Mapping Judicial Review: Sinclair Oil v. Levien

Abstract

The defining issue of corporate law is the intensity of judicial review of director actions. Over the last four decades, Delaware has developed an elaborate array of judicial standards and defined (and then rearranged) the process by which such litigation plays out. This piece explores that development using the framework set out in Sinclair Oil v. Levien, a classic of Delaware corporate jurisprudence. The first part tells the story of this case, the parties and their lawyers, in a way that seeks to provide a context for the discussion of fiduciary duty within a parent/subsidiary corporate group. Subsequent parts develop, with a graphic aid, the judicial space defined by the Sinclair court and filled in by judges over the ensuing decades and then analyzes the fiduciary duty of controlling shareholders Sinclair provides room for "selfish" ownership for a majority shareholder, so long as the minority shareholders receive a proportional benefit, a standard that at the time seemed to expand the discretion for majority shareholders. Viewed from a point decades later, this part of Sinclair has not proved to be a template for broader applications and other doctrines have developed to constrain the actions of majority shareholders. The intensity of judicial review of corporate decisions is the central issue of corporate law. Sinclair Oil Corp. v. Levien, a foundational decision in Delaware corporate jurisprudence from 1971, defines the space within which judicial review occurs with a format that still guides courts today. Along one boundary is deference by judges to decisions of business managers that is reflected in the business judgment rule. Along the other boundary is an intrusive judicial involvement by which the court asks the corporation or other defendant to prove the intrinsic fairness of the transaction. Since Sinclair the Delaware courts have filled in the space defined within those boundaries with a host of other decision points and varying degrees of judicial review, but it was Sinclair that provided the landscape. The case remains in wide use today in classrooms (and courtrooms) because it presents an attractive pedagogical package. Three challenged actions were before the court; for two of those actions the court adopted deference and for the other, intrinsic fairness. Hence, the outcome provides a structure that directs students to address the differences between the two standards. At the same time, the case raises the difficult policy question of how far a parent corporation can go in directing the actions of the subsidiary for the parent's own purposes. The Sinclair court takes a rather narrow definition of self-dealing, requiring that the parent get something at the expense of the subsidiary before a court will interfere with the directors' decision. This story unfolds in three parts. Section I introduces the parties and frames the issues presented in the case. Section II develops, with a graphic aid, the judicial space defined by the Sinclair court and filled in by judges over the ensuing decades. Section III analyzes the fiduciary duty of controlling shareholders (as opposed to duties of directors and managers without share control.) Sinclair provides room for "selfish" ownership for a majority shareholder, so long as the minority shareholders receive a proportional benefit, a standard that at the time seemed to expand the discretion for majority shareholders. Viewed from a point decades later, this part of Sinclair has not proved to be a template for broader applications and other doctrines have developed to constrain the actions of majority shareholders.