Before SWAN, AUGUSTUS N. HAND, and PATTERSON, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
The above suits were consolidated and heard by the District Court on an agreed statement of facts and resulted in identical decrees against the defendant. They were suits by preferred stockholders of Power Company asserting by derivation alleged rights of that company against North American under a contract dated March 27, 1931.
The Power Company is a public utility holding company organized under the laws of Delaware and at the date of the contracts had 2,000,000 shares of authorized common stock, without par value, of which 1,516,586 shares were outstanding. North American and Middle West Utilities Company (herein called Middle West) each then owned 43% of the common stock. Since January, 1933, the personnel of the management of Power Company has been subject to the approval of North American.
In the winter of 1930-1931 Power Company was in need of financing. To accomplish this financing it issued and sold to the public in 1931 $10,000,000 Serial Gold Notes, $2,000,000 maturing on April 1 of each year from 1932 to 1936, inclusive. To insure payment of the notes North American and Middle West made the agreement of March 27, 1931, with Power Company. The rights of Power Company under the agreement were assigned to a trustee as collateral security for the notes.
The agreement (after reciting that Middle West and North American were largely interested in the stock of Power Company and that the latter was about to sell the Serial Gold Notes and was desirous to issue and sell its common stock annually in each of the years 1932 to 1936, inclusive, for the purpose of securing funds for the retirement of the notes at their maturity) provided that Power Company should annually offer to its common stockholders of record on March 5 in each of such years the right of purchasing ratably, according to their respective common stock holdings, an aggregate amount of the then unissued common stock of Power Company sufficient to produce at the offering price (determined as hereafter stated) a cash sum of $2,000,000 in each of said years. It further provided that Power Company might at its option at any time offer to its common stockholders shares then in its treasury in lieu of unissued shares. The offering price was to be "that number of whole dollars which shall most nearly equal (and for this purpose a fraction of one-half shall be treated as if less than one-half) seventy-five per centum (75%) of the average closing price per share of the Common stock of the Power Company on The Chicago Stock Exchange averaged for the last 10 trading days next preceding March first in each respective year in which such offer of Common stock is made to the Common stockholders." The offering was to be open for acceptance and payment by such stockholders to and including March twenty-fifth next following the date on which each offer was made.
North American and Middle West jointly and severally agreed with Power Company to purchase for cash at the prices at which the stock was offered to the common stockholders all shares so offered which had not been purchased by such stockholders on or before March 25 in each respective year, payment to be made between March 26 and March 30, inclusive, in each year.
The Power Company agreed to issue and sell its shares to its common stockholders and to Middle West and North American purchased by them respectively, pursuant to the contract, and to take all steps necessary to that end. For that purpose Power Company agreed to keep on hand 250,000 shares of its then unissued common stock (except as sales and deliveries were made therefrom).
The agreement also provided that the Power Company was privileged at any time by due corporate action "to reclassify and/or rearrange its common stock * *" and "in the event of any such reclassification and/or rearrangement, the shares of stock taking the place of the now authorized shares * * * shall stand in lieu thereof, and be subject to the terms of this agreement in like manner as the Power Company's presently authorized common stock. The Power Company shall also be privileged at any time to increase the amount of its authorized common stock."
Then followed article five of the agreement, the interpretation of which is the critical matter before us: "5. If at any time it shall become legally impossible for the Power Company to offer for sale and/or to sell and deliver sufficient shares of its common stock to provide funds sufficient to retire all of the notes of said issue as the same respectively mature, as contemplated by this Agreement, then and in that event Middle West Company and The North American Company jointly and severally agree with the Power Company that they will upon the maturity of such notes purchase for cash at par, plus accrued interest, such of said notes as shall not have been retired by the application of the proceeds of the sale of common stock of the Power Company as herein provided."
There was a further provision that the agreement was for the express benefit of the trustee for the noteholders and the parties thereto, and that no stockholder of Power Company as such, except the two underwriters, should have any rights under it.
At the time the agreement went into effect Power Company had outstanding its preferred stock and 1,516,586 shares of common stock. The price range of the common on the Chicago Exchange between November 1, 1930, and April 1, 1931, was from 60 to 70 5/8 dollars per share.
The gist of the cause of action which the complainants assert on behalf of Power Company is that in 1935 and in 1936 North American violated the contract of March 27, 1931, in that it did not purchase stock of Power Company but instead took a note of the latter each year for $2,000,000 which it advanced to pay off the Serial Gold Notes falling due in these years. Middle West failed to perform its part of the joint and several obligations in March, 1932, because it went into the hands of a receiver shortly thereafter, and North American necessarily had to perform all future obligations accruing under the agreement. There is no controversy as to performance of the contract by North American in 1932, 1933 and 1934.
By the letter of February 19, 1932, North American agreed to have the stock in that year offered at $15 per share rather than at $12 per share which would have been the price as determined by the formula in the contract of March 27, 1931. On this basis 133,334 shares were offered. The other stockholders subscribed for a few shares and North American ...