Appeal from an order entered in the United States District Court for the Southern District of New York, Conner, J., denying defendant-appellant's motion for a stay of proceedings pending compulsory arbitration. After an inital appeal was dismissed for lack of appellate jurisdiction, the district court certified the order for appeal pursuant to 28 U.S.C. § 1292(b) and we accepted the certification. Affirmed.
Kaufman Meskill and Kearse, Circuit Judges.
In this appeal, we must construe a narrow and specific arbitration clause in a contract to determine whether the parties intended it to reach a particular dispute that has arisen out of an agreement governing the purchase of shares of preferred stock. The case is a consolidation of three separate lawsuits filed against defendant-appellant Pennsylvania Power & Light Co. (PP&L), a public utility that raises capital in part through the issuance of preferred shares. In 1986, PP&L sought to redeem, at par value, thousands of preferred shares issued in earlier years. In so doing, PP&L claimed to be acting pursuant to detailed agreements that governed the issuance and sale of those shares. The plaintiffs-appellees, all institutional investors that held shares affected by the call for redemption, argued that PP&L's action was not authorized by the agreements. After the shareholders initiated these lawsuits in the United States District Court for the Southern District of New York, seeking declaratory relief and damages, PP&L moved for a stay pending compulsory arbitration of the dispute.
The district court, Conner, J., denied the motion, ruling that the contract provision upon which PP&L relied did not manifest an intention by the parties to submit this particular dispute to arbitration. See GEICO Corp. v. Pennsylvania Power & Light Co., 669 F. Supp. 590 (S.D.N.Y. 1987). We then dismissed PP&L's initial appeal from the district court's order, holding that we lacked appellate jurisdiction. See McDonnell Douglas Finance Corp. v. Pennsylvania Power & Light Co., 849 F.2d 761 (2d Cir. 1988) (McDonnell Douglas I). However, on remand, the district court certified the order for immediate interlocutory appeal pursuant to 28 U.S.C. § 1292(b) (1982 & Supp. IV 1986). We now accept that certification and affirm the district court's order denying a stay pending arbitration.
PP&L is a public utility corporation organized and operating under the laws of the Commonwealth of Pennsylvania. In late 1982, PP&L issued 340,000 shares of 14 % Series Preferred Stock (the 14 % Series) at a par value of $100 per share. Many of those shares either were sold directly to or subsequently transferred to appellees Government Employees Insurance Co. (GEICO); GEICO Corporation (GEICO Corp.); Criterion Insurance Co.; CNA Assurance Co. of Connecticut (CNA); Peoples Security Life Insurance Co. (PSLIC); Commonwealth Life Insurance Co. (CLIC); and National Standard Life Insurance Co. (NSLIC). In early 1983, PP&L issued 260,000 shares of 11 % Series Preferred Stock (the 11 % Series), also at a $100 par value. Many of those shares either were sold to or later transferred to appellees McDonnell Douglas Finance Corp. (MDFC), GEICO, CNA and Criterion. Both issuances and all subsequent sales were governed by detailed Preferred Stock Purchase Agreements (the Agreements), which were identical in all relevant respects. The Agreements also incorporated the terms of statements governing the original issuances that were filed by the utility with the Commonwealth of Pennsylvania (the Statements).
At the time the original purchases were negotiated, prospective shareholders were anxious to "lock in" the high yields offered by the shares. See J. App. at 491. Because PP&L could not issue "non-callable" or irredeemable shares, it agreed to pay premiums over par in the event of any early redemption. See id. These premiums were set out in section 2.2 of the Statements governing the issuance of the shares. The utility could redeem shares in the 14 % Series according to a graduated schedule of decreasing redemption values, with the price set at $120 per share for the twelve month period beginning October 1, 1986. The 11 % Series shares could be redeemed at $125 per share at any time on or before March 31, 1988.
As another indication of the shareholders' attempt to "lock in" after-tax yields on the shares, Paragraph 4N of the Agreements explicitly embodied the parties' assumption that all shareholders would remain eligible for the eighty-five percent Dividends Received Deduction then provided by section 243(a)(1) of the Internal Revenue Code, 26 U.S.C. § 243(a)(1) (1982). The parties agreed that if any shareholder "shall lose the benefit of, lose the right to claim or suffer disallowance with respect to dividends on the shares," then PP&L would indemnify the shareholders for any economic loss below anticipated after-tax yields. That obligation of the company, however, was expressly subject in both Agreements to a proviso that read:
Provided, however, that if the Company shall have received any such written notice of [a] Loss [requiring indemnification] or if the Company shall have made a good faith determination that there is substantial risk that it would be required to make any indemnity payments pursuant to this paragraph 4N with respect to more than two consecutive quarters (regardless of whether the Company shall have received any such written notice of Loss), then the Company, at its option, may redeem all the Shares then outstanding at the redemption price of $100 per share plus dividends accrued to the date of redemption.
This right of redemption at par value was not subject to the terms of section 2.2 of the Statements that required premiums over par in the event of an optional redemption. Finally, Paragraph 4N of the Agreements provided that:
If the Company should disagree with any Owner's computation of the amount of the required indemnity payment or refund thereof as provided below or if any Owner should disagree with such good faith determination of the Company that there is substantial risk, then the Company and the Owner shall appoint an independent tax counsel to resolve the dispute and, if the parties cannot agree to the appointment of such counsel, said independent tax counsel shall be appointed by the American Arbitration Association and the Company shall not be obligated to pay, and such Owner shall not be obligated to refund, the disputed portion of such amount until and only to the extent that such dispute is resolved adversely to the party required to make payment.
Subsequently, the Tax Reform Act of 1986 reduced the amount of the Dividends Received Deduction provided by section 243(a)(1) of the Code from eighty-five to eighty percent. See Pub. L. No. 99-514, § 611(a)(1), 100 Stat. 2085, 2249 (1986). Based on that development, PP&L sent a letter on October 22, 1986 to all shareholders of the 14 % Series and the 11 % Series, informing them that it intended to redeem the shares at par value on December 31, 1986. The letter stated:
The redemption is being made pursuant to the provisions of Paragraph 4N of the Purchase Agreements . . . . The Tax Reform Act of 1986 . . . provides for a reduction of the dividends received deduction from 85 % to 80 % for dividends received after December 31, 1986. As a result of the enactment of this legislation, the Company has determined that a Loss (as defined in Paragraph 4N of the Purchase Agreements) would occur beginning with the payment of a regular quarterly dividend . . . on January 1, 1987 ...