A.W. Chesterton Co., Inc. v. Chesterton

128 F.3d 1 (1st Cir. 1997)

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Nature of the Case

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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.