The law commonly describes the fiduciary duties of corporate directors as twofold, consisting both of a duty of care and a duty of loyalty these common law antecedents still guide the court when interpreting the scope of the statute. The duty of care requires each director to perform the duties of a director in good faith, in a manner such director reasonably believes to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. Such a showing relieves directors of liability for their actions on behalf of the corporation.
This is a shareholders' derivative suit brought by the minority shareholders of a closely held Iowa corporation specializing in barbeque sauce, Cookies Food Products, Inc. (Cookies). The target of the lawsuit is the majority shareholder, Duane "Speed" Herrig and two of his family-owned corporations, Lakes Warehouse Distributing, Inc. (Lakes) and Speed's Automotive Co., Inc. (Speed's). Plaintiffs alleged that Herrig, by acquiring control of Cookies and executing self-dealing contracts, breached his fiduciary duty to the company and fraudulently misappropriated and converted corporate funds. Plaintiffs sought actual and punitive damages. Trial to the court resulted in a verdict for the defendants, the district court finding that Herrig's actions benefited, rather than harmed, Cookies.
Is a transaction voidable as improper self-dealing when the director can show that she acted in good faith, honesty, and fairness, and that the transaction was fair and reasonable to the corporation?
The court held (1) the majority shareholder's services to the corporation were neither unfairly priced nor inconsistent with the corporation's interest, (2) the majority shareholder did not owe the minority shareholders a duty to disclose any information before the board of directors executed distributorship, royalty, warehousing, or consulting fee arrangements, (3) statutes placed the duty of managing the affairs of the corporation on the board of directors, not the shareholders.