Court Opinion

ID: 9737058
Source: CourtListenerOpinion
Date Created: 2023-08-26 19:14:27.182483+00
Date Added: 2024-06-11T09:42:14.054695
License: Public Domain

SCHULTZ, Justice
(dissenting).
My quarrel with the majority opinion is not with its interpretation of the law, but with its application of the law to the facts. I would reverse the trial court’s holding.
The majority opinion correctly stated the common law and statutory principles. When there is self-dealing by a majority stockholder which is challenged, the majority stockholder has the burden to establish that they have acted in good faith, honesty and fairness. This burden of fairness requires not just a showing of profitability, but also a showing of the fairness of the bargain to the interest of the corporation. I would hold that Herrig failed to sustain his burden.
In the present case, Herrig gained control of the corporation by buying a majority of the stock. His first act was to replace all of the board of directors except one, an employee of the company. From that time on, he engaged in a course of self-dealing and refused to cooperate or comply with the requests of the minority stockholders. He renewed his exclusive distributing contract, increased commissions for freight and advertising expenses, additional storage cost and his own salary, plus paid himself a royalty for taco sauce and instigated a consultation fee for himself. It was Herrig’s burden to demonstrate that all of his self-dealing transactions were fair to the company.
Much of Herrig’s evidence concerned the tremendous success of the company. I believe that the trial court and the majority opinion have been so enthralled by the success of the company that they have failed to examine whether these matters of self-dealing were fair to the stockholders. While much credit is due to Herrig for the success of the company, this does not mean that these transactions were fair to the company.
I believe that Herrig failed on his burden of proof by what he did not show. He did not produce evidence of the local going rate for distribution contracts or storage fees outside of a very limited amount of self-serving testimony. He simply did not show the fair market value of his services or expense for freight, advertising and storage cost. He did not show that his taco sauce royalty was fair. This was his burden. He cannot succeed on it by merely showing the success of the company.
The shareholders, on the other hand, produced testimony of what the fair market value of Herrig’s services were. The majority discounts this testimony and chooses instead to focus on the success Cookies achieved as a result of Herrig’s actions. They focus on the success of the company rather than whether his self-dealing actions were arms-length transactions that were fair and reasonable to the stockholders. The appellants have put forth convincing testimony that Herrig has been grossly over compensated for his services based on their fair market value. Appellant’s expert witness, a CPA, performed an analysis to show what the company would have earned if it had hired a $65,000 a year executive officer, paid a marketing supervisor and an advertising agency a commission of five percent of the sales each, built a new warehouse and hired a warehouseman. It was compared with what the company actually *457did make under Herrig’s management. The analysis basically shows what the operating cost of this company should be on the open market when hiring out the work to experts. In 1985 alone, the company’s income would have doubled what it actually made were these changes made. The evidence clearly shows that the fair market value of those services is considerably less than what Herrig actually has been paid.
Similarly, appellant’s food broker expert witness testified that for $110,865, what the CPA analysis stated was the fair market value for brokerage services, his company would have provided all of the services that Herrig had performed. The company actually paid $730,637 for the services, a difference of $620,000 in one year.
In summary, I believe the majority was dazzled by the tales of Herrig’s efforts and Cookies’ success in these difficult economic times. In the process, however, it is forgotten that Herrig owes a fiduciary duty to the corporation to deal fairly and reasonably with it in his self-dealing transactions. Herrig is not entitled to skim off the majority of the profits through self-dealing transactions unless they are fair to the minority stockholders. At trial, he failed to prove how his charges were in line with what the company could have gotten on the open market. Because I cannot ignore this inequity to the company and its shareholders, I must respectfully dissent.