment of the subsidiary’s minority SH’s.  In such a situation, any transactions will be tested by their intrinsic fairness if there is evidence of breach of the parent company’s fiduciary duty coupled with self-dealing.  For instance, in the present case, the allegation that Sinclair caused excessive dividends to be paid out of Sinven is not enough to create a cause of action against the parent company for intrinsic unfairness.  Levien must meet the burden of proving the dividend was not based on a reasonable business objective.  However, the court found that the dividends were not self-dealing since Sinclair had received nothing to the exclusion of Sinven and its minority SH’s.  Thus, as to dividends, the BJR applied.  As to the allegations that the dividends had prevented Sinven form expanding, the court held that Levien had proved no loss of business opportunities due to the drain of case from Sinven, so again the BJR protected Sinclair.  However, the court held that there was self-dealing by Sinclair in contracting w/its dominated subsidiary, International.  Sinclair caused International to breach its K w/Sinven to the detriment of Sinven’s minority SH’s.  But Sinclair received products from Sinven through International and thus benefited from the transaction.  However, Sinclair failed to cause Sinven to enforce the K.  Therefore, Sinclair’s inherent duty to its subsidiary, Sinven, coupled w/its self-dealing, shifted the burden to it to show its breach of the International/Sinven K was intrinsically fair.  The court found that Sinclair failed to meet the burden.

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