USCA1 Opinion
United States Court of Appeals
For the First Circuit
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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.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, Chief U.S. District Judge]
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Before
Torruella, Chief Judge,
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Aldrich, Senior Circuit Judge,
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and Lynch, Circuit Judge.
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Martin F. Gaynor, with whom Harry L. Manion III was
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on brief, for appellees.
Lawrence P. Heffernan, with whom Michael D. Lurie
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and Peter L. Banis were on brief, for appellant.
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October 14, 1997
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LYNCH, Circuit Judge. This appeal involves the duties
LYNCH, Circuit Judge.
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imposed by Massachusetts law on a minority shareholder in a
closely held corporation. 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. Because such a transfer would
terminate the Company's advantageous Subchapter S status
under the Internal Revenue Code, the district court found
that the proposed transfer violated Chesterton's fiduciary
duty to the Company and enjoined him from proceeding with the
transfer. Chesterton appeals this finding and injunction, as
well as the district court's denial of Chesterton's
counterclaim for relief under M.G.L. ch. 156B. We affirm.
I.
There is little dispute about the facts which
emerged from the trial. While it is unclear whether
Chesterton is asserting that the district court's factual
conclusions are not supported by the evidence, we state the
facts as the court could have found them. Cambridge Plating
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Co. v. Napco, Inc., 85 F.3d 752, 756 (1st Cir. 1996).
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The Company has been a closely held Massachusetts
corporation since its inception in 1885, and is currently
owned and operated by the descendants of the Company's
founder, Arthur W. Chesterton. Chesterton, the defendant in
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this case and the grandson of the original Arthur Chesterton,
is currently the Company's largest shareholder, with 27.06%
of the Company s stock. The Company and its affiliates
manufacture mechanical seals, packaging, pumps and related
products, which are distributed throughout the world.
Two corporate events set the stage. The first
occurred in 1975, when the shareholders of the Company
approved the Company's Restated Articles of Organization
("the Articles"). The Articles provide the Company with a
right of first refusal in the event that a shareholder seeks
to transfer her shares to an individual or entity outside the
immediate Chesterton family. The shareholder must give the
Company 30 days notice; the Company may avoid the sale by
opting to purchase the stock within the 30 days. 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 to
a Subchapter S corporation. The Board perceived Subchapter S
status as advantageous to the Company because it allows
shareholders in a small business corporation to avoid the
double taxation of income to which shareholders in a
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Subchapter C corporation are subject. The income of a
Subchapter C corporation is taxed first 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 dividends. A Subchapter S corporation, in
contrast, is not taxed at 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.
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1361 - 1399.
In order to qualify for Subchapter S treatment, a
corporation must be a domestic corporation which does not:
(1) have more than seventy-five shareholders, (2) have a
corporation or other non-individual as a shareholder, (3)
have a non-resident alien as a shareholder, and (4) have more
than one class of stock. 26 U.S.C. 1361(b). Failure to
abide by any of these limitations results in automatic
termination of Subchapter S status. 26 U.S.C. 1362(d)(2).
After the Company Board voted to adopt Subchapter
S status, the officers and directors sought to inform the
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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.
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shareholders about the benefits and limitations of the S
election, and recommended that the shareholders give their
consent. Under the Internal Revenue Code, the unanimous
consent of the shareholders of a corporation is required in
order to finalize a Subchapter S election. 26 U.S.C.
1362(a)(2). As an officer and director of the Company at the
time, Chesterton was heavily involved in this process. He
led and participated in shareholder meetings regarding the
Subchapter S election. At those meetings the shareholders
were provided with information regarding the benefits of
Subchapter S election, as well as the limitations it imposed.
The shareholders unanimously consented to the Subchapter S
election. Implicit in this consent was a general
understanding 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 Company's performance, including its declining
profits, heavy debt, and credit problems.2 Chesterton also
objects to a financial arrangement that the Company has with
Chesterton International, B.V. ("BV"), a Company affiliate.3
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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.
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Under the arrangement, the affiliate BV pays the Company a
large management fee,4 which has allowed the Company to
continue to pay dividends to its shareholders, despite its
poor financial performance. Chesterton believes that this
arrangement masks the Company s dire financial straights. He
.
also objects to the arrangement because much of the
management 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 the Company,
Chesterton sought to sell his Company stock. He found little
interest because all he could offer was a minority of
shares.5 After some failed efforts to locate an investor
willing to purchase his stock outright, Chesterton devised
the scheme at issue in this case. Chesterton proposed to
transfer a portion of his shares to two shell corporations
which are wholly-owned by him. Chesterton complied with the
Articles of Organization by providing the Company with the
proper notice of his proposed transfer so that it could
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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.
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purchase his shares. The Company, however, declined because
it lacks the ability to purchase the shares.
When the Company would not purchase his shares,
Chesterton sought to proceed with the 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 the Company s status as a Subchapter S
corporation. Should a corporation become a Company
shareholder, as it would under Chesterton's proposed
transfer, the Subchapter S status terminates automatically.
26 U.S.C. 1362(d)(2). If Chesterton were to consummate
his proposed transfer to the shell corporations, the Company
would revert to Subchapter C status. The Company's
Subchapter S status enabled it to distribute an additional
$5.3 million in dividends between 1985 and 1995. Reversion
to Subchapter C status would represent a significant
financial loss for the Company 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 Company because it is currently grandfathered
under an old provision which exempted Subchapter S
corporations from taxes on the sale of corporate assets. See
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26 U.S.C. 1374(c)(1). Even if the Company eventually
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regained its Subchapter S status, it would permanently lose
its grandfathered status.
Fearing the loss of its Subchapter S status, the
Company and its shareholders instituted suit, seeking to
enjoin Chesterton from effectuating his plan. The original
complaint alleged breach of fiduciary duty, breach of
contract, breach of implied covenant of good faith and fair
dealing, and interference with an advantageous relationship.
Before trial, the parties stipulated to a dismissal of all
claims, with prejudice, except for the breach of fiduciary
duty claim. Plaintiffs also agreed to "waive their claims
for damages, but [not] their claims for equitable relief."
After a bench trial, the district court ruled that the
proposed transfers would violate Chesterton's fiduciary duty
under Massachusetts law and that they would result in
irreparable harm to the Company. The court enjoined the
transfers and denied Chesterton's counterclaim for monetary
relief under Mass. Gen. Laws ch. 156B.
Chesterton argues that the district court
improperly determined the scope of Chesterton's fiduciary
duty under Massachusetts law. He asserts that the district
court improperly resurrected the waived contract claim by
discussing the general agreement among the shareholders not
to disrupt the Company's Subchapter S status. He argues that
the district court improperly concluded that the Subchapter S
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election imposed an implied restriction on transferability of
stock, where the Company did not follow the legal
requirements for imposing stock transfer restrictions under
Mass. Gen. Laws ch. 156B. Finally, he argues that the
district court improperly restricted 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
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Tribe v. Narragansett Elec. Co., 89 F.3d 908, 912 (1st Cir.
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1996) (citing Caroline T. v. Hudson Sch. Dist., 915 F.2d 752,
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754-55 (1st Cir. 1990)). The standard for issuing a
permanent injunction requires the district court to find that
(1) plaintiffs prevail on the merits; (2) plaintiffs would
suffer irreparable injury in the absence of injunctive
relief; (3) the harm to plaintiffs would outweigh the harm
the defendant would suffer from the imposition of an
injunction; and (4) the public interest would not be
adversely affected by an injunction. Indian Motorcycle
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Assoc. III Ltd. Partnership v. Massachusetts Housing Fin.
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Agency, 66 F.3d 1246, 1249 (1st Cir. 1995) (internal citation
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omitted). The district court found, and we agree, that the
public interest was not at issue in this case. We turn to
the remaining three factors.
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A. Success on the Merits
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In Donahue v. Rodd Electrotype Co. of New England,
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Inc., 328 N.E.2d 505 (Mass. 1975), the Massachusetts Supreme
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Judicial Court first announced that shareholders in a closely
held corporation owe an elevated fiduciary duty to one
another. See generally, Peter M. Rosenblum, Corporate
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Fiduciary Duties in Massachusetts and Delaware, in How to
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Incorporate and Counsel a Business 331, 354-366
(Massachusetts Continuing Legal Education, Inc., ed., 1996)
(providing an informative review of Donahue and its progeny).
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After noting that close corporations bear a "striking
resemblance to a partnership," the court stated that "the
relationship among the stockholders must be one of trust,
confidence and absolute loyalty if the enterprise is to
succeed." Id. at 515. The court condemned "[d]isloyalty and
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self-seeking conduct on the part of any stockholder" in a
close corporation, and held that such shareholders owe one
another a duty of "utmost good faith and loyalty." Id. The
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court stated that stockholders in a close corporation "may
not act out of avarice, expediency or self-interest in
derogation of their duty of loyalty to the other stockholders
and to the corporation." Id. Although the Donahue case
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itself dealt with the majority's treatment of a minority
shareholder, the court expressly did not limit the
application of its strict fiduciary duty standard to majority
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shareholders, and stated that "[i]n the close corporation,
the minority may do equal damage through unscrupulous and
improper 'sharp dealings' with an unsuspecting majority." Id.
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at n. 17 (citing Helms v. Duckworth, 249 F.2d 482 (D.C. Cir.
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1957)).
The first Massachusetts case to apply the Donahue
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standard to a minority shareholder was Smith v. Atlantic
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Properties, Inc., 422 N.E.2d 798 (Mass. App. Ct. 1981). In
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Smith, a provision in the corporate charter effectively gave
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minority shareholders the power to veto any distribution of
dividends. Although all the other shareholders desired a
distribution of dividends, the defendant steadfastly refused
to agree to a distribution because nondistribution was
personally beneficial to him. The appeals court held that
the majority could seek protection from the actions of the
minority shareholder which were detrimental to the interests
of the corporation and the other shareholders. Id. at 801.
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Although the court recognized that the veto provision was
drafted in part to protect minority interests, it
nevertheless determined that a minority shareholder was bound
to the Donahue standard of fiduciary responsibility when that
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shareholder's actions controlled the disposition of a
particular corporate issue. Id. at 803 n.9 ("'A minority
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shareholder whose conduct is controlling on a particular
issue should be bound by no different standard [than the
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majority].'") (quoting Hetherington, The Minority's Duty of
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Loyalty in Close Corporations, 1972 Duke L.J. 921, 946).
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The Supreme Judicial Court endorsed the Smith
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approach in Zimmerman v. Bogoff, 524 N.E.2d 849 (Mass. 1988),
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holding a minority shareholder to the same standard of strict
fiduciary duty as the majority, where the minority's self-
interested actions were harmful to the corporation and other
shareholders. Id. at 853-54. The court made clear that
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"[t]he protections of Donahue are not limited to those with
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less than 50% share ownership." Id. at 853.
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The Donahue family of cases establishes that
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Chesterton owes the Company and its other shareholders a
fiduciary duty of "utmost good faith and loyalty." The
district court did not abuse its discretion in finding that
Chesterton breached that duty. If Chesterton were to
effectuate his proposed transfer, the Company and its
shareholders would lose the substantial financial benefits
they have derived from the Company's Subchapter S status.
Such benefits are likely to continue if the Company maintains
its Subchapter S status. Chesterton, disgruntled with
overall Company performance and in pursuit of his own self-
interest, has threatened to destroy these substantial
benefits. No claim is before us as to whether the Company
and its other shareholders have acted fairly toward
Chesterton over the years; we decide only that the district
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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 S election, the
shareholders were informed and understood
that the Company would lose its S status
if a shareholder sold shares to another
corporation. 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 of
the agreement regarding S status, which
Defendant supported and facilitated, he
cannot now sell his shares in a manner
that would terminate the Company's S
status, even though he would have been
entitled to do so under the Articles had
there been no S status agreement.
A.W. Chesterton Co. v. Chesterton, 951 F. Supp. 291, 295 (D.
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Mass. 1997). Chesterton argues that this discussion
improperly resurrects a contract claim that plaintiffs
voluntarily dismissed. We disagree: in context it is clear
that the court was discussing the shareholders' understanding
as it relates to Chesterton's fiduciary duty. Under
Massachusetts law, the expectations and understanding of the
shareholders are relevant to a breach of fiduciary duty
determination. See, e.g., Wilkes v. Springside Nursing Home,
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Inc., 353 N.E.2d 657, 664 (Mass. 1976) (holding that the duty
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of utmost good faith and loyalty at a minimum requires
shareholders to consider their actions in light of company
policies or long-standing understandings of the
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shareholders). Viewed in this context, it is irrelevant
whether the agreement among the shareholders that they would
not act so as to destroy the Company's Subchapter S status is
legally enforceable. The existence of the agreement simply
sheds light on the Company's and other shareholders'
expectations, and reinforces the disloyal nature of
Chesterton's proposed plan. Further, the strict duty
Chesterton owes is created at law and would exist regardless
of any agreement.
Chesterton also argues that he falls within an
exception to Donahue. In Wilkes v. Springside Nursing Home,
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Inc., 353 N.E.2d 657, 663 (Mass. 1976), the Supreme Judicial
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Court fashioned an exception to Donahue, recognizing that
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"the controlling group in a close corporation must have some
room to maneuver in establishing the business policy of the
corporation." If "the controlling group can demonstrate a
legitimate business purpose for its action," then it will not
be held to have violated its fiduciary duty to the
corporation and other shareholders. Id. The court held that
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the proffered legitimate business purpose defense would fail,
however, if the complaining shareholder(s) could demonstrate
that the same business objective could have been achieved
through a less harmful course of action. Id.
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Implicitly conceding that his proposed transfer
would further his own personal interests but not the
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interests of the business, Chesterton argues that the
legitimate business purpose test applies only to minority
shareholders with management discretion or control over the
corporation, and that he is not in such a position.
Chesterton proposes the adoption of a less demanding test for
non-managing minority shareholders that inquires whether the
action is for a "bona fide purpose." Chesterton's bona fide
purpose test, although creative, fails for a number of
reasons.
First, Massachusetts law has not adopted any such
rule. The Massachusetts cases make clear that a "legitimate
business purpose" must be a legitimate purpose for the
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corporation, not for the defendant shareholder. In Zimmerman
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and Smith, for example, the defendant minority shareholders
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acted to benefit their own interests, while disregarding the
interests of the corporation. The fact that their actions
were taken to benefit themselves was no excuse. The
defendant in Smith argued that his use of the veto power to
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block the payment of dividends was at least partly due to his
own legitimate purposes, specifically a "tax avoidance
purpose." Smith, 422 N.E.2d at 800. Regardless of the Smith
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defendant s personal reasons for refusing to authorize the
payment of dividends, the refusal nevertheless violated his
duty of good faith and loyalty to the corporation s
interests. Id. at 803. The Massachusetts cases do not
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provide any grounds for Chesterton s proposed test, and as a
federal court ruling on Massachusetts law, we hesitate to
expand that law beyond its clearly established boundaries.
See F.D.I.C. v. Insurance Co. of N. Am., 105 F.3d 778, 783
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(1st Cir. 1997) ("We must apply the law 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 Donahue remedy [from
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placing] a strait jacket on legitimate corporate activity."
Zimmerman, 524 N.E.2d at 853. If the defendant has no
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control over the enterprise, he has no need for the business
discretion that the Wilkes court intended to protect through
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its legitimate business purpose defense. Furthermore, as
Smith and Zimmerman explain, a minority shareholder is held
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to the Donahue fiduciary duty precisely because his actions
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could and do affect the interests of the corporation and the
other shareholders. Here, because Chesterton's actions will
determine whether the Company retains its advantageous S
status, he unquestionably has control over that issue.
Chesterton did not establish a legitimate business
purpose for his proposed transfer at trial, and does not
argue one on appeal. Indeed, if there was no market for
Chesterton's shares because they were minority shares, there
is little reason to think that there will suddenly be a
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market because those same minority shares have been
transferred to corporate ownership. There is no evidence of
any such effect.6 Further, Chesterton proposed to transfer
only approximately 10% of his shares to the corporations,
which hardly would have satisfied his articulated goal of
complete divestment. The district court did not abuse its
discretion.
1. Chesterton's Chapter 156B argument
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Chesterton argues that the only legitimate
restrictions on the transferability of Company stock are
those found in the 1975 Restated Articles of Organization and
that he complied with the Articles' procedural requirements
by providing the Company with the proper notice of his
proposed transfer. This argument misses the point. If the
strict Donahue fiduciary obligations did not restrict
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otherwise legitimate actions, they would add nothing to a
shareholder s legal duties. See, e.g., Smith, 422 N.E.2d at
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802 (minority shareholder breached his fiduciary duty to the
corporation in exercising veto power over dividends that
corporate charter gave him). Chesterton cannot defend a
breach of fiduciary duty claim on the basis that he has not
violated the Articles of Organization.
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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.
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Chesterton also asserts that any transfer
restriction beyond those incorporated in the 1975 Articles is
invalid for failure to comply with the requirements of Mass.
Gen. Laws ch. 156B. Chesterton refers to 76, 77(d), and
87-98, which provide, inter alia, that a shareholder in a
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chapter 156B corporation is entitled to appraisal rights in
the event that the corporation adopts any amendment to its
articles 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 meeting at
which the proposed transfer restrictions will be considered.
Chesterton argues that the district court was precluded from
finding that the 1985 Subchapter S election resulted in an
implied restriction on the shareholders ability to transfer
their shares because the Company did not comply with Mass.
Gen. Laws ch. 156B.
Again, Chesterton s argument is misguided. These
provisions do not apply here. The procedures and rights that
Chesterton refers to apply in only three situations: (1) when
the corporation makes certain amendments to the articles of
organization; (2) when certain mergers are accomplished; and
(3) when the corporation sells all or substantially all of
its assets. Mass. Gen. Laws ch. 156B, 76-77, 82-83, and
86-98. None of these situations exist in this case.
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Chesterton argues that even if the 156B protective
procedures do not technically apply to this situation, 156B
reveals a strong public policy disfavoring any transfer
restrictions in the absence of formal notice and appraisal
rights. This argument fails for two reasons. First,
Chesterton s strict fiduciary duty does not result in a
complete transfer restriction. Chesterton was free to
transfer his shares in a manner that would not terminate the
Company s S status. Second, the public policy embodied in
the Donahue doctrine is at least as strong as the policy
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disfavoring transfer restrictions.
We reject all of Chesterton s inventive arguments,
and affirm the district court s finding that plaintiffs
succeed on the merits of their breach of fiduciary duty
claim.
B. Irreparable Harm
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The district court found that the Company would
suffer irreparable harm from the loss of its Subchapter S
status, in part because that harm is not measurable.
Chesterton argues that because the harm to the Company from
the loss of its Subchapter S status is entirely financial,
equitable relief is inappropriate. Where the harm is not
measurable, it is not an abuse of discretion to award
equitable relief. Ross-Simons of Warwick, Inc. v. Baccarat,
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Inc., 102 F.3d 12, 19 (1st Cir. 1996) ("If the plaintiff
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suffers a substantial injury that is not accurately
measurable . . . irreparable harm is a natural sequel.").
The loss of advantageous tax status can form the basis for a
finding of irreparable harm. See San Francisco Real Estate
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Investors v. Real Estate Inv. Trust of Am., 701 F.2d 1000,
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1007 (1st Cir. 1983) (relying on loss of advantageous tax
status and other findings to support a preliminary
injunction). The district court found that the actual degree
of the injury was not measurable, "because the amount of the
increased 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 also argues that the Company would
suffer no 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 that the BV pays to the Company. He argues that if the
BV made distributions of its income directly to the
shareholders, rather than to the Company through the
management fee, the shareholders would receive substantial
sums of money. In addition, he asserts that the management
fee does not accurately measure the value of services
provided by the Company to the BV, and that this disparity
could result in an IRS reallocation of income, in turn
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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 by redirecting the management fee does
not alter the fact that the loss of Subchapter S status is
injurious in any event.
For the same reasons, we reject Chesterton's claim
that the district court improperly restricted Chesterton's
attempts to cross-examine the Company's tax expert regarding
the nature and propriety of the management fee. We review
the district court's decision to exclude evidence for abuse
of discretion. Stevens v. Bangor and Aroostock R.R. Co., 97
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F.3d 594, 599 (1st Cir. 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
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The final consideration regarding the propriety of
injunctive relief is whether, on balance, the harm plaintiffs
will suffer from the proposed transfers outweighs the harm
that Chesterton will suffer if his transfers are enjoined.
The district court found that an injunction would not harm
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Chesterton because the proposed sales would do little to
advance his efforts to sell the stock. The court stated
that, "if [Chesterton] was unable to find a buyer for his
shares in the Company, it strains logic to believe that he
would be able to find a buyer for shares in [the shell
corporations] when 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 and no evidence was presented to
support it. On this record, the district court's finding
that the potential harm to plaintiffs outweighs the harm to
defendant was proper.
II. Chesterton s Counterclaim for Relief Under 156B
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Finally, Chesterton appeals the district court's
denial of his claim for relief under Mass. Gen. Laws ch.
156B. Chesterton argues that even if the district court
properly determined that the Subchapter S election impliedly
restricted the shareholders' rights to transfer their stock
to a corporation, he is now entitled to notice and to the
exercise of his dissenter's rights under 156B. He asserts
that the district court's decision is the first notice of the
restriction that he has had, and that under 156B he is now
entitled to dissent from the restriction and enforce his
appraisal rights. Chesterton's claim to 156B appraisal
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rights fails for the same reason that his general 156B
argument fails: that provision is not triggered by this
situation. The district court correctly denied Chesterton's
misdirected claim to 156B appraisal rights.
The decision of the district court is affirmed.
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