Objections to the Zenith Electronics Corporation disclosure and restructuring plan.
In the interest of fairness to the entire community of Zenith interests, the following objections and preliminary requests for relief from stay are offered:
1. We believe the Bankruptcy Code has not been satisfied because the plan was the product of alleged gross breaches of fiduciary duty of Zenith?s self-interested officers and directors who were among the parties directly benefited by the restructuring plan. The LGE controlled Zenith Board of Directors and the special committee were not disinterested parties, independent of LGE direct influence.
LGE?s claim that the "independent committee" made the restructuring decisions, not LGE, acting on an arm's-length basis is without merit since there is a pattern of dominance of disinterested directors by interested directors and a record of unfair transactions between LGE and Zenith as evidenced in the attachments. (Puma v. Marriott)
We request that all cross transactions between LGE and Zenith be examined by the court to determine fairness to Zenith. In the absence of fairness, we request that the bankruptcy proceedings be cancelled.
 The business judgment rule presupposes that a challenged corporate decision is made by disinterested corporate directors. We allege that a majority of directors were personally interested in all Zenith and LGE cross transactions thus the burden shifts to the directors to prove that each transaction was fair and reasonable to the corporation. (Revlon, 506 A.2d at 180).
 The presence of directors on both sides of the plan gives stockholders the right to subject all cross transactions between Zenith and LGE to the scrutiny of the court (Robotham v. Prudential Ins. Co of America 1903).
 A corporation controlling a majority of another corporation's board must arrange transactions consistently with its duty to preserve and protect the controlled corporation (Wright v. Heizers Corp 1977).
 Inferences of self-dealing, fraud, deliberate waste of corporate assets or misrepresentation by majority shareholder are grounds for punitive damages (Stringer v. Car Data Systems, Inc).
 Directors who breach a fiduciary duty to minority shareholders are liable for decreases in the value of their stock from time of their breach (Speed v. Transamerica Corp).
 A corporation that exercises control over another corporation through election of its board of directors is liable for consequential damages resulting from a transaction between the controlling corporation and the corporation it controls (Chelrob v. Barrett)
The interested directors and LGE, as controlling shareholder, failed to carry out at arms' length transactions for the protection of the entire Zenith community of interests.
 Directors failed to exercise their fiduciary responsibilities to use due care to ensure that the corporation seek redress where a majority shareholder has drained the corporate resources for its own benefit to the detriment of minority shareholders (Bangor v. Bangor 1974).
 Since all evidence indicates that there exists numerous instances of individual gain at the expense of the corporation, the fiduciary (Zenith?s directors and LGE, majority shareholder) must establish the fairness of his dealings or is subject to liability (Perkman v. Feldman) (Sinclair Oil Corp v. Levien).
 There exist grounds for the Trustee to set aside equity for the creditors and stockholders. Pepper v. Litton, 308 U.S. 295, 306-7 (1939).
 All self-interested votes (benefiting LGE at the expense of Zenith) taken by majority shareholders acting as directors need be be voided in equity. (Zahn v. Transamerica Corporation)
(See APPENDIX A and B Fiduciary Issues and Cross Transactions)
2. The disclosure and plan fail to disclose whether or not the independent directors received special indemnification inducements, as was the case with many of Zenith?s officers and employees. This needs disclosure in order to determine whether or not LGE colluded with the ?independent? directors.
The Disclosure statement incorrectly states that there were only four members of the special committee. When the special committee voted on the approval of the LGE suggested plan, there were five special committee members, the fifth being Robert Helman, an attorney working for a firm which represents LGE. The court should take notice that it was LGE who requested Zenith to select Peter J. Solomon to perform the analysis.
3. Zenith's "special committee" members did not receive nor consider a sufficient range of Zenith restructuring options and valuation estimates to make a fair business decision concerning the restructuring of Zenith. The concept of adequacy relates to whether the board could obtain a higher price in an arms-length transaction engaged in without the pressure of time, such as by an auction or in a recapitalization, if it chooses so to do.
Under normal corporate restructuring decisions, directors evaluate the range of values that might be received based upon a broad range of methodologies of valuation including an analysis of transactions involving the acquisition of comparable companies, a recapitalization analysis, and a break-up or liquidation analysis. In this case, a very narrow range of valuation methodologies was employed indicating an inadequate fairness report and disclosure statement.
(See APPENDIX C-E for alternatives to the plan and to the valuation methodologies not considered by the directors)
The board failed to question Peter J. Solomon?s conclusory opinion that the estimates are within the range of fair value. It is alleged that:
 Zenith?s Network Systems has been grossly undervalued.
 Zenith?s intellectual properties have been grossly undervalued.
 Zenith?s television manufacturing enterprise has been grossly undervalued.
 Zenith?s accessory division has been grossly undervalued.
 Zenith?s debits to LGE should be recharacterized as equity investments of the majority shareholder and be subordinate to the equity investments of minority shareholders;
 LGE is the alter ego of the Company, thereby liable for all of the Company?s obligations
4. The disclosure stated that Zenith intended to terminate Network Systems operations by end of 1999. This falsehood goes to the heart of our objections that throughout LGE?s control of Zenith, LGE, allegedly, has conducted a pattern of fraudulent self-dealing without director oversight and less than at arm?s length transactions. Evidence:
(A.) ELECTRONIC BUYERS NEWS, August 24, 1999: "The newly created SMTC Manufacturing Corp. is attempting to make a quick leap up the contract electronics manufacturing hierarchy through the recent merger and acquisition of a plant in Mexico...
SMTC has announced that it has acquired from Zenith Electronics Corp. a manufacturing facility in Chihuahua, Mexico, as well as a logistics center in El Paso, Texas. As part of the acquisition of Zenith's Chihuahua plant, SMTC has also entered into a long-range supply agreement with that company's Network Systems division. The Chihuahua facility currently focuses on manufacturing digital set-top boxes and satellite receivers.
SMTC plans to immediately begin upgrading the plant and adding additional surface-mount assembly capability, Walker said. The 250,000-sq.-ft. plant is located on a 16-acre campus, and could be expanded to provide an additional 300,000 sq. ft. of manufacturing capacity. SMTC will offer employment to 600 workers at the Chihuahua plant.
"Zenith is pleased to begin a working relationship with SMTC that will permit full utilization of the facility in Chihuahua, and continued manufacture of our digital set-top boxes," said William Luehrs, president of Zenith Network Systems. The company is also studying expansion possibilities in China for the near future, according to Hi-Tech's Johnson."
Certain kinds of transfers to defeat provisions of the Bankruptcy Code or to give a creditor advantages in consideration of promises in connection with a bankruptcy case are crimes. See 18 U.S.C. õ 152 & 157; see also United States v. Ballard, 779 F.2d 287 (5th Cir.), cert. denied, 106 S.Ct. 1519 (1986) (attorney required to testify about transfers not disclosed on bankruptcy schedules based on "crime/fraud" exception to attorney client privilege); United States v. Rogers,722 F.2d 557 (9th Cir. 1983), cert. denied, 105 S.Ct. 129 (1984) (transfer of assets on eve of bankruptcy violation of 18 U.S.C. õ 152).
5. The plan was not proposed in good faith by the directors and by LGE because it stripped Zenith stockholders of the value of significant causes of action in order to protect LGE and Zenith?s directors from legal liabilities. Texaco Inc., 84 B.R. 893 (Bankr. S.D.N.Y. 1988).
We request that the Equity Committee or this shareholder be given the opportunity to file a relief from stay of exclusivity in order that all shareholders may be entitled to initiate derivative actions against LGE and the directors. It is essential that the derivative actions be allowed to occur prior to any decision by the court concerning the plan because the outcome of the derivative suits may obviate Zenith?s need for implementing the present restructuring plan.
6. We request that the Equity Committee or this shareholder be given the opportunity to file a motion for the court to order that a trustee be appointed to manage Zenith. We allege that there is ample evidence for cause including instances of fraud, dishonesty, incompetence, gross mismanagement described here within and that such an appointment is in the interests of creditors, equity security holders, and the estate. |
