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)