Sinclair Oil Corporation organized a subsidiary, Sinclair
Venezuelan Oil Company (Sinven), for the purpose of oper-
ating in Venezuela. Sinclair owned about 97 percent of
Sinven’s stock. Sinclair nominates all members of Sinven’s
board of directors, and none of the directors were independ-
ent of Sinclair. A minority shareholder of Sinven brought a
derivative action on behalf of Sinven against Sinclair, seeking
to recover damages sustained by Sinven. The derivative suit
alleged that Sinclair had caused Sinven to pay out such exces-
sive dividends that the industrial development of Sinven was
effectively prevented.
a. What are the arguments that the transactions between Sinclair and Sinven should be subjected to judicial scrutiny and upheld only if Sinclair shows them to have been entirely fair and entered in good faith?
b. What are the arguments that the transactions between Sinclair and Sinven should be subjected to the business judgment rule and overturned only if Sinven shows that Sinclair had not acted with due care, in good faith, and in a manner
reasonably believed to be in the best interests of Sinven?
c. Explain which standard should apply.
