5-3

Sinclair Oil Corporation organized a subsidiary, Sinclair Venezuelan Oil Company (Sinven) for the purpose of operating 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 independent 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 excessive dividends that the industrial development of Sinven was effectively prevented.

1. 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?
2. 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?