Cookies Food Products v. Lakes Warehouse

FACTS:  A group of Cookies’ (Plaintiff) minority SH’s brought a derivative suit against Herrig (Defendant) and Lakes (Defendant), a distributing company owned by Herrig, contending that sums paid Herrig and Lakes grossly exceeded the value of services rendered, thereby substantially reducing corp. profits and SH equity.  Plaintiff also claimed that Herrig breached his fiduciary duties to Plaintiff and its SH’s b/c he allegedly negotiated for royalties, warehousing fees and consultant fees w/out fully disclosing the benefit he would gain.  Plaintiff sought recovery for lost profits, an accounting to determine the full extent of the damage, atty fees, punitive damages, appointment of a receiver to manage the corp. property, removal of Herrig from control, and sale of the company in order to generate an appropriate return on their investment.  Herrig and Lakes contended that Plaintiff was in dire financial straits when Herrig was approached by Plaintiff to become a distributor for Cookies’ product, barbecue sauce.  Plaintiff executed an exclusive distributorship agreement with Herrig, and Plaintiff’s sales began to improve.  As sales increased, Plaintiff extended the distribution agreement several times, and Defendant ultimately became the majority SH of Plaintiff.  Herrig also developed and began to market taco sauce for Plaintiff that became very popular and for which Herrig negotiated a royalty agreement with Plaintiff.  However, not all of Plaintiff’s SH’s were happy with Herrig’s management of the company and were discontented that they were not paid dividends.  B/c Plaintiff’s stock was not publicly traded, the SH’s had no ready access to buyers for their stock, and w/out dividends, no ready method of realizing a return on their investment in the company existed.  They thus brought suit against Lakes, Herrig’s company which distributed Plaintiff’s products and Herrig himself.  The trial court brought in a verdict for Defendants and deciding that their action benefited rather than harmed Plaintiff. Plaintiff appealed.

ISSUE:  Under Iowa Code §496A.34, may a corp. director engage in self-dealing w/out clearly violating the duty of loyalty if:  (1) the interest is disclosed to the board of directors which authorizes the transaction of such interested director; (2) the interest is disclosed to the SH’s entitled to vote, and they authorize the transaction; and (3) the transaction is fair and reasonable to the corp.?

HOLDING:  Yes.  Under Iowa Code, a corp. director may engage in self-dealing w/out clearly violating the duty of loyalty if he follows the above three requirements.  Also, directors who engage in self-dealing must establish the additional element that they have acted in good faith, honesty, and fairness.  Here, the trial court concluded that Herrig did not breach any duties owed to Plaintiff or the minority SH’s and found that Defendant’s compensation was fair and reasonable.  Plaintiff, on appeal, challenged:  (1) the trial court’s allocation of the burden of proof regarding the claim of self-dealing; (2) the standard employed by the court to determine whether Herrig’s self-dealing was fair and reasonable to Plaintiff; (3) the finding that any self-dealing by Defendant D was done in good faith and with honesty and fairness; (4) the finding that Herrig breached no duty to disclose crucial facts to Plaintiff’s board before it completed deliberations on Defendant’s self-dealing transactions; and (5) the trial court’s denial of restitution as compensation for Herrig’s alleged breach of loyalty.  There can be no dispute that the agreements at issue here – exclusive distributorship, taco sauce royalty, warehousing of Plaintiff’s products by Lakes (Defendant) and Herrig’s consulting fees – have all benefited Plaintiff, as demonstrated by its financial success.  Even if Plaintiff could have procured similar services from others at lower costs, we are not persuaded that Defendant’s fees were exorbitant or unreasonable.  Defendant was a driving force in the company and its success.  At trial, Plaintiff’s expert accountant conceded that Plaintiff might have in fact been underpaid for his accomplishments. Plaintiff cannot reasonably claim that Herrig owed Plaintiff a duty to render such services at no profit to himself or his companies.  Herrig furnished sufficient information to Plaintiff’s board to enable it to make prudent decisions regarding the arrangements w/him.  Affirmed.

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