Opinion ID: 2208628
Heading Depth: 1
Heading Rank: 5

Heading: Denial of Equitable Relief.

Text: The appellants also claim that Herrig committed equitable fraud, which entitles them to an accounting of his profits and to restitution for losses caused by his fraudulent acts. Appellants make no attempt to establish the specific elements of actionable fraud required under Iowa law. See Grefe v. Ross, 231 N.W.2d 863, 864 (Iowa 1975) (party claiming fraud must establish representation, falsity, materiality, scienter, intent to deceive, reliance, and resulting injury and damage by preponderance of clear, satisfactory, and convincing evidence). Rather, appellants simply assert that Herrig's failure to disclose certain information to directors and shareholders constituted an intentional fraud like that recognized by this court in Holden v. Construction Machinery Co., 202 N.W.2d at 359 (in equity court, intentional acts of fraud include all acts, omissions, and concealments that involve a breach of either legal or equitable duties that injure another or give one an undue or unconscionable advantage). While both Iowa's statutes and case law impose a duty of disclosure on interested directors who engage in self-dealing, neither has delineated what information must be disclosed, or to whom. See Iowa Code § 496A.34; Midwest Management Corp. v. Stephens, 353 N.W.2d 76, 80 (Iowa 1984) (defendant director violated fiduciary duty to disclose information to those who have a right to know the facts when by silence he allowed directors of corporation to believe he had agreed to purchase large block of corporate stock in exchange for corporation's investment in his broker-dealer securities investment business); Schildberg Rock Prods. Co. v. Brooks, 258 Iowa 759, 767-68, 140 N.W.2d 132, 137 (Iowa 1966) (failure of defendant directors to disclose seizure of corporate opportunity concerning lease agreement to majority shareholder violated fiduciary duty to corporation); Bechtel, 243 Iowa at 1097, 51 N.W.2d at 225 (1952) (defendant director perpetrated fraud by concealment, silence, and violation of duty to make full disclosure to corporation). While these cases strongly encourage directors to make the fullest possible disclosure of pertinent facts to persons responsible for making informed decisions, they also suggest the court must look to the particular facts of each case to determine whether a director has violated the duty of disclosure. Examining Herrig's conduct under this duty of disclosure, we find no support for plaintiffs' assertion that Herrig owed the minority shareholders a duty to disclose any information before the board executed the exclusive distributorship, royalty, warehousing, or consultant fee agreements. These actions comprise management activity, and our statutes place the duty of managing the affairs of the corporation on the board of directors, not the shareholders. See Iowa Code § 496A.34 (1987). Because the shareholders had no role in making decisions concerning these agreements, we hold that Herrig owed these shareholders no duty to disclose facts concerning any aspect of these agreements before the board entered or extended them. We also note that plaintiffs did not complain at trial that the financial reports they regularly received concerning the affairs of the company were anything less than adequate. With regard to the board of directors, the record before us aptly demonstrates that all members of Cookies' board were well aware of Herrig's dual ownership in Lakes and Speed's. We are unaware of any authority supporting plaintiffs' contention that Herrig was obligated to disclose to Cookies' board or shareholders the extent of his profits resulting from these distribution and warehousing agreements; nevertheless, the exclusive distribution agreement with Lakes authorized the board to ascertain that information had it so desired. Appellants cannot reasonably claim that Herrig owed Cookies a duty to render such services at no profit to himself or his companies. Having found that the compensation he received from these agreements was fair and reasonable, we are convinced that Herrig furnished sufficient pertinent information to Cookies' board to enable it to make prudent decisions concerning the contracts. Nor does Herrig's status as an inside director of Cookies alter our determination that he disclosed adequate information about his self-dealing. An inside director is one who also serves as an officer of the corporation and is involved in the daily management of the company. Because of the inside director's experience with company affairs, directors not so intimately involved in running the company are entitled to rely on the inside director's recommendations and opinions when making their own decisions. See Rowen, 282 N.W.2d at 652-53. Although our review of the record indicates that Herrig was somewhat reluctant to answer all the minority shareholders' questions concerning the board's decisions, he did not withhold any crucial information from the directors that caused the company to make unnecessarily expensive commitments in reliance on his silence, and thus has not committed equitable fraud. Cf. Midwest Management Corp., 353 N.W.2d at 82; Holden, 202 N.W.2d at 356-60; Schildberg Rock Prods. Co., 258 Iowa at 767-70, 140 N.W.2d at 136-38.