## Facts

- Sinclair Oil Corporation owned about 97% of Sinclair Venezuelan Oil Company (Sinven) and controlled Sinven’s board through its nominees.
- A minority shareholder brought a derivative action on Sinven’s behalf challenging Sinclair’s conduct in three areas.
- From 1960–1966, Sinclair caused Sinven to pay approximately $108 million in dividends, allegedly exceeding earnings and reducing funds available for growth.
- The plaintiff alleged Sinclair denied Sinven expansion and development opportunities by placing new ventures in other Sinclair-owned entities rather than in Sinven.
- Sinclair caused Sinven to enter an exclusive supply contract with Sinclair International Oil Co., a wholly owned Sinclair subsidiary, requiring Sinven to sell all crude and products to International at specified prices.
- International allegedly failed to satisfy minimum purchase obligations and repeatedly made late payments, harming Sinven’s financial position.
- The Court of Chancery applied the intrinsic fairness standard to all claims due to Sinclair’s control, found Sinclair liable on all theories, and ordered an accounting for damages.
- Sinclair appealed.

## Issues

1. Whether Sinven’s dividend payments, though large, were self-dealing by the controlling shareholder such that intrinsic fairness applied, and whether the dividends were wrongful.
2. Whether Sinclair’s allocation of alleged development and expansion opportunities away from Sinven breached fiduciary duties under intrinsic fairness.
3. Whether the International supply contract and International’s nonperformance constituted controlling-shareholder self-dealing, shifting the burden to Sinclair to prove intrinsic fairness, and whether Sinclair was liable for resulting damages.

## Decision

- The Delaware Supreme Court reversed liability on the dividend claim and the industrial development/expansion claim.
- The court affirmed liability on the International contract claim and affirmed the remedy of an accounting for damages attributable to the contract breach.
- The court held intrinsic fairness applies only to controlling-shareholder self-dealing in which the parent receives a non-pro rata benefit to the exclusion and detriment of the minority; otherwise the business judgment rule applies.

## Legal Principles

- A controlling shareholder owes fiduciary duties to the controlled corporation and its minority stockholders.
- The intrinsic fairness standard applies only when the controlling shareholder engages in self-dealing—i.e., uses control to cause the subsidiary to confer a benefit on the parent (or its affiliates) that is not shared proportionately and is detrimental to the minority.
- When intrinsic fairness applies, the burden shifts to the controlling shareholder to prove objective fairness under careful judicial scrutiny.
- Pro rata dividends that benefit all stockholders equally, and that comply with statutory dividend requirements, are reviewed under the business judgment rule absent fraud, illegality, waste, or relevant conflict.
- Absent proof of a specific corporate opportunity belonging to the subsidiary, a parent is not required to allocate new ventures to a partially owned subsidiary rather than to other affiliates.
- Affiliate transactions in which the parent stands on both sides, and the affiliate’s performance failures harm the subsidiary, can constitute self-dealing requiring intrinsic fairness review and supporting damages.

## Conclusion

The court held that control alone does not trigger intrinsic fairness review; the plaintiff must show self-dealing that uniquely benefits the controller at the minority’s expense. Applying that distinction, the court rejected challenges to pro rata dividends and alleged nondevelopment, but imposed liability where the controller used an affiliate contract structure that harmed the subsidiary through late payments and unmet purchase obligations.


Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971)