Court Dismisses Injunction Request to Prohibit Korea Zinc's Treasury Stock Acquisition (Comprehensive)

The court dismissed the provisional injunction request filed by Youngpoong and MBK to prohibit Korea Zinc from acquiring its own shares. Market attention is focused on whether Korea Zinc will purchase its own shares, as the Korea Exchange has requested a disclosure inquiry regarding reports of Korea Zinc's proposed tender offer for its own shares.

The Civil Division 50 of the Seoul Central District Court on the 2nd dismissed Youngpoong's provisional injunction request against Korea Zinc Chairman Choi Yoon-beom, which sought to prohibit the acquisition of treasury shares.

With the court's decision, Korea Zinc can continue to pursue the purchase of its own shares, one of the means to defend its management rights.

Earlier, Youngpoong and private equity firm MBK Partners filed a provisional injunction with the court, requesting that Korea Zinc be prohibited from acquiring its own shares during the tender offer period (September 13 to October 4) as they planned to launch a tender offer to secure management rights of Korea Zinc.

According to Article 140 of the Capital Markets Act, a tender offeror and its special related parties cannot purchase shares of the target company by any means other than the tender offer during the tender offer period.

MBK Side: "Acquisition of Treasury Shares Constitutes Breach of Fiduciary Duty and Market Manipulation... Available Funds for Treasury Share Purchase Only 58.6 Billion KRW"

In response, MBK stated, "Although Youngpoong's provisional injunction request to prohibit Korea Zinc's acquisition of treasury shares was rejected because Korea Zinc was not recognized as a special related party of Youngpoong, Korea Zinc's tender offer to purchase treasury shares at a price significantly higher than the normal stock price constitutes breach of fiduciary duty and should be prohibited."

They argue that Korea Zinc's tender offer to acquire treasury shares carries legal risks.

MBK emphasized, "The parties involved in this dispute are MBK, Youngpoong, and the current management led by Chairman Choi Yoon-beom. Korea Zinc is not a party to the dispute, so it should not use company funds to acquire treasury shares for the benefit of one party to the dispute, Chairman Choi." They further argued, "The actual market price of Korea Zinc shares is about 500,000 KRW per share, but considering the current price has risen to around 700,000 KRW, there is no reason for Korea Zinc to acquire treasury shares. If Korea Zinc acquires shares at 800,000 KRW per share, it will immediately incur a loss of about 300,000 KRW per share. Directors who make such decisions are liable for breach of fiduciary duty."

They also pointed out that it could constitute market manipulation. MBK explained, "If Korea Zinc decides to acquire treasury shares at 800,000 KRW per share around October 2, near the end of MBK's tender offer period, Korea Zinc's stock price will temporarily rise close to 800,000 KRW, and general investors may not respond to MBK's tender offer price of 750,000 KRW. This constitutes market manipulation under the Capital Markets Act."

MBK also pointed out violations of the separate purchase prohibition under the Capital Markets Act. They stated, "Under the Capital Markets Act, tender offerors and their special related parties cannot make separate purchases until the tender offer period ends. Korea Zinc, as an affiliate of Youngpoong and a special related party, cannot separately purchase Korea Zinc shares until October 6, the end of the tender offer period. This separate purchase prohibition aims to prevent confusion in investment decisions and the possibility of market manipulation. If Korea Zinc resolves to acquire treasury shares at 800,000 KRW per share on October 2, it violates this prohibition."

They also argued that it goes against the purpose of counter-tender offers. If a counter-tender offer occurs during an ongoing tender offer period, the initial tender offeror can raise their offer price and extend the tender offer period. However, if Korea Zinc resolves to acquire treasury shares on October 2 and the actual tender offer occurs after MBK's tender offer period ends on October 7, MBK loses the opportunity to raise its offer price or extend the period. This is seen as a legal loophole undermining the counter-tender offer system.

MBK also noted that acquiring treasury shares is not possible within the retained earnings limit approved by the shareholders' meeting. Korea Zinc set 269.311371071 billion KRW as retained earnings carried forward at the regular shareholders' meeting in March 2024. Therefore, funds available for interim dividends or treasury share acquisitions in 2024 are limited to the amount approved by the shareholders' meeting. However, Korea Zinc has already used amounts exceeding this limit through interim dividends and treasury share acquisition trust contracts by board resolution. Thus, no funds remain for treasury share acquisition in 2024, and even if the board resolves, treasury shares cannot be acquired.

Korea Zinc Plans to Cancel All Treasury Shares Upon Acquisition... Chairman Choi Yoon-beom, Who Has Taken a Last Stand, Uses All Available Cards

Meanwhile, it was confirmed that Korea Zinc revealed a policy to cancel all treasury shares during the provisional injunction trial process. Treasury shares do not have voting rights, which relatively increases the current management's control, and also enables securing friendly shares through stock exchanges with allied companies.

Korea Zinc's disclosure of the 'policy to cancel all treasury shares' through this trial is interpreted not as an effort to secure voting shares through exchanges with friendly companies, but as a long-term plan to enhance shareholder value through cancellation, aiming to win the court's favor.

With the dismissal of Youngpoong and MBK's provisional injunction, Korea Zinc can now pursue a two-track strategy of 'treasury share acquisition' and 'counter tender offer.' Some in the business community view Korea Zinc's recent issuance of corporate bonds (CP) to raise 400 billion KRW and preparations for loans from securities firms as groundwork for treasury share acquisition.

Since MBK raised its tender offer price from 660,000 KRW to 750,000 KRW per share, if Chairman Choi launches a tender offer at 800,000 KRW per share to secure a 6% stake, the required funds are estimated to exceed 1.3 trillion KRW.

Korea Zinc's efforts to mobilize the Choi family's global network to secure friendly forces are also interpreted as moves anticipating a counter tender offer. Earlier, Chairman Choi visited Tokyo around the Chuseok holiday to meet with senior officials of BHP's Japan branch, the world's largest mining company, and reportedly contacted Japan's SoftBank, a global investment firm.

Korea Zinc affiliate Kemco's Chairman Choi Nae-hyun and Korea Zinc's Australian affiliate Arc Energy's CEO Choi Joo-won are also actively working to secure global friendly forces. Chairman Choi's side is reportedly negotiating with U.S.-based private equity firms Bain Capital and Kohlberg Kravis Roberts (KKR) to raise around 1 trillion KRW.