Opinion ID: 2208628
Heading Depth: 1
Heading Rank: 4

Heading: Standard of Law.

Text: Next, appellants claim the district court applied an inappropriate standard of law to determine whether Herrig's conduct was fair and reasonable to Cookies. Appellants correctly assert that self-dealing transactions must have the earmarks of arms-length transactions before a court can find them to be fair or reasonable. See Bechtel, 243 Iowa at 1023, 51 N.W.2d at 184. The crux of appellants' claim is that the court should have focused on the fair market value of Herrig's services to Cookies rather than on the success Cookies achieved as a result of Herrig's actions. We agree with appellants' contention that corporate profitability should not be the sole criteria by which to test the fairness and reasonableness of Herrig's fees. In this connection, appellants cite authority from the Michigan Supreme Court that we find persuasive: Given an instance of alleged director enrichment at corporate expense ... the burden to establish fairness resting on the director requires not only a showing of fair price but also a showing of the fairness of the bargain to the interests of the corporation. Fill Bldgs., Inc. v. Alexander Hamilton Life Ins. Co., 396 Mich. 453, 241 N.W.2d 466, 469 (1976). Applying such reasoning to the record before us, however, we cannot agree with appellants' assertion that Herrig's services were either unfairly priced or inconsistent with Cookies corporate interest. There can be no serious dispute that the four agreements in issuefor exclusive distributorship, taco sauce royalty, warehousing, and consulting feeshave all benefited Cookies, as demonstrated by its financial success. Even if we assume Cookies could have procured similar services from other vendors at lower costs, we are not convinced that Herrig's fees were therefore unreasonable or exorbitant. Like the district court, we are not persuaded by appellants' expert testimony that Cookies' sales and profits would have been the same under agreements with other vendors. As Cookies' board noted prior to Herrig's takeover, he was the driving force in the corporation's success. Even plaintiffs' expert acknowledged that Herrig has done the work of at least five peopleproduction supervisor, advertising specialist, warehouseman, broker, and salesman. While eschewing the lack of internal control, for accounting purposes, that such centralized authority may produce, the expert conceded that Herrig may in fact be underpaid for all he has accomplished. We believe the board properly considered this source of Cookies' success when it entered these transactions, as did the district court when it reviewed them. A secondary claim relating to appellants' standard-of-law argument is appellants' recurring complaint that Herrig had no right to take over control of Cookies. We find no legal or factual basis for this assertion. First, appellants presented no proof that all shareholders had agreed from the outset that no single shareholder would be allowed to acquire majority control of the company. In fact, the bylaws the board approved before Herrig assumed control belie this assertion; they provide for no restrictions on the identity of stock purchasers if the board of directors declines an offer to purchase available Cookies stock. Second, the law has long recognized the right of majority shareholders to control the affairs of a corporation, if done so lawfully and equitably, and not to the detriment of minority stockholders. See 12B W. Fletcher, Cyclopedia on the Law of Private Corporations § 5783, at 120 (1986). The district court was correct in so holding.