Before McLAUGHLIN, KALODNER and HASTIE, Circuit Judges.
Is a beneficial owner of stock registered for business convenience in another's name a "holder" of such stock within the purview of a state statute requiring, in certain circumstances, posting of security for expenses in a shareholder's derivative action?
That is the primary issue, of first impression, presented by this appeal.
The undisputed facts may be summarized as follows:
The plaintiff, Rex Murdock, a resident of New Mexico, owned more than five per cent of the stock of the corporate defendant, Follansbee Steel Corporation ("Follansbee"), a Delaware corporation. Murdock's stock was not registered in his name but was represented by street certificates standing in the name of stockbrokers. He brought a shareholder's derivative action in the United States District Court for the Western District of Pennsylvania against Follansbee and eleven of its present and past directors charging them with fraud, mismanagement and waste.
Follansbee and the other defendants filed a motion to require Murdock to give security pursuant to the provisions of Section 2 of the Pennsylvania Act of April 18, 1945, P.L. 253, No. 114, 12 P.S. § 1322. The motion asserted that Murdock was not a record owner of any of Follansbee's shares.*fn1
The District Court, in its opinion, W.D.Pa.1953, 114 F.Supp. 690, 693, held that "* * * the [Pennsylvania] statute requires that plaintiff be a stockholder of record of five per centum of the outstanding shares of defendant corporation's stock or enter adequate and proper security." Pursuant to this holding the District Court ordered Murdock to register his stock within 30 days or enter security. Murdock failed to comply, and as a result a second order issued directing him to enter security in the sum of $100,000. Because of non-compliance with this second order, the District Court entered a final order dismissing Murdock's complaint "with prejudice". The instant appeal followed.
Before proceeding to consideration of the critical issue presented by this appeal it must be noted that as beneficial owner of stock in Follansbee, the plaintiff had the capacity to bring his derivative action in the court below even though he was not a stockholder of record. That is so since under Delaware law an equitable or beneficial owner is permitted to maintain a derivative action*fn2 and we are required to give effect to it.*fn3 We make this observation in view of the fact that the District Court in its opinion stated, 114 F.Supp. at page 693: "In this matter the Court does not pass on plaintiff's right to sue as an unrecorded or beneficial owner of stock."
It is settled, too, that the Pennsylvania statute relating to security for expenses is applicable. Cohen v. Beneficial Industrial Loan Corp., 1949, 337 U.S. 541, 69 S. Ct. 1221, 93 L. Ed. 1528.*fn4
Section 2 of the Pennsylvania Act, supra, 12 P.S. § 1322, provides as follows:
"Security for costs and attorneys' fees. In any such suit instituted or maintained by holder of holders of less than five per centum of the outstanding shares of any class of such corporation's stock or voting trust certificates, the corporation in whose right such action is brought shall be entitled, at any stage of the proceedings, to require the plaintiff or plaintiffs to give security for the reasonable expenses, including attorneys' fees, which may be incurred by it in connection with such suit, and by the other parties defendant in connection therewith, for which it may become liable pursuant to section three of this act, to which security the corporation shall have recourse in such amount as the court having jurisdiction shall determine upon the termination of such action. The amount of such security may, from time to time, be increased in the discretion of the court having jurisdiction of such action upon showing that the security provided has or may become inadequate."
The defendants contend that in construing Section 2 we should take into consideration the provisions of Section 1, 12 P.S. § 1321, and Section 3, 12 P.S. § 1323, of the Pennsylvania Act. These sections provide:
" § 1321. Plaintiff must be shareholder. In any suit brought to enforce a secondary right on the part of one or more shareholders against any officer, or director, or former officer or director of a corporation, domestic or foreign, because such corporation refuses to enforce rights which may properly be asserted by it, the plaintiff or plaintiffs must aver and it must be made to appear, that the plaintiff or each plaintiff was a stockholder at the time of the transaction of ...