Getty Oil Co. v. Skelly Oil Co.

Supreme Court of Delaware · Corporations

CorporationsParent-subsidiary fiduciary dutiesBusiness judgment ruleMinority shareholder fairnessparent corporationsubsidiaryminority shareholdersfiduciary duty

Facts

Getty, through a holding company, owned 71% of Skelly, while the remainder of Skelly's stock was publicly held. Under the federal Mandatory Oil Import Program, Getty received allocations based on a historical basis tied to Tidewater, while Skelly had separately received input-based allocations until the federal administrator later ruled that Skelly, as a controlled corporation under the regulations, could receive allocations only through Getty. Getty and Skelly had otherwise operated independently, with limited dealings between them. After federal authorities determined that any allocation for Skelly had to come through Getty, Getty sought a declaration of its duty, if any, to share its allocations with Skelly.

Issue

When a parent corporation receives a government-created allocation and the transaction and its terms are determined by federal law rather than by the parent, does Delaware law require the parent to share that allocation with its controlled subsidiary? More specifically, what standard governs judicial review of the parent's refusal to share in that setting?

Rule

Delaware applies a fairness inquiry to parent-subsidiary dealings, but the applicable test depends on who controls the transaction and its terms. If the parent controls the making of the transaction and fixes its terms, the intrinsic fairness test applies; if the transaction and its terms are set by a third party such as the government, the business judgment test applies, and the court will not interfere absent gross and palpable overreaching.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Harbor Energy, a Delaware parent based in Houston, owns 78% of Plains Metro Refining, a Delaware subsidiary with public minority shareholders in Kansas City. A federal program awards pipeline shipping credits only to the controlling company of an affiliated group and fixes the amount by a formula written into federal regulations; the parent declines to pass any credits to the subsidiary.

If the minority shareholders sue in Delaware alleging the parent acted unfairly, which standard should the court apply?

Explanation. Delaware distinguishes between parent-set transactions and third-party-set transactions. When the transaction and its terms are fashioned by a third party such as the federal government, the business judgment test applies rather than intrinsic fairness. Majority ownership alone does not automatically trigger intrinsic fairness. (Derived from Getty Oil Co. v. Skelly Oil Co. (n.d.).)