Court Opinion

ID: 2964952
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Date Created: 2015-09-21 21:33:20.957601+00
Date Added: 2024-06-11T11:43:04.013063
License: Public Domain

USCA1 Opinion

	

                            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

                                         -2-
                                          2

            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

                                         -3-
                                          3

            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. 

                                         -4-
                                          4

            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.

                                         -5-
                                          5

            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.

                                         -6-
                                          6

            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

                                         -7-
                                          7

            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

                                         -8-
                                          8

            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.

                                         -9-
                                          9

            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

                                         -10-
                                          10

            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

                                         -11-
                                          11

            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

                                         -12-
                                          12

            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

                                         -13-
                                          13

            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

                                         -14-
                                          14

            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
                        ___

                                         -15-
                                          15

            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

                                         -16-
                                          16

            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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                                          22

            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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