## Facts

- A.W. Chesterton Company, Inc. was a closely held Massachusetts corporation owned and operated by descendants of its founder.
- Arthur W. Chesterton, a minority shareholder and the largest individual holder, owned 27.06% of the company’s stock.
- The company’s restated articles gave the company a right of first refusal when a shareholder sought to transfer shares outside the immediate family: the shareholder had to give notice, the company could elect to buy within 30 days, and if it declined the transfer could proceed.
- The company elected Subchapter S status, producing tax benefits that depended on maintaining eligible shareholders (and excluding ordinary corporations as shareholders).
- After disputes with management and other shareholders and difficulty selling his minority block for liquidity, Chesterton proposed transferring some shares to two shell corporations he controlled.
- The proposed transfer would cause loss of Subchapter S status because the transferees were ineligible corporate shareholders.
- The company and other shareholders sued to enjoin the transfer as a breach of fiduciary duty; Chesterton counterclaimed for relief under Massachusetts General Laws chapter 156B.
- The district court enjoined the transfer and denied the chapter 156B counterclaim; Chesterton appealed.

## Issues

1. Whether, under Massachusetts law, a minority shareholder in a closely held corporation breaches fiduciary duty by transferring shares to entities that would terminate the corporation’s Subchapter S status, even if the transfer satisfies the articles’ right-of-first-refusal procedure.
2. Whether the shareholder was entitled to relief under Mass. Gen. Laws ch. 156B based on alleged unfair treatment.

## Decision

- The First Circuit affirmed the injunction barring Chesterton from transferring shares to his shell corporations.
- The court held that the proposed transfer breached the fiduciary duty owed in a closely held corporation because it would intentionally destroy a valuable corporate tax status for the shareholder’s self-interested purposes.
- The court rejected the argument that compliance with the articles’ transfer procedure immunized the transaction from fiduciary-duty review.
- The First Circuit also affirmed denial of Chesterton’s counterclaim under Mass. Gen. Laws ch. 156B for failure to establish statutory grounds for relief.

## Legal Principles

- In Massachusetts closely held corporations, shareholders owe one another fiduciary duties comparable to those among partners, requiring “utmost good faith and loyalty.”
- These duties can apply to minority shareholders when their actions can materially harm the corporation or other shareholders.
- Technical compliance with corporate transfer restrictions does not preclude a finding of fiduciary breach; fiduciary obligations constrain the exercise of otherwise lawful shareholder rights.
- A shareholder may be enjoined from a stock transfer when the transfer’s intended effect is substantial harm to the corporation and other owners, such as terminating advantageous Subchapter S status.
- Statutory remedies under Mass. Gen. Laws ch. 156B require satisfaction of statutory conditions; dissatisfaction with management does not justify self-help measures that injure the corporation.

## Conclusion

The court upheld an injunction preventing a substantial minority shareholder from transferring shares to controlled shell corporations where the transfer would terminate the corporation’s Subchapter S status, holding that fiduciary duties in closely held corporations can bar actions that deliberately harm the firm and other shareholders despite formal compliance with transfer procedures, and it found no basis for relief under Mass. Gen. Laws chapter 156B.


A.W. Chesterton Co. v. Chesterton, 128 F.3d 1 (1st Cir. 1997)