Schreiber v. Pennzoil Corporation

Delaware Court of Chancery · 1980 · Corporations

419 A.2d 952 (Del. Ch. 1980)

Updated August 22, 2026

Corporationsderivative actioncontrolling stockholderparent-subsidiary transactionintrinsic fairnessbusiness judgment ruleratificationfull disclosure

Facts

Pennzoil controlled both POGO and PLATO and managed POGO under a contract entitling it to a 3% fee on all POGO cash disbursements except specified exclusions. To allow creation of PLATO and POGO's investment in it, POGO's Class B stockholders received proxy materials describing the amendments, POGO's planned $21,666,666 investment in PLATO, and the management-fee formula; 96% of shares voted approved. After PLATO was formed, POGO invested in PLATO at an originator's price of $2 per share, while public investors paid an effective $5 per share and Pennzoil guaranteed the public debentures but POGO did not share that guarantee burden. Pennzoil then charged POGO about $650,000 under the management contract, and plaintiff claimed the charge was improper, excessive, and effectively a double charge because Pennzoil also charged PLATO when PLATO later spent the funds.

Issue

Whether Pennzoil breached fiduciary duties or caused corporate waste by charging POGO a 3% management fee on POGO's investment in PLATO. The court also had to determine whether the minority stockholders' informed approval shifted the burden of persuasion to the plaintiff and whether the transaction was intrinsically fair.

Rule

When a parent controls a transaction with its subsidiary and benefits from it to the exclusion and detriment of the subsidiary, intrinsic fairness rather than the business judgment rule governs. But a non-unanimous vote of minority stockholders, after full disclosure of all germane facts, does not bar judicial review of an alleged wasteful transaction; instead, it shifts the burden of persuasion to the party attacking the transaction. A management fee authorized by contract is proper where the transaction falls within the contract's terms, the fee is not excessive in light of the services and benefits provided, and the transaction does not benefit the parent to the exclusion and detriment of the subsidiary.

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

Ridgewell Energy controls Bay Current Drilling, a Delaware subsidiary based in Houston. Bay Current's minority stockholders approve, by 88% of the shares voting, an amendment allowing Bay Current to invest $30 million in a sister entity, and the proxy materials fully describe the investment, the manager's 2% fee on cash disbursements, and the affiliate structure.

In a later derivative suit alleging the parent improperly collected the 2% fee on Bay Current's investment, which statement is most accurate?

Explanation. A non-unanimous vote of minority stockholders after full disclosure of all germane facts does not preclude judicial scrutiny of an alleged wasteful parent-subsidiary transaction, but it does shift the burden of persuasion to the party attacking the transaction. The vote is therefore not a complete cleansing device, yet it is not a nullity. (Derived from Schreiber v. Pennzoil Corporation (1980).)