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 duty of loyalty.
    • 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 the money.
    • 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 fairness).
      • For intrinsic fairness, the burden of proof is on the controlling shareholder (Sinclair) to prove that there was a high degree of fairness.
    • 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 business purpose.
  • 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 reversed.
      • 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.