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June 6, 1951

BUTTE COPPER & ZINC CO. et al. (two cases)

The opinion of the court was delivered by: WEINFELD

There are three separate motions before the Court in two actions brought by the plaintiff, a stockholder of Butte Copper & Zinc Co., hereinafter referred to as Butte, against Butte and against Anaconda Copper Mining Co., hereinafter referred to as Anaconda.

One action is admittedly a derivative suit on behalf of Butte, wherein judgment is sought requiring the co-defendant Anaconda to account to Butte for profits derived by Anaconda by reason of its continued operation of Butte's mines and properties after June 24, 1950.

The other action, asserted by plaintiff to be a representative one, seeks an injunction restraining Butte from carrying out a 'purported lease of Butte's properties and mines to Anaconda and from causing or permitting the operation of Butte's mines and properties by Anaconda.' Defendants claim that this action too is derivative. For purposes of convenience, the conceded derivative action shall be referred to as such and the disputed one as the injunction suit.

 Both complaints, verified the same day, allege in haec verba the same facts. They differ in that the injunction suit, except for the nature of the relief requested, also contains allegations of irreparable damage.

 The motions are as follows:

 In the Derivative Action.

 (1) By the defendant Butte for an order directing plaintiff to furnish security under the New York General Corporation Law, Section 61-b, Mck. Consol. Laws, c. 23. *fn1"

 In the Injunction Action.

 (2) By the plaintiff pursuant to Rule 56 of the Federal Rules of Civil Procedure, 28 U.S.C.A., for summary judgment, or in the alternative, for an order pursuant to Rule 56(d); and

 (3) By the defendants for an order dismissing the complaint, or in the alternative, requiring the plaintiff to furnish security for expenses pursuant to Section 61-b of the New York General Corporation Law.

 Since 1904 Butte has been the owner of mines and mine properties in Montana. Its operations in the early years were not particularly successful and eventually it was compelled to suspend operations for lack of capital. In 1915 Butte and Anaconda entered into an agreement whereby Anaconda installed certain equipment and machinery, placed the mines in sound condition and operated them for a time, for which Anaconda received 11.6% of Butte's stock and one-half of the profits. Thereafter, in July 1917, an agreement was made for the operation of all of Butte's mines by Anaconda, the net earnings to be divided equally between the two companies. In substance, this arrangement between Anaconda and Butte continued uninterruptedly for thirty-six years, from 1917 to June 24, 1950, under four separate agreements for different terms, the last of which was entered into on June 24, 1940 for a ten-year period. Butte is a Maine corporation. Each of these agreements was approved by the stockholders of Butte pursuant to Section 80 subd. I of the Maine Corporation Law, R.S. 1944, c. 49. *fn2"

 On June 12, 1950, a letter agreement was signed by the executive officers of Butte and Anaconda, whereby the existing agreement terminating on June 24, 1950, was continued in effect from that date until either party (a) exercised a right of cancellation (incidentally, a right not contained in any prior agreement) or (b) delivered a definitive agreement for a new term, whichever shall first occur. The nature of this arrangement is in sharp dispute and is the central point of the controversy. Plaintiff grounds his complaints thereon, charging that it violates the Maine Corporation Law in that the consent of Butte stockholders was not obtained. The defendant Butte disputes that such approval was required because (1) it is not a lease, and (2) assuming, arguendo, that it is, it was made in the ordinary and usual course of Butte's business.

 The defendant Butte argues that the letter agreement was a stop-gap arrangement to protect Butte's interest and to avoid interruption of the mines' operations which had proved profitable to Butte through the years. The expedient was adopted because of negotiations then pending between Butte and the Internal Revenue Bureau of the Treasury Department as to the depletion allowances claimed by Butte under the Internal Revenue Code, 26 U.S.C.A., the determination of which was dependent upon the nature of the existing and prior agreements between Butte and Anaconda. The Government contended they were leases whereas Butte urged they were agreements for the joint operation of the mines on a 50-50 basis. Butte's officers in their considered judgment and acting upon the advice of counsel decided against entering into a renewal agreement until a ruling was made as to the tax consequences of the agreements under which the two defendants had operated for so long a period. Instead, it was decided to continue operations pursuant to the letter agreement of June 12, 1950, which defendants designate as an interim arrangement, leaving for subsequent action the terms of a definitive agreement.

 Butte points to a favorable Treasury Department ruling some six or seven months thereafter, in February 1951. It states that with the tax situation thus clarified it has since carried on negotiations with Anaconda for a new lease and when the terms have been concluded it will be submitted, as in previous years, ...

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