280 A.2d 717 (Del. 1971)
Sinclair Oil Corporation operated primarily as a holding company in the business of exploring for oil and of producing and marketing crude oil and oil products.1 At all times relevant to this litigation, Sinclair owned about 97% of Sinven’s stock.2 Sinven was incorporated in 1922 and has been engaged in petroleum operations primarily in Venezuela and since 1959 has operated exclusively in Venezuela.3 The plaintiff owns about 3000 of 120,000 publicly held shares of Sinven.4
Sinclair nominates all members of Sinven’s board of directors.5 Almost without exception, they were officers, directors, or employees of corporations in the Sinclair complex.6 By reason of Sinclair’s domination, Sinclair owed Sinven a fiduciary duty.7
From 1960 through 1966, Sinven paid out $108,000,000 in dividends ($38,000,000 in excess of Sinven’s earnings during the same period).8 The Chancellor held that Sinclair caused these dividends to be paid during a period when it had a need for large amounts of cash.9 From 1960 to 1966 Sinclair purchased or developed oil fields in Alaska, Canada, Paraguay, and other places around the world.10 Sinclair made no real effort to expand Sinven.11 Sinven was not permitted to participate and was confined in its activities to Venezuela.12
In 1961 Sinclair created Sinclair International Oil Company, a wholly owned subsidiary used for the purpose of coordinating all of Sinclair’s foreign operations.13 On September 28, 1961, Sinclair caused Sinven to contract with International whereby Sinven agreed to sell all of its crude oil and refined products to International at specified prices.14 The contract provided for minimum and maximum quantities and prices.15 Although the contract called for payment on receipt, International’s payments lagged as much as 30 days after receipt.16 International did not comply with this requirement.17
The plaintiff brought a derivative action in the Court of Chancery against Sinclair.18 The Chancellor applied the intrinsic fairness standard and ordered Sinclair to account for damages sustained by its subsidiary, Sinclair Venezuelan Oil Company (hereafter Sinven), organized by Sinclair for the purpose of operating in Venezuela, as a result of dividends paid by Sinven, the denial to Sinven of industrial development, and a breach of contract between Sinclair’s wholly-owned subsidiary, Sinclair International Oil Company, and Sinven.19 Sinclair appealed from that order to the Supreme Court of Delaware.20
Whether the intrinsic fairness standard or the business judgment rule applies to dividend payments by a subsidiary whose board is dominated by the parent corporation?21
When a parent controls a subsidiary and fixes the terms of a transaction, the intrinsic fairness standard applies only upon a showing of self-dealing.22 Self-dealing occurs when the parent receives something from the subsidiary to the exclusion of and detriment to the minority stockholders of the subsidiary.23 Absent self-dealing the business judgment rule governs and courts will not interfere absent gross and palpable overreaching.24
Yes. The business judgment rule applies to the dividend payments by Sinven.25 Although Sinclair caused Sinven to pay out $108,000,000 in dividends from 1960 through 1966 while Sinclair needed cash, a proportionate share of this money was received by the minority shareholders of Sinven.26 Sinclair received nothing from Sinven to the exclusion of its minority stockholders.27 The dividends complied with 8 Del.C. § 170.28 Because no self-dealing occurred, the intrinsic fairness standard does not apply.29
The business judgment rule applies to the dividend payments; the Chancellor erred in applying the intrinsic fairness test.30
Whether the intrinsic fairness standard or the business judgment rule applies to a parent's allocation of business expansion opportunities among its subsidiaries?31
When a parent controls a subsidiary and fixes the terms of a transaction, the intrinsic fairness standard applies only upon a showing of self-dealing. Self-dealing occurs when the parent receives something from the subsidiary to the exclusion of and detriment to the minority stockholders of the subsidiary. Absent self-dealing the business judgment rule governs and courts will not interfere absent gross and palpable overreaching.
Yes. The business judgment rule applies to Sinclair’s allocation of expansion opportunities.32 Sinclair purchased or developed oil fields in Alaska, Canada, Paraguay, and other places around the world from 1960 to 1966.33 Sinclair made no real effort to expand Sinven.
The plaintiff could point to no opportunities which came to Sinven independently.34 Sinclair usurped no business opportunity belonging to Sinven and received nothing from Sinven to the exclusion of and detriment to Sinven’s minority stockholders.35 Because no self-dealing occurred, the intrinsic fairness standard does not apply.
The business judgment rule applies to the allocation of expansion opportunities; the Chancellor erred in applying the intrinsic fairness test.36
Whether a contract between a dominated subsidiary and another wholly-owned subsidiary of the parent constitutes self-dealing that requires application of the intrinsic fairness standard?37
A contract between a dominated subsidiary and another wholly-owned subsidiary of the parent constitutes self-dealing requiring the intrinsic fairness standard when the parent receives products or benefits from the subsidiary to the exclusion of the minority stockholders.38
Yes. The contract constitutes self-dealing that requires application of the intrinsic fairness standard.3940 On September 28, 1961, Sinclair caused Sinven to contract with International whereby Sinven agreed to sell all of its crude oil and refined products to International at specified prices. Sinclair’s act of contracting with its dominated subsidiary was self-dealing.41 Under the contract Sinclair received the products produced by Sinven, and the minority shareholders of Sinven were not able to share in the receipt of these products.42
The contract constitutes self-dealing that requires application of the intrinsic fairness standard.
Whether a parent corporation is entitled to an overall setoff against damages for benefits conferred on the subsidiary in the course of their dealings?43
A parent corporation is entitled to a setoff on specific transactions but is not entitled to an overall setoff against all damages claimed.44
No. Although Sinclair conferred benefits provided by it to Sinven with respect to all the alleged damages through the International contract and other dealings, the Chancellor held that setoff should be allowed on specific transactions, e. g., benefits to Sinven under the contract with International, but denied an overall setoff against all damages claimed.45 The Supreme Court of Delaware agreed with the Chancellor, although the point may well be moot in view of our holding that Sinclair is not required to account for the alleged excessiveness of the dividend payments.46
A parent corporation is not entitled to an overall setoff against damages for benefits conferred on the subsidiary in the course of their dealings.47