Escolar Documentos
Profissional Documentos
Cultura Documentos
No. 97-1268
Plaintiffs,Appellees,
v.
ARTHUR W. CHESTERTON,
Defendants,Appellant.
____________________
____________________
Before
____________________
D. Lurie
______________________
_________________
____________________
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
his shares,
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.
well
the
as
district
court's
denial
of
Chesterton's
We affirm.
I.
There
emerged
from
Chesterton
is
the
little
dispute
trial.
is asserting
While
that
about the
it
is
facts
unclear
the district
whether
court's factual
which
state the
Cambridge Plating
_________________
The Company
corporation since
owned
and operated
founder,
its inception
by
the
in 1885,
descendants
Arthur W. Chesterton.
-22
held Massachusetts
and is
of
the
currently
Company's
is currently the
of
the
Company s stock.
manufacture
The Company
mechanical seals,
and
27.06%
its affiliates
packaging, pumps
and related
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
of
Organization
Company 30
opting
days notice;
to purchase the
stock within
avoid the
the 30
days.
give the
sale by
If the
focuses
The second
occurred in
1985,
when the
Company's
a Subchapter S corporation.
status
as
advantageous
shareholders in
double
taxation
a small
of
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
the form
of
contrast,
dividends.
A Subchapter
is not taxed at
corporation,
in
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
than seventy-five
or other
treatment, a
shareholders,
non-individual as
does not:
(2) have
shareholder, (3)
than one
abide
class of stock.
by any
termination of
of
these
26 U.S.C.
limitations
1361(b).
results
Failure
in
to
automatic
1362(d)(2).
S status,
the officers
and directors
sought to
inform the
____________________
1.
Chesterton
-4-
shareholders
about the
benefits and
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.
time,
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
The
shareholders unanimously
election.
Implicit
understanding
in
consented to the
this
consent
Subchapter S
was
general
status.
with
the
profits,
Company's
heavy debt,
performance,
including
its
declining
Chesterton also
a Company affiliate.3
____________________
2.
3.
-55
Under
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
also
objects
management
to
the
arrangement
because
much
of
this
He
the
Company employee.
Because
of his
dissatisfaction with
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
his proposed
transfer
so that
with the
it
could
____________________
4.
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.
-66
purchase
his shares.
When the
Chesterton sought
Company
to proceed
would not
with the
purchase his
shares,
transfer.
But that
status.
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
would
$5.3
the Company s
to
Subchapter
S status enabled
status
The
it to distribute
Subchapter
status.
would
an additional
represent
Company's
Reversion
significant
Once a
five years.
26 U.S.C. 1362(g).
effect on the
under
an
Company because it is
old
provision
which
currently grandfathered
exempted
Subchapter
26
U.S.C.
1374(c)(1).
Even if
-77
the
See
___
Company eventually
S status, it would
permanently lose
Fearing
Company
and its
the loss of
its Subchapter S
status, the
shareholders
instituted suit,
seeking
complaint
alleged
breach
of
fiduciary
claims,
duty claim.
for
Plaintiffs also
breach
parties stipulated to
The original
duty,
to
of
fair
relationship.
a dismissal of
all
of fiduciary
agreed to "waive
their claims
equitable relief."
After
bench trial,
the
district
court ruled
that
the
under
Massachusetts
irreparable harm
transfers and
to
law
and
that
the Company.
they
The
would
duty
result
court enjoined
in
the
for monetary
Chesterton
argues
improperly
determined the
duty under
Massachusetts law.
court
scope
improperly resurrected
that
the
district
of Chesterton's
He asserts
the waived
court
fiduciary
contract claim
by
not
He argues that
-88
stock,
where
the
Company
Mass.
Gen. Laws
district
court
ch.
did
not
follow
the
156B.
improperly
Finally,
he
restricted
argues that
legal
under
the
Chesterton's
presentation of
accounting practices.
II.
injunction for
abuse
of discretion.
Narragansett Indian
____________________
754-55
(1st
Cir.
1990)).
The
standard
for
issuing
(1)
plaintiffs prevail on
suffer
irreparable
relief; (3)
the
injury
the harm to
defendant
would
in
the
plaintiffs would
absence
of
injunctive
suffer
from
the
imposition
the harm
of
an
injunction;
adversely
and
(4)
affected by
the
an
public
interest
injunction.
would
not
be
Indian Motorcycle
__________________
omitted).
The
not at issue in
-99
this case.
We
turn to
A.
In
Inc.,
____
held
corporation owe
another.
an
elevated
See generally,
______________
Peter
fiduciary
M.
duty
Rosenblum,
Incorporate
and
Counsel
Business
to
one
Corporate
_________
in How
__
331,
to
354-366
1996)
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"
in a close
expediency
or
in a
owe one
of
"striking
stated that
must be
the
act out
bear
the court
the stockholders
court
corporations
a partnership,"
relationship among
confidence
close
The
corporation "may
self-interest
in
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
-1010
shareholders, and
the minority
stated that
may do
"[i]n the
equal damage
close corporation,
through unscrupulous
and
at
1957)).
standard
to a
minority shareholder
Smith,
_____
to apply the
was
Smith v.
_____
Donahue
_______
Atlantic
________
1981).
In
dividends.
the other
Although all
distribution of
shareholders desired
to
because
agree
to
distribution
personally beneficial
to him.
nondistribution
was
held that
the actions of
of the corporation
Although the
drafted
in
to the interests
court recognized
part
to
that the
protect
the
Id. at 801.
___
veto provision
minority
was
interests,
it
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
The
Supreme
Judicial
Court
endorsed
the
Smith
_____
fiduciary
interested
duty as the
shareholders.
Id.
___
at 853-54.
The
court made
clear that
those with
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
duty.
If
transfer,
lose the
derived from
cases
good faith
Chesterton
they have
minority's self-
Chesterton
the
Company
substantial financial
the Company's
Subchapter S
were
to
and
its
benefits
status.
its
Subchapter
status.
Chesterton,
disgruntled
overall Company
interest,
has
threatened
benefits.
No claim
and
other
its
to
destroy
is before us
shareholders
these
substantial
as to whether the
have
acted
fairly
-1212
with
Company
toward
district
court did not abuse its discretion in holding that he has not
court's analysis:
At
the
time
of
the
election,
the
corporation.
to another
By unanimously
electing S
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
Mass.
1997).
improperly
Chesterton
resurrects
voluntarily dismissed.
argues
contract
that
claim
We disagree:
this
that
discussion
plaintiffs
in context it is clear
as
it
relates
to
Chesterton's
fiduciary
shareholders
are
determination.
relevant
to a
breach
duty.
Under
understanding of the
of
fiduciary duty
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
legally enforceable.
sheds
light
on
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
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
room
an
Court
within
have some
demonstrate a
be
held
to
have
violated
its
fiduciary
Id.
___
duty
to
the
that the
same business
objective could
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
corporation,
and
that
he
is
argues
not
to
that
minority
or control over
in
such
the
the
position.
purpose
reasons.
test, although
fide purpose."
creative,
fails
for
number
of
rule.
The Massachusetts
business
purpose" must
be
legitimate
purpose
and Smith,
_____
acted
for the
________
In Zimmerman
_________
interests
were
such
taken
of the corporation.
to
benefit
The fact
themselves
was
no
excuse.
The
power to
own
legitimate
purpose."
purposes,
specifically
"tax
avoidance
defendant s personal
reasons for
payment of dividends,
duty
of
interests.
good
faith
Id. at 803.
___
refusing to
and
loyalty
The
to
the
Massachusetts
authorize the
violated his
corporation s
cases
do
not
-1515
federal court
expand
See
___
ruling on
Massachusetts law,
its clearly
to
established boundaries.
we hesitate
of Massachusetts as
In
addition,
Chesterton's
proposed
expansion
The test is
designed to
prevent "the
Zimmerman,
_________
524 N.E.2d
on legitimate corporate
at
853.
discretion
Donahue remedy
_______
If
the
[from
activity."
defendant has
no
its
legitimate business
to the Donahue
_______
Furthermore, as
other shareholders.
determine
purpose defense.
whether
is held
his actions
the Company
retains
will
its advantageous
purpose
argue
for his
proposed transfer
one on appeal.
Indeed, if
a legitimate business
at trial,
there was no
is
little reason
to think
that
and
there will
does not
market for
shares, there
suddenly
be a
-1616
market
because
those
same
minority
shares
only approximately
10% of
would have
complete divestment.
been
There is no evidence of
which hardly
have
his shares
to the
to transfer
corporations,
satisfied his
articulated goal
of
its
discretion.
1.
Chesterton
restrictions on
the
argues
that
the
transferability of
only
legitimate
Company
stock
are
that he
by
providing
the Company
proposed transfer.
strict
Donahue
_______
shareholder s
802
the
proper
notice of
fiduciary
otherwise legitimate
with
procedural requirements
obligations
actions, they
legal duties.
did
would add
not
his
If the
restrict
nothing to
corporation
in
exercising veto
power
over dividends
that
corporate
charter gave
him).
Chesterton
cannot defend
not
____________________
6.
-1717
Chesterton
also
asserts
that
any
transfer
87-98, which
156B.
Chesterton refers to
the
articles
that a
shareholder in
is entitled to appraisal
of Mass.
rights in
amendment to its
Those
shareholders
be provided
in
the notice
of any
meeting at
considered.
Chesterton
finding that
S election resulted
shareholders
in an
ability to transfer
Mass.
Again, Chesterton s
argument is misguided.
These
(3) when
its assets.
86-98.
articles of
all or substantially
all of
-1818
procedures do not
reveals
rights.
strong
restrictions
public
policy
in the absence
This
argument
situation, 156B
disfavoring
of formal notice
fails
for
two
any transfer
and appraisal
reasons.
First,
Chesterton s
complete
strict
transfer
fiduciary
restriction.
Company s S status.
the
duty does
Chesterton
result
was
in a
free
to
Second, the
Donahue doctrine
_______
not
is at
least as
strong as
in
the policy
We reject all of
and
affirm
succeed
the district
on the
merits
court s
of their
finding
breach
that
plaintiffs
of fiduciary
duty
the Company
would
claim.
B.
Irreparable Harm
________________
The
district court
found that
from the
loss of
its Subchapter
status,
in
part
because
the loss of
measurable,
equitable
Inc.,
____
it
relief.
102 F.3d
not
is
an
not
measurable.
status is entirely
is inappropriate.
is
harm
its Subchapter S
equitable relief
that
abuse
Where
of
financial,
the harm
discretion
is not
to award
12, 19
(1st Cir.
-1919
1996) ("If
the plaintiff
suffers
substantial
measurable .
. .
injury
that
irreparable harm
is a
finding of irreparable
Investors v.
_________
1007 (1st
status
injunction).
other
natural sequel.").
(relying on
findings
accurately
to
loss of advantageous
support
tax
preliminary
increased
not
Cir. 1983)
and
harm.
is
future
earnings
and
distributions."
This
finding
is
of discretion.
Chesterton
suffer no
also
argues
that
the
Company
would
fee
BV
made
distributions
shareholders,
rather
of
than
its
to
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
value
of
services
provided by
the Company to
could result
in
an
IRS reallocation
of
income,
in
turn
-2020
This argument,
regardless of
its accuracy,
is
irrelevant.
not alter
loss of Subchapter
fee does
S status is
that the
district court
improperly restricted
the nature
and propriety of
of discretion.
F.3d 594,
Chesterton's
Stevens v.
_______
We review
for abuse
1996).
The
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
Such a
C.
Balance of Equities
___________________
the propriety of
will
that
The
if his transfers
that an injunction
-2121
the harm
are enjoined.
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
sell."
Chesterton claims
the liquidity
of those
shares.
The
claim is counter-intuitive
support it.
that the
On
this record,
the district
presented to
court's finding
the harm to
Finally,
Chesterton appeals
denial
of his
claim for
156B.
Chesterton argues
the
relief under
that
even if
district court's
Mass. Gen.
the district
restricted the
to a corporation,
exercise of his
he is now
entitled to
Laws ch.
court
impliedly
their stock
notice and to
156B.
He
the
asserts
restriction that he
entitled
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.
denied Chesterton's
-2323