Sinclair Oil Corp. v. Levien
280 A.2d 717 (Del. 1971)
Sinven was a subsidiary of
Sinclair (who owned 97% of the stock). Sinclair nominated all of Sinven's
directors and pretty much controlled Sinven.
The directors of Sinven took a
number of actions that were not in the best interest of Sinven, but were
in the best interest of Sinclair (like paying out extra-large dividends
instead of investing in business infrastructure). Levien, one of the
minority shareholders of Sinven, sued Sinclair for breach of fiduciary
Sinven was paying out more
in dividends than they were making in earnings! Levien argued that Sinclair
authorized the huge dividend because they were short of cash and needed
In addition, Levien argued
that Sinclair had Sinven sign a contract to supply oil to another
Sinclair subsidiary, and then didn't allow Sinven to take action when the
other subsidiary breached.
The Trial Court found for
Levien. Sinclair appealed.
The Trial Court found that
Sinven's directors were not independent of Sinclair and that Sinclair
owed Sinven a fiduciary duty.
The Court found that the
test to see if Sinclair had breached its duty was one of intrinsic
fairness (aka entire
For intrinsic fairness, the burden of proof is on the controlling
shareholder (Sinclair) to prove that there was a high degree of
Sinclair argued that the
test should be the business judgment rule, which says that the judgment of the directors will not be
overturned unless the decision was objectively unrelated to any rational
The Appellate Court affirmed
in part and reversed in part.
The Appellate Court found
that the intrinsic fairness
standard should only be applied in cases where there both a
parent-subsidiary relationship and evidence of self-dealing.
Self-dealing is defined as
situations where the parent causes the subsidiary to act in such a way
that the parent receives something from the subsidiary to the exclusion
of and detriment to the minority shareholders of the subsidiary.
The Court found that with
regards to the dividend issue, Sinven's minority shareholders got just as
much dividend as Sinclair did, so there was no self-dealing, the intrinsic
fairness didn't apply and the business
judgment rule should be used.
Damages to the minority shareholder cause by excessive dividends are
The Court also found that
there were no business opportunities that could have gone to Sinven if
they retained the money they paid out in dividends.
However, the Court found
that with regards to the contract issue, Sinclair was self-dealing by
having their subsidiaries enter into contract with one another and then
breach them without penalty. Therefore intrinsic fairness applied, and damages to the minority
shareholders caused by the breach of contract are affirmed.
Basically, this case said that
if there is a parent corporation dominating a subsidiary, they can't take
actions that would help the parent but hurt the subsidiary's minority
shareholders. But, if the parent and the minority shareholders get the
same benefit from a transaction, then the business judgment rule applies.