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A.W. Chesterton Co. v. Chesterton
United States Court of Appeals for the First Circuit
128 F.3d 1 (1997)
A.W. Chesterton Co. (plaintiff) was a closely held Massachusetts corporation founded in 1885. The Chesterton Co. and its affiliates manufactured mechanical seals, packaging, pumps, and related products. The Chesterton Co. was owned and operated by the descendants of its founder. Arthur W. Chesterton (defendant) was the founder’s grandson and owned the largest percentage of shares at 27.06 percent. Under the Chesterton Co.’s articles of incorporation, other shareholders had a right of first refusal over the sale of any of the shares. Additionally, shareholders of the Chesterton Co. decided to move the Chesterton Co. to a closely held S corporation, which provided significant tax benefits. One of the requirements to maintain that status was to ensure that only individuals were permitted to hold stock. Based on a series of disagreements, Arthur decided to sell his stock and invest elsewhere. However, Arthur was not able to find a willing buyer for his minority stake in the Chesterton Co. Then, Arthur decided to transfer the stock to two shell corporations that Arthur owned because he believed that the transfer would improve his chances of selling the stock in general. Arthur presented the idea to the Chesterton Co., but no one decided to purchase the shares. Therefore, Arthur was planning to move forward with the sale to the shell corporations. Prior to the sale, the Chesterton Co. sued Arthur, alleging a planned violation of Arthur’s fiduciary duty to the company. The trial court granted the injunction, and Arthur appealed.
Rule of Law
Holding and Reasoning (Lynch, J.)
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