
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.                                         -17-                                          17                      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.                                           -18-                                          18                      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            ____                                         -19-                                          19            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                                         -20-                                          20            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                                         -21-                                          21            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                                         -22-                                          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.                                                             ________                                         -23-                                          23
