Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Welsh, Judge.
Before MARIS, JONES, and GOODRICH, Circuit Judges.
Appellant is a shareholder of the Pennroad Corporation of Delaware. He instituted a derivative action against the corporation and certain of its past and present directors. Named also as defendants are the representatives of certain persons, now deceased, who were directors at the time of the acts complained of. The claims made were alleged to have arisen upon the purchase and holding by the corporation of the capital voting stock of the Boston & Maine Railroad in excess of the amount permitted by the laws of New York and Massachusetts. The defendants filed their answer moving for dismissal of the complaint. The court below dismissed the action and this appeal was taken.
The Boston & Maine Railroad is a multiple corporation, incorporated under the laws of New York, Massachusetts, New Hampshire and Maine. It is alleged that Pennroad purchased, in 1931 and prior years, and is still holding approximately nineteen and one half per cent of the capital voting stock of the Boston & Maine. Such purchase and holding, it is said, violates subdivision (2) of § 54 of the Public Service Law of New York, Consol. Laws, c. 48, and § 5 of Chapter 156 of the General Laws of Massachusetts (Ter. Ed. 1932).
Our inquiry may be more clearly directed to the essential problem of the case if the considerations may first be narrowed. This we do by disposing first of the Massachusetts statute.
That Act provides: "No corporation, * * * shall purchase, * * * or hold, * * * more than ten per cent of the total capital stock of any domestic corporation authorized to carry on within the commonwealth the business of a railroad, * * * ."
It may be assumed that the Boston & Maine Railroad falls within the statutory description of a "domestic corporation authorized to carry on within the commonwealth the business of a railroad". See Attorney General v. New York, N.H. & H.R. Co., 1908, 198 Mass. 413, 84 N.E. 737; Peters v. Boston & Maine R. Co., 1873, 114 Mass. 127. Does the prohibition of the statute apply to the acquisition and holding by Pennroad, a Delaware corporation?
The Supreme Judicial Court of Massachusetts in Flynn v. Commissioners of Department of Public Utilities, 1939, 302 Mass. 131, 18 N.E.2d 538, 540, stated categorically, in considering the applicability of this section, that "Only domestic corporations are forbidden to hold more than ten per cent of the stock of such a [gas or electric] company. G.L. (Ter. Ed.) c. 156, § 5. See also c. 181, § 10." Gas and electric companies are among those listed in § 5 along with railroads. Plaintiff, in his elaborate analysis of the case, argues that this statement is mere dictum. But, the brief of the Attorney General of Massachusetts in the case, a copy of which has been made available to us, shows that the point was specifically made to the court and the court's citation of chapter 181 of the statute*fn1 shows that the court meant precisely what it said. This forthright statement as to the applicability of § 5 is conclusive upon us as to the Massachusetts law. While it is ordinarily true that foreign corporations are restricted in their activities within a state to the same extent which the state restricts the activities of a domestic corporation,*fn2 that rule, under the Flynn case, supra, does not apply to the holding by the foreign corporation of shares in a Massachusetts railroad company.
The plaintiff's argument that the purchase and holding were ultra vires for Pennroad stands on no firmer ground. Our attention is called to paragraph Third (12) of the certificate of incorporation of the Pennroad Corporation which, in enumerating its powers states: "* * * ; provided, however, that the Corporation shall not in any state, territory or country, carry on any business, or exercise any powers, which a corporation organized under the laws of said state, territory or country could not carry on or exercise except to the extent permitted or authorized by the laws of such state, territory or country." Since the Supreme Judicial Court of Massachusetts has stated that the purchase and holding of stock by a foreign corporation in a domestic railroad company is not forbidden by the Massachusetts law, there is no violation of the provisions of the charter so far as that law is concerned.
Our legal problem is narrowed, therefore, to the question of the effect of the New York statute. It is to be kept in mind that this case is in federal court on grounds of diversity of citizenship only. It is state law which the court applies to the rights and liabilities of the parties. We have a Delaware corporation, certian Pennsylvania defendants, a New York plaintiff and acts done by the defendants which are alleged to have injured those on whose behalf plaintiff sues because of an asserted violation of New York law. In this multistate situation the federal court applies the rules of conflict of laws of the state in which it sits. Klaxon Company v. Stentor Electric Manufacturing Co., Inc., 1941, 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477. If there are state authorities in point they are controlling; if not, the federal court fashions its rule from the materials at hand as best it can.
The New York statute provides "* * * no stock, corporation of any description, domestic or foreign, * * * , shall purchase or acquire, take, or hold, more than ten per centum of the total*fn3 capital stock issued by any railroad corporation * * * organized or existing under or by virtue of the laws of this state * * * ."
The problem under the New York statute can be, in turn, split into three parts.
1. Does the phrase "organized or existing under or by virtue of the laws of this state" apply to a corporation holding a charter from other states as well as from New York so as to make the prohibition applicable? And, if it does, should that prohibition be referred to as the controlling rule, to the exclusion of the laws of the other charter ...