Sinclair Oil Corporation organized a subsidiary, Sinclair Venezuelan Oil Company (Sinven), for

the purpose of operating in Venezuela. Sinclair owned about 97% 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?

(3) Explain which standard should apply.