A.W. CHESTERTON CO., INC. V. CHESTERTON
128 F.3d 1 (1st Cir. 1997)
NATURE OF THE CASE: This appeal involves the duties imposed by Massachusetts law on a
minority shareholder (Chesterton (D)in a closely held corporation and a court ordered
injunction related to the transfer of shares in violation of that duty.
FACTS: Chesterton (P) has been a closely held Massachusetts corporation since its
inception in 1885. D is currently the Company's largest shareholder, with 27.06% of the
Company's stock. In 1975 shareholders approved the Company's Restated Articles of
Organization which 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. In 1985, 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. Under the Internal Revenue Code, the unanimous consent of the shareholders of a
corporation is required in order to finalize a Subchapter S election. D led and participated
in shareholder meetings regarding the Subchapter S election. 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. Eventually D sought to sell his Company stock. D proposed to
transfer a portion of his shares to two shell corporations which are wholly-owned by him. D
provided P with the proper notice of his proposed transfer so that it could purchase his
shares. P declined because it lacks the ability to purchase the shares. The share transfer
would have a deleterious effect on P's tax status. Under D's proposed transfer, the
Subchapter S status terminates automatically. P's Subchapter S status enabled it to
distribute an additional $5.3 million in dividends between 1985 and 1995. P instituted suit,
seeking to enjoin D from effectuating his plan. The district court ruled that the proposed
transfers would violate D's fiduciary duty under Massachusetts law and that they would
result in irreparable harm to P. The court enjoined the transfers. This appeal resulted.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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