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USCA1 Opinion

United States Court of Appeals


For the First Circuit
____________________

No. 97-1268

A.W. CHESTERTON COMPANY, INC., JAMES D. CHESTERTON, THOMAS


CHESTERTON, JR., ANDREW W. CHESTERTON, GLENN E. CHESTERTON,
FLORENCE CHESTERTON, BOSTON SAFE DEPOSIT, INC., Trustee of
the Thomas Chesterton Trust, and ADELE FORMAN,

Plaintiffs,Appellees,

v.

ARTHUR W. CHESTERTON,

Defendants,Appellant.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Joseph L. Tauro, Chief U.S. District Judge]


_________________________

____________________

Before

Torruella, Chief Judge,


___________

Aldrich, Senior Circuit Judge,


____________________

and Lynch, Circuit Judge.


_____________

____________________

Martin F. Gaynor, with whom Harry L. Manion III was


________________
___________________
on brief, for appellees.
Lawrence P.

Heffernan, with whom Michael

D. Lurie

______________________

_________________

and Peter L. Banis were on brief, for appellant.


______________
____________________

October 14, 1997

____________________

LYNCH,
LYNCH,

Circuit Judge.
Circuit Judge.
_____________

This

appeal

involves

the

duties

imposed by Massachusetts

closely

held

law on a minority

corporation.

shareholder in a

Arthur

W.

Chesterton

("Chesterton"), a minority shareholder in the A.W. Chesterton

Company, frustrated in his efforts to dispose of

his shares,

proposed to transfer a portion of his stock in the Company to

two

shell corporations.

terminate the

under the

that

Company's

Because

advantageous

Internal Revenue

the proposed

such

Code, the

transfer violated

transfer

Subchapter

district court

would

status

found

Chesterton's fiduciary

duty to the Company and enjoined him from proceeding with the

transfer.

Chesterton appeals this finding and injunction, as

well

the

as

district

court's

denial

of

counterclaim for relief under M.G.L. ch. 156B.

Chesterton's

We affirm.

I.

There

emerged

from

Chesterton

is

the

little

dispute

trial.

is asserting

conclusions are not

While

that

about the

it

is

facts

unclear

the district

have found them.

whether

court's factual

supported by the evidence, we

facts as the court could

which

state the

Cambridge Plating
_________________

Co. v. Napco, Inc., 85 F.3d 752, 756 (1st Cir. 1996).


___
___________

The Company

corporation since

owned

and operated

founder,

has been a closely

its inception

by

the

in 1885,

descendants

Arthur W. Chesterton.

-22

held Massachusetts

and is

of

the

currently

Company's

Chesterton, the defendant in

this case and the grandson of the original Arthur Chesterton,

is currently the

of

the

Company's largest shareholder, with

Company s stock.

manufacture

The Company

mechanical seals,

and

27.06%

its affiliates

packaging, pumps

and related

products, which are distributed throughout the world.

Two

occurred

corporate events

in 1975,

when

the

set the

stage.

shareholders

of

The

the

first

Company

approved the

Company's

("the Articles").

Restated

Articles

The Articles provide

right of first refusal in

of

Organization

the Company with

the event that a shareholder seeks

to transfer her shares to an individual or entity outside the

immediate Chesterton family.

Company 30

opting

days notice;

to purchase the

The shareholder must

the Company may

stock within

avoid the

the 30

days.

give the

sale by

If the

Company declines the option, the shareholder may proceed with

the sale as planned.

Part of Chesterton s argument

focuses

on the fact that he had complied with these provisions of the

Articles when he proposed his stock transfer.

The second

occurred in

1985,

when the

Company's

Board of Directors voted to change the Company's status under

the Internal Revenue Code from a Subchapter C corporation

a Subchapter S corporation.

status

as

advantageous

shareholders in

double

taxation

a small

of

The Board perceived Subchapter S

to the

Company

because

business corporation

income

to

to

-33

which

it allows

to avoid

shareholders

the

in

Subchapter

corporation are

Subchapter

C corporation

subject.

is taxed

The

first

income of

at the

corporate

level when the company earns income, and a second time at the

shareholder level when the shareholders receive the income in

the form

of

contrast,

dividends.

A Subchapter

is not taxed at

corporation,

in

the corporate level; rather, each

shareholder pays income tax individually in proportion to her

share of

ownership in

the corporation.1

See 26
___

U.S.C.

1361 - 1399.

In order to

corporation

(1)

must be a

have more

corporation

qualify for Subchapter S

domestic corporation which

than seventy-five

or other

treatment, a

shareholders,

non-individual as

does not:

(2) have

shareholder, (3)

have a non-resident alien as a shareholder, and (4) have more

than one

abide

class of stock.

by any

termination of

of

these

26 U.S.C.

limitations

1361(b).

results

Failure

in

Subchapter S status. 26 U.S.C.

to

automatic

1362(d)(2).

After the Company Board voted to adopt Subchapter

S status,

the officers

and directors

sought to

inform the

____________________

1.

There is a drawback to Subchapter S status known as

"phantom income." That phrase describes the liability that


shareholders in an S corporation face for taxes on their
share of the corporation's profits, even if those profits are
not distributed to the shareholders as dividends.

Chesterton

makes much of the fact that the Company's shareholders are


subject to the risk of phantom income, but offered no
evidence that the risk had materialized.

-4-

shareholders

about the

benefits and

election, and recommended

consent.

Under

consent of the

order

to

1362(a)(2).

that the

the Internal

limitations

shareholders give

Revenue

Code, the

shareholders of a corporation

finalize

Subchapter

of the

their

unanimous

is required in

election.

26

U.S.C.

As an officer and director of the Company at the

time,

Chesterton was heavily

led and

participated in

Subchapter

with

process.

shareholder meetings

S election.

were provided

involved in this

At those meetings

information regarding

He

regarding the

the shareholders

the

benefits

of

Subchapter S election, as well as the limitations it imposed.

The

shareholders unanimously

election.

Implicit

understanding

in

consented to the

this

consent

Subchapter S

was

general

among the shareholders that they would take no

action that would adversely affect the Company's Subchapter S

status.

In the early 1990's, Chesterton became discontented

with

the

profits,

Company's

heavy debt,

performance,

including

and credit problems.2

objects to a financial arrangement

its

declining

Chesterton also

that the Company has with

Chesterton International, B.V. ("BV"),

a Company affiliate.3

____________________

2.

Chesterton points to testimony which showed that the

Company currently has $16,000,000 in outstanding debt, that


it has violated its loan agreements, and that in 1994 the
Company needed to borrow money to pay dividends.

3.

The affiliate BV is owned and operated by the same

shareholders and Board of Directors as the Company.

-55

Under

the arrangement, the

large

management

continue

fee,4

affiliate BV pays

which has

to pay dividends

poor financial

allowed

the Company a

the

to its shareholders,

performance.

Chesterton

Company to

despite its

believes that

arrangement masks the Company s dire financial straights.


.

also

objects

management

to

the

arrangement

because

much

of

this

He

the

fee is funnelled into Company pension plans, from

which Chesterton does not benefit because he is not a current

Company employee.

Because

of his

dissatisfaction with

Chesterton sought to sell his Company stock.

interest

shares.5

because

all

After some

he

could

offer

failed efforts

was

the Company,

He found little

minority of

to locate

an investor

willing to

purchase his

the scheme

at issue

transfer

which are

Articles

a portion of

stock outright,

in this case.

his shares to

wholly-owned by him.

of Organization by

proper notice

of

Chesterton devised

Chesterton

proposed to

two shell corporations

Chesterton complied with the

providing the Company

his proposed

transfer

so that

with the

it

could

____________________

4.

Chesterton asserts that this management fee does not

actually reflect the value of services provided to the BV by


the Company.

He argues that because the Internal Revenue

Service could reclassify the excess of the fee over the value
of the services as dividends to the BV shareholders, this
incongruity exposes the shareholders to increased tax
liability.

5.

None of Chesterton s fellow shareholders were willing to

sell their stock and join him to offer a majority package.

-66

purchase

his shares.

The Company, however, declined because

it lacks the ability to purchase the shares.

When the

Chesterton sought

Company

to proceed

would not

with the

purchase his

shares,

transfer.

But that

transfer would have a deleterious effect on the Company's tax

status.

The Company and its shareholders derive significant

tax benefits

from

corporation.

shareholder,

as

transfer, the

26 U.S.C.

his

it

would

corporation

under

Subchapter S status

1362(d)(2).

revert

Subchapter

to

Should

status as

a Subchapter

become

Company

Chesterton's

proposed

terminates automatically.

If Chesterton were

to consummate

proposed transfer to the shell corporations, the Company

would

$5.3

the Company s

to

Subchapter

S status enabled

status

The

it to distribute

million in dividends between

Subchapter

status.

would

financial loss for the Company

an additional

1985 and 1995.

represent

Company's

Reversion

significant

and its shareholders.

Once a

corporation loses its Subchapter S status, it cannot reattain

that status for a minimum of

five years.

26 U.S.C. 1362(g).

In fact, loss of Subchapter S status would have a more severe

effect on the

under

an

Company because it is

old

provision

which

currently grandfathered

exempted

Subchapter

corporations from taxes on the sale of corporate assets.

26

U.S.C.

1374(c)(1).

Even if

-77

the

See
___

Company eventually

regained its Subchapter

S status, it would

permanently lose

its grandfathered status.

Fearing

Company

and its

the loss of

its Subchapter S

status, the

shareholders

instituted suit,

seeking

enjoin Chesterton from

complaint

alleged

effectuating his plan.

breach

of

fiduciary

contract, breach of implied covenant

Before trial, the

claims,

duty claim.

for

Plaintiffs also

damages, but [not]

breach

of good faith and

parties stipulated to

with prejudice, except

The original

duty,

dealing, and interference with an advantageous

to

of

fair

relationship.

a dismissal of

all

for the breach

of fiduciary

agreed to "waive

their claims

their claims for

equitable relief."

After

bench trial,

the

district

court ruled

that

the

proposed transfers would violate Chesterton's fiduciary

under

Massachusetts

irreparable harm

transfers and

to

law

and

that

the Company.

they

The

would

duty

result

court enjoined

denied Chesterton's counterclaim

in

the

for monetary

relief under Mass. Gen. Laws ch. 156B.

Chesterton

argues

improperly

determined the

duty under

Massachusetts law.

court

scope

improperly resurrected

discussing the general

that

the

district

of Chesterton's

He asserts

the waived

court

fiduciary

that the district

contract claim

agreement among the shareholders

to disrupt the Company's Subchapter S status.

by

not

He argues that

the district court improperly concluded that the Subchapter S

-88

election imposed an implied restriction on transferability of

stock,

where

the

Company

requirements for imposing

Mass.

Gen. Laws

district

court

ch.

did

not

follow

the

stock transfer restrictions

156B.

improperly

Finally,

he

restricted

argues that

legal

under

the

Chesterton's

presentation of

evidence at trial concerning certain Company

accounting practices.

We reject Chesterton's arguments.

II.

We review the district court's grant of a permanent

injunction for

abuse

of discretion.

Narragansett Indian
____________________

Tribe v. Narragansett Elec. Co., 89 F.3d 908,


_____
_______________________

912 (1st Cir.

1996) (citing Caroline T. v. Hudson Sch. Dist., 915 F.2d 752,


___________
_________________

754-55

(1st

Cir.

1990)).

The

standard

for

issuing

permanent injunction requires the district court to find that

(1)

plaintiffs prevail on

suffer

irreparable

relief; (3)

the

injury

the harm to

defendant

the merits; (2)

would

in

the

plaintiffs would

absence

of

injunctive

plaintiffs would outweigh

suffer

from

the

imposition

the harm

of

an

injunction;

adversely

and

(4)

affected by

the

an

public

interest

injunction.

Assoc. III Ltd. Partnership v.


_____________________________

would

not

be

Indian Motorcycle
__________________

Massachusetts Housing Fin.


___________________________

Agency, 66 F.3d 1246, 1249 (1st Cir. 1995) (internal citation


______

omitted).

The

district court found, and we

public interest was

not at issue in

the remaining three factors.

-99

agree, that the

this case.

We

turn to

A.

Success on the Merits


_____________________

In

Inc.,
____

Donahue v. Rodd Electrotype Co. of New England,


_______
____________________________________

328 N.E.2d 505 (Mass. 1975), the Massachusetts Supreme

Judicial Court first announced that shareholders in a closely

held

corporation owe

another.

an

elevated

See generally,
______________

Peter

fiduciary

M.

duty

Rosenblum,

Fiduciary Duties in Massachusetts and Delaware,


________________________________________________

Incorporate

and

Counsel

(Massachusetts Continuing Legal

Business

to

one

Corporate
_________

in How
__

331,

Education, Inc., ed.,

to

354-366

1996)

(providing an informative review of Donahue and its progeny).


_______

After

noting

that

resemblance to

and

succeed." Id. at
___

self-seeking

close

absolute

515.

not

loyalty if

conduct on the

part of

one of

"the

trust,

enterprise

is to

avarice,

any stockholder"

that such shareholders

in a close

expediency

or

in a

owe one

good faith and loyalty." Id.


___

stated that stockholders

of

"striking

stated that

must be

the

The court condemned "[d]isloyalty and

corporation, and held

act out

bear

the court

the stockholders

another a duty of "utmost

court

corporations

a partnership,"

relationship among

confidence

close

The

corporation "may

self-interest

in

derogation of their duty of loyalty to the other stockholders

and

to the

corporation."

Id.
___

Although the

Donahue case
_______

itself

dealt with

shareholder,

the majority's

the

court

treatment

expressly

did

of a

not

minority

limit

the

application of its strict fiduciary duty standard to majority

-1010

shareholders, and

the minority

stated that

may do

"[i]n the

equal damage

close corporation,

through unscrupulous

and

improper 'sharp dealings' with an unsuspecting majority." Id.


___

at

n. 17 (citing Helms v. Duckworth, 249 F.2d 482 (D.C. Cir.


_____
_________

1957)).

The first Massachusetts case

standard

to a

minority shareholder

Properties, Inc., 422


________________

Smith,
_____

to apply the

was

Smith v.
_____

N.E.2d 798 (Mass. App. Ct.

Donahue
_______

Atlantic
________

1981).

In

a provision in the corporate charter effectively gave

minority shareholders the

power to veto any

dividends.

the other

Although all

distribution of

shareholders desired

distribution of dividends, the

defendant steadfastly refused

to

because

agree

to

distribution

personally beneficial

to him.

nondistribution

The appeals court

was

held that

the majority could

seek protection from

the actions of

minority shareholder which were detrimental

of the corporation

Although the

drafted

in

to the interests

and the other shareholders.

court recognized

part

to

that the

protect

the

Id. at 801.
___

veto provision

minority

was

interests,

it

nevertheless determined that a minority shareholder was bound

to the Donahue standard of fiduciary responsibility when that


_______

shareholder's

actions

particular corporate

shareholder whose

issue should

be

controlled

issue.

conduct

bound by

Id.
___

the

disposition

of

at 803

n.9 ("'A

minority

is controlling

no different

on

particular

standard [than

the

-1111

majority].'") (quoting

Hetherington, The Minority's Duty of


_______________________

Loyalty in Close Corporations, 1972 Duke L.J. 921, 946).


_____________________________

The

Supreme

Judicial

Court

endorsed

the

Smith
_____

approach in Zimmerman v. Bogoff, 524 N.E.2d 849 (Mass. 1988),


_________
______

holding a minority shareholder to the same standard of strict

fiduciary

interested

duty as the

majority, where the

actions were harmful to the corporation and other

shareholders.

Id.
___

at 853-54.

"[t]he protections of Donahue


_______

The

court made

clear that

are not limited to

those with

less than 50% share ownership."

The

Chesterton

fiduciary

district

Donahue
_______

owes the

duty of

family

Id. at 853.
___

of

Company and

"utmost

breached

effectuate

his

that

proposed

shareholders would

its

establishes

that

other shareholders

and

loyalty."

The

discretion in finding that

duty.

If

transfer,

lose the

derived from

cases

good faith

court did not abuse its

Chesterton

they have

minority's self-

Chesterton

the

Company

substantial financial

the Company's

Subchapter S

were

to

and

its

benefits

status.

Such benefits are likely to continue if the Company maintains

its

Subchapter

status.

Chesterton,

disgruntled

overall Company

performance and in pursuit of

interest,

has

threatened

benefits.

No claim

and

other

its

to

destroy

is before us

shareholders

Chesterton over the years; we

his own self-

these

substantial

as to whether the

have

acted

fairly

decide only that the

-1212

with

Company

toward

district

court did not abuse its discretion in holding that he has not

acted fairly towards them.

Chesterton's attack focuses on part of the district

court's analysis:

At

the

time

of

the

election,

the

shareholders were informed and understood


that the
if a

Company would lose its S status

shareholder sold shares

corporation.

to another

By unanimously

electing S

status, the shareholders agreed that they


would not act in any way that would cause
the

Company

to

lose

the

considerable

benefits of S

status. . .

. In view

the agreement

regarding S

status, which

Defendant supported
cannot now
that

would

and facilitated,

sell his
terminate

shares in
the

of

he

a manner

Company's

status,

even though

entitled

he would

have been

to do so under the Articles had

there been no S status agreement.

A.W. Chesterton Co. v. Chesterton,


___________________
__________

Mass.

1997).

improperly

Chesterton

resurrects

voluntarily dismissed.

951 F. Supp. 291, 295 (D.

argues

contract

that

claim

We disagree:

this

that

discussion

plaintiffs

in context it is clear

that the court was discussing the shareholders' understanding

as

it

relates

to

Chesterton's

fiduciary

Massachusetts law, the expectations and

shareholders

are

determination.

relevant

to a

breach

duty.

Under

understanding of the

of

fiduciary duty

See, e.g., Wilkes v. Springside Nursing Home,


_________ ______
________________________

Inc., 353 N.E.2d 657, 664 (Mass. 1976) (holding that the duty
____

of

utmost

good faith

and

loyalty

at

a minimum

requires

shareholders

policies

to consider their

or

long-standing

actions in light

understandings

of company

of

the

-1313

shareholders).

whether

Viewed

in this

context,

it is

irrelevant

the agreement among the shareholders that they would

not act so as to destroy the Company's Subchapter S status is

legally enforceable.

sheds

light

on

The existence of the

the

Company's

expectations,

and

reinforces

Chesterton's

proposed

plan.

Chesterton owes

and

the

agreement simply

other

shareholders'

disloyal

nature

Further,

the

strict

of

duty

is created at law and would exist regardless

of any agreement.

Chesterton also

exception to Donahue.
_______

In

argues

that he

falls

fashioned an

exception to

Donahue,
_______

to maneuver in establishing

corporation."

If "the

Judicial

recognizing that

"the controlling group in a close corporation must

room

an

Wilkes v. Springside Nursing Home,


______
________________________

Inc., 353 N.E.2d 657, 663 (Mass. 1976), the Supreme


____

Court

within

have some

the business policy of the

controlling group can

demonstrate a

legitimate business purpose for its action," then it will not

be

held

to

have

violated

its

corporation and other shareholders.

fiduciary

Id.
___

duty

to

the

The court held that

the proffered legitimate business purpose defense would fail,

however, if the complaining

that the

same business

shareholder(s) could demonstrate

objective could

through a less harmful course of action.

Implicitly

would

further

his

conceding

own

that his

personal

-1414

have been

achieved

Id.
___

proposed

interests

but

transfer

not

the

interests

of

the

business,

legitimate business

Chesterton

purpose test

applies only

shareholders with management discretion

corporation,

and

that

he

is

argues

not

to

that

minority

or control over

in

such

the

the

position.

Chesterton proposes the adoption of a less demanding test for

non-managing minority shareholders that

action is for a "bona

purpose

reasons.

test, although

fide purpose."

creative,

inquires whether the

Chesterton's bona fide

fails

for

number

of

First, Massachusetts law has

rule.

The Massachusetts

business

purpose" must

not adopted any

cases make clear that a "legitimate

be

legitimate

purpose

corporation, not for the defendant shareholder.


___________

and Smith,
_____

acted

for example, the

for the
________

In Zimmerman
_________

defendant minority shareholders

to benefit their own interests, while disregarding the

interests

were

such

taken

of the corporation.

to

benefit

defendant in Smith argued


_____

The fact

themselves

that their actions

was

no

excuse.

that his use of the veto

The

power to

block the payment of dividends was at least partly due to his

own

legitimate

purpose."

purposes,

specifically

Smith, 422 N.E.2d at 800.


_____

"tax

avoidance

Regardless of the Smith


_____

defendant s personal

reasons for

payment of dividends,

duty

of

interests.

good

faith

Id. at 803.
___

refusing to

the refusal nevertheless

and

loyalty

The

to

the

Massachusetts

authorize the

violated his

corporation s

cases

do

not

-1515

provide any grounds for Chesterton s proposed test, and as

federal court

expand

See
___

ruling on

that law beyond

Massachusetts law,

its clearly

to

established boundaries.

F.D.I.C. v. Insurance Co. of N. Am.,


________
________________________

(1st Cir. 1997)

we hesitate

("We must apply the law

105 F.3d 778, 783

of Massachusetts as

given by its state legislature and state court decisions.").

In

addition,

Chesterton's

proposed

expansion

mistakes the purpose of the legitimate business purpose test.

The test is

designed to

prevent "the

placing] a strait jacket

Zimmerman,
_________

524 N.E.2d

on legitimate corporate

at

853.

control over the enterprise, he

discretion

Donahue remedy
_______

If

the

[from

activity."

defendant has

no

has no need for the business

that the Wilkes court intended to protect through


______

its

legitimate business

Smith and Zimmerman


_____
_________

to the Donahue
_______

Furthermore, as

explain, a minority shareholder

fiduciary duty precisely because

could and do affect the

other shareholders.

determine

purpose defense.

whether

is held

his actions

interests of the corporation and the

Here, because Chesterton's actions

the Company

retains

will

its advantageous

status, he unquestionably has control over that issue.

Chesterton did not establish

purpose

argue

for his

proposed transfer

one on appeal.

Indeed, if

a legitimate business

at trial,

there was no

Chesterton's shares because they were minority

is

little reason

to think

that

and

there will

does not

market for

shares, there

suddenly

be a

-1616

market

because

those

same

minority

transferred to corporate ownership.

shares

Further, Chesterton proposed

only approximately

10% of

would have

complete divestment.

been

There is no evidence of

any such effect.6

which hardly

have

his shares

to the

to transfer

corporations,

satisfied his

articulated goal

of

The district court

did not abuse

its

discretion.

1.

Chesterton's Chapter 156B argument


__________________________________

Chesterton

restrictions on

the

argues

that

the

transferability of

only

legitimate

Company

stock

are

those found in the 1975 Restated Articles of Organization and

that he

by

complied with the Articles'

providing

the Company

proposed transfer.

strict

Donahue
_______

shareholder s

802

the

proper

notice of

This argument misses the point.

fiduciary

otherwise legitimate

with

procedural requirements

obligations

actions, they

legal duties.

did

would add

not

his

If the

restrict

nothing to

See, e.g., Smith, 422 N.E.2d at


_________ _____

(minority shareholder breached his fiduciary duty to the

corporation

in

exercising veto

power

over dividends

that

corporate

charter gave

him).

breach of fiduciary duty claim

Chesterton

cannot defend

on the basis that he has

not

violated the Articles of Organization.

____________________

6.

Chesterton asserts that he had a potential buyer for an

interest in his new corporations.

That buyer was an old

friend of Chesterton's and the district court found this


rationale to be a sham.

-1717

Chesterton

also

asserts

that

any

transfer

restriction beyond those incorporated in the 1975 Articles is

invalid for failure to comply with the requirements

Gen. Laws ch.

87-98, which

156B.

Chesterton refers to

provide, inter alia,


__________

chapter 156B corporation

the

event that the

articles

that a

76, 77(d), and

shareholder in

is entitled to appraisal

corporation adopts any

of Mass.

rights in

amendment to its

which restrict the transferability of stock.

Those

sections also require that notice of the rights of dissenting

shareholders

be provided

in

the notice

of any

which the proposed transfer restrictions will be

meeting at

considered.

Chesterton

argues that the district court was precluded from

finding that

the 1985 Subchapter

implied restriction on the

their shares because

S election resulted

shareholders

the Company did

in an

ability to transfer

not comply with

Mass.

Gen. Laws ch. 156B.

Again, Chesterton s

provisions do not apply here.

argument is misguided.

These

The procedures and rights that

Chesterton refers to apply in only three situations: (1) when

the corporation makes

certain amendments to the

organization; (2) when certain

(3) when

the corporation sells

its assets.

86-98.

articles of

mergers are accomplished; and

all or substantially

Mass. Gen. Laws ch. 156B,

all of

76-77, 82-83, and

None of these situations exist in this case.

-1818

Chesterton argues that even

procedures do not

reveals

rights.

technically apply to this

strong

restrictions

public

policy

in the absence

This

if the 156B protective

argument

situation, 156B

disfavoring

of formal notice

fails

for

two

any transfer

and appraisal

reasons.

First,

Chesterton s

complete

strict

transfer

fiduciary

restriction.

transfer his shares in a

Company s S status.

the

duty does

Chesterton

result

was

in a

free

to

manner that would not terminate the

Second, the

Donahue doctrine
_______

not

is at

public policy embodied

least as

strong as

in

the policy

disfavoring transfer restrictions.

We reject all of

and

affirm

succeed

the district

on the

merits

Chesterton s inventive arguments,

court s

of their

finding

breach

that

plaintiffs

of fiduciary

duty

the Company

would

claim.

B.

Irreparable Harm
________________

The

district court

suffer irreparable harm

found that

from the

loss of

its Subchapter

status,

in

part

because

Chesterton argues that

the loss of

measurable,

equitable

Inc.,
____

it

relief.

102 F.3d

not

is

an

not

measurable.

the Company from

status is entirely

is inappropriate.

is

harm

because the harm to

its Subchapter S

equitable relief

that

abuse

Where

of

financial,

the harm

discretion

is not

to award

Ross-Simons of Warwick, Inc. v. Baccarat,


____________________________
_________

12, 19

(1st Cir.

-1919

1996) ("If

the plaintiff

suffers

substantial

measurable .

. .

injury

that

irreparable harm

is a

The loss of advantageous tax status can

finding of irreparable

Investors v.
_________

1007 (1st

status

injunction).

other

natural sequel.").

form the basis for a

See San Francisco Real Estate


___ __________________________

(relying on

findings

accurately

to

701 F.2d 1000,

loss of advantageous

support

tax

preliminary

The district court found that the actual degree

of the injury was not

increased

not

Real Estate Inv. Trust of Am.,


______________________________

Cir. 1983)

and

harm.

is

measurable, "because the amount of the

tax liability would be contingent on the Company's

future

earnings

and

distributions."

This

finding

is

supported by the record and common sense, and is not an abuse

of discretion.

Chesterton

suffer no

also

argues

that

the

Company

would

irreparable harm in the absence of the injunction,

because the Company could have achieved a return equal to the

Subchapter S status tax savings by redirecting the management

fee

BV

that the BV pays to the Company.

made

distributions

shareholders,

rather

of

than

its

to

He argues that if the

income

the

Company

management fee,

the shareholders

sums of money.

In addition, he asserts

fee

does

not

accurately

measure

directly

would receive

the

to

through

the

the

substantial

that the management

value

of

services

provided by

the Company to

could result

in

an

the BV, and

IRS reallocation

that this disparity

of

income,

in

turn

-2020

resulting in substantially greater taxes to the shareholders.

This argument,

regardless of

its accuracy,

is

irrelevant.

The fact that the Company could achieve greater distributions

for its shareholders

not alter

by redirecting the management

the fact that the

loss of Subchapter

fee does

S status is

injurious in any event.

For the same reasons,

that the

district court

we reject Chesterton's claim

improperly restricted

attempts to cross-examine the Company's

the nature

and propriety of

the district court's

of discretion.

F.3d 594,

Chesterton's

tax expert regarding

the management fee.

decision to exclude evidence

Stevens v.
_______

599 (1st Cir.

We review

for abuse

Bangor and Aroostock R.R. Co., 97


_____________________________

1996).

The

district court limited

Chesterton's proffered examination because

it found that the

testimony was collateral to the main issues in the case.

The

court also relied on the fact that for the years 1991 through

1993, the IRS had audited the Company's taxes and had made no

adjustments or comments regarding the management fee.

Such a

ruling was well within the court's discretion.

C.

Balance of Equities
___________________

The final consideration regarding

the propriety of

injunctive relief is whether, on balance, the harm plaintiffs

will

suffer from the

that

Chesterton will suffer

The

proposed transfers outweighs

district court found

if his transfers

that an injunction

-2121

the harm

are enjoined.

would not harm

Chesterton

advance

because the

his efforts

proposed sales

to sell

would

the stock.

that, "if

[Chesterton] was

unable to find

shares in

the Company, it

strains logic to

would

be able

to

corporations] when

find a

do little

The

to

court stated

a buyer

for his

believe that he

buyer

for shares

in [the

shell

their primary

assets are

the very

same

shares he was previously unable to

sell."

Chesterton claims

that by transferring the shares to his shell corporations, he

will somehow increase

the liquidity

of those

shares.

The

claim is counter-intuitive

support it.

that the

On

and no evidence was

this record,

the district

presented to

court's finding

potential harm to plaintiffs outweighs

the harm to

defendant was proper.

II. Chesterton s Counterclaim for Relief Under 156B


_______________________________________________

Finally,

Chesterton appeals

denial

of his

claim for

156B.

Chesterton argues

the

relief under

that

even if

district court's

Mass. Gen.

the district

properly determined that the Subchapter S election

restricted the

shareholders' rights to transfer

to a corporation,

exercise of his

he is now

entitled to

dissenter's rights under

Laws ch.

court

impliedly

their stock

notice and to

156B.

He

the

asserts

that the district court's decision is the first notice of the

restriction that he

entitled

has had, and that

to dissent

appraisal rights.

from the

under 156B he is

restriction

Chesterton's

claim

and enforce

to

156B

now

his

appraisal

-2222

rights

argument

fails

for

fails:

the same

that

reason

provision is

that

not

his general

triggered

156B

by this

situation.

The district court correctly

denied Chesterton's

misdirected claim to 156B appraisal rights.

The decision of the district court is affirmed.


________

-2323