A friend asked whether a minority shareholder of a subsidiary corporation may bring a derivative suit on behalf of the subsidiary against the majority shareholder/parent corporation, with specific reference to Levien's derivative suit against Sinclair Oil on behalf of Sinven. The answer is yes.
Levien’s suing derivatively on behalf of Sinven. As a shareholder of Sinven he has standing to bring Sinven’s claims against Sinclair:
A subsidiary, or its minority shareholder derivatively, may maintain an action against its corporate parent in an appropriate case for breach of a fiduciary duty arising out of a parent-subsidiary transaction, contract or dealing.88 Sinclair Oil Corp. v. Levien, 280 A2d 717 (Del) (derivative action by minority shareholder of subsidiary against its parent corporation); Getty Oil Co. v. Skelly Oil Co., 267 A2d 883 (Del); Liebert v. Grinnell Corp., 194 A2d 846 (Del Ch 1963) (parent shareholders bringing double derivative action on behalf of subsidiary against parent).
12B Fletcher Cyc. Corp. § 5888. This works because "A subsidiary is a separate entity capable of suing other parties, including its parent corporation, for breach of contract.” 9 Fletcher Cyc. Corp. § 4229, citing Sinclair Oil Corp. v. Levien, 280 A2d 717 (Del 1971) (subsidiary's minority shareholder bringing derivative action against parent for injury to subsidiary); Liebert v. Grinnell Corp., 194 A2d 846 (Del Ch 1963) (parentshareholders bringing double derivative action on behalf of subsidiaryagainst parent).
With specific reference to the fact pattern in Sinclair, Fletcher reports that:
A minority shareholder, even a single minority shareholder, has the same right as other shareholders to bring a derivative proceeding. It is not necessary that a shareholder have the support of a majority of shareholders or even the support of all the minority shareholders. A minority shareholder of a subsidiary corporation may maintain a derivative action against the parent corporation for the parent's breach of fiduciary duty owing to the subsidiary.5
13 Fletcher Cyc. Corp. § 5975. Footnote 5 cites: Sinclair Oil Corp. v. Levien, 280 A2d 717 (Del); Liebert v. Grinnell Corp., 194 A2d 846 (Del Ch 1963) (parent shareholders bringing double derivative action on behalf of subsidiary against parent); Marks v. Wolfson, 188 A2d 680 (Del Ch 1963) (minority shareholder of subsidiary suing majority shareholder of parent).
New York follows the same rule: Subsidiary's minority shareholders can sue parent derivatively for causing subsidiary to pay dividends, with funds borrowed from parent, on a class of preferred shares that was solely owned by parent, when, though the subsidiary had a surplus, the suing shareholders allege that (1) its prospective earnings won't be enough to repay the loan, and (2) the subsidiary wouldn't have paid the dividend if it weren't dominated by parent. Weinberger v Semenenko, 36 NYS2d 396 (1942).
Interestingly, the issue is pending in the area of series LLCs:
The Drafting Committee's current approach: “A series manager of one protected series of a series organization does not in that capacity owe any fiduciary duties to another protected series of the organization or [to] the owners associated with another protected series.” The Committee has instructed the Reporter to draft around “the Sinven problem.” Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971) (shareholders of one corporate subsidiary [Sinven] brought derivative claims against the parent in part because the parent had allocated a business opportunity to another subsidiary).
Daniel S. Kleinberger, Series of Unincorporated Business Entities: The Mobius Strip and Klein Bottle of Business Entity Law, Bus. L. Today, February 2015, at 1, 3-4.
