## Facts

- Cookies Food Products, Inc. was a closely held Iowa corporation formed to produce and distribute barbeque sauce; early sales were poor and the company faced serious financial trouble.
- The board turned to shareholder Duane D. “Speed” Herrig, who owned Lakes Warehouse Distributing, Inc. and Speed’s Automotive, Inc., to help distribute and market Cookies’ products.
- Cookies authorized Herrig to purchase product at a discount and resell it; this evolved into an exclusive distributorship in which Lakes handled distribution and related services for a commission based on sales.
- Over time, Herrig became the majority shareholder and effectively controlled board composition and management decisions.
- Cookies entered additional arrangements involving Herrig or his companies, including: warehousing/facilities services provided by Lakes; a royalty to Herrig for a taco-sauce recipe he developed; and consulting/management fees paid to Herrig.
- Minority shareholders brought a derivative action alleging that these related-party transactions were self-dealing, unfair to the corporation, and amounted to breach of fiduciary duty, fraudulent misappropriation, and conversion of corporate funds.
- After a bench trial, the district court found the transactions benefited Cookies and entered judgment for defendants; the minority shareholders appealed.

## Issues

1. What standard governs interested-director or controlling-shareholder transactions, and who bears the burden to prove fairness?
2. Whether the challenged related-party contracts and compensation arrangements breached the fiduciary duty of loyalty owed to the corporation.
3. Whether the transactions supported derivative claims for fraudulent misappropriation or conversion of corporate funds.
4. Whether the controlling director had a duty to disclose to shareholders the specific profits he earned from the related-party transactions, apart from disclosure to the board.

## Decision

- The Iowa Supreme Court affirmed judgment for the defendants after de novo review, giving deference to credibility-related findings.
- The court held that self-dealing transactions are not automatically void or voidable, but the interested director bears the burden to prove the transactions were fair and reasonable to the corporation when authorized.
- The court concluded Herrig met that burden for the distributorship, warehousing/facilities, royalty, and consulting/management arrangements.
- The court rejected claims of fraudulent misappropriation and conversion because the payments and contracts were found fair and beneficial to the corporation.
- The court held that the director’s disclosure obligation on such management matters ran primarily to the board, not to individual shareholders, and Herrig had no separate duty to disclose to shareholders the specific profits he made from the transactions when the board was adequately informed.

## Legal Principles

- Interested-director and controlling-shareholder transactions are subject to heightened scrutiny but are not per se invalid.
- The fiduciary who engages in self-dealing bears the burden to prove the transaction was honest, in good faith, and fair and reasonable to the corporation at the time of authorization.
- A fairness determination may consider the corporation’s circumstances, the services and risks assumed by the fiduciary’s affiliated entities, and whether the arrangements provided corporate benefit.
- Absent unfairness or improper diversion, approved compensation and related-party contracts do not establish fraudulent misappropriation or conversion in a derivative action.
- A director’s duty of disclosure regarding management-level information is owed primarily to the board of directors; shareholder entitlement to specific profit details is not automatic.

## Conclusion

The court upheld related-party contracts in a closely held corporation because the controlling director proved the arrangements were made in good faith and were fair and reasonable to the corporation, and it limited any disclosure duty about personal profits to disclosure directed to the board rather than individual shareholders.


Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447 (Iowa 1988)