A.W. Chesterton Co. v. Chesterton

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, Circuit Judge. This appeal involves the duties
LYNCH, Circuit Judge.

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

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

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.

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

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

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

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

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

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 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

Assoc. III Ltd. Partnership v. Massachusetts Housing Fin.

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

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

In Donahue v. Rodd Electrotype Co. of New England,

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

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

Fiduciary Duties in Massachusetts and Delaware, in How to

Incorporate and Counsel a Business 331, 354-366

(Massachusetts Continuing Legal Education, Inc., ed., 1996)

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

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

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

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

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.

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

1957)).

The first Massachusetts case to apply the Donahue

standard to a minority shareholder was Smith v. Atlantic

Properties, Inc., 422 N.E.2d 798 (Mass. App. Ct. 1981). In

Smith, a provision in the corporate charter effectively gave

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.

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

shareholder's actions controlled the disposition of a

particular corporate issue. Id. at 803 n.9 ("'A minority

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

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 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

"[t]he protections of Donahue are not limited to those with

less than 50% share ownership." Id. at 853.

The Donahue family of cases establishes that

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.

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,

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

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,

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

Court fashioned an exception to Donahue, recognizing that

"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

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.

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

corporation, not for the defendant shareholder. In Zimmerman

and Smith, for example, the defendant minority shareholders

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

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

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

(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

placing] a strait jacket on legitimate corporate activity."

Zimmerman, 524 N.E.2d at 853. If the defendant has no

control over the enterprise, he has no need for the business

discretion that the Wilkes court intended to protect through

its legitimate business purpose defense. Furthermore, as

Smith and Zimmerman explain, a minority shareholder is held

to the Donahue fiduciary duty precisely because his actions

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

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

otherwise legitimate actions, they would add nothing to a

shareholder s legal duties. See, e.g., Smith, 422 N.E.2d at

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.

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

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

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

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,

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

Investors v. Real Estate Inv. Trust of Am., 701 F.2d 1000,

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

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

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

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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