Monday, May 19, 2014

Sinclair Oil v. Levien case brief summary

Sinclair Oil v. Levien (1971)          
o    G/R: When there is a conflict of interest by self dealing the test is intrinsic fairness test.
o    Facts: Derivative action based on Sinclair causing Sinven to pay out excessive dividends in excess of  earnings = $38 million.
o    Issue: Are dividend payments in essence self dealing?
o    Holding: No, a proportionate share of the money was received by the minority shareholders. The appropriate test that should have been applied was BJR.
o    Issue 2: Company did not have to bind self to a K but when did…Was breach of k evidence of self dealing?
o    Holding: Yes, Sinclair received the benefits of the k, so it must comply with contractual duties.
o    Sinclair owed Sinven a fiduciary duty based on the following factors:
§ Sinclair nominates all Sinven’s board of directors
§ Directors are not independent
§ Result is that Sinclair dominated Sinven
o    Since a fiduciary duty was owed lower court said the intrinsic fairness test applies:
o    Intrinsic Fairness: P must prove, subject to careful judicial scrutiny, that its transactions with D were objectively fair.
o    This test involves a high degree of fairness and shifts the burden of proof to Defendant Corporation.
§ See page 48 of Jost
§ Page 29 of mine
o    When to Apply: When situation involves a parent and a subsidiary, with the parent controlling the transaction and fixing the terms AND is accompanied by self dealing.
o    Self Dealing: Where the parent has received a benefit to the exclusion and at the expense of the subsidiary and thus the minority stockholders.
o    However, lower court was overturned b/c there was no evidence of self dealing in regards to the dividend payments. However there was evidence of self dealing in re to k claim.
o    Since there was evidence of self dealing in re to k claim that Sinclair would have to show under IFT that its choosing not to enforce the k was Intrinsically Fair/Objectively Fair to the minority shareholders of Sinven. (They did not)

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