MBK·Yeongpung 'Counterattack'... Additional Injunction Request for Korea Zinc's 'Suspension of Treasury Stock Buyback'

Following a court ruling allowing Korea Zinc to repurchase its own shares, MBK Partners and Young Poong have launched a counterattack. They filed an injunction to halt the tender offer process for the purpose of share repurchase, signaling their intent to block Korea Zinc's share buyback efforts.

According to the investment banking (IB) industry on the 2nd, Young Poong filed an injunction with the Seoul Central District Court on the same day, requesting the suspension of Korea Zinc's "tender offer for the purpose of acquiring treasury shares (share repurchase tender offer)" procedure.

This is separate from the injunction filed on September 13 to prohibit Korea Zinc, a special related party during the tender offer period by MBK Partners and Young Poong, from acquiring treasury shares. The injunction requests the suspension of the related procedures on the grounds that the Korea Zinc board's resolution to conduct a tender offer for share repurchase constitutes a breach of fiduciary duty harming the interests of the company and all shareholders.

Since treasury shares can only be disposed of after six months of acquisition, considering the tendency for the stock price to revert to the previous level (around KRW 550,000 per share) after the tender offer ends, if Korea Zinc repurchases treasury shares at a price higher than the current tender offer price (for example, KRW 800,000 per share), the value of the acquired shares is expected to drop by at least 40%. MBK argues that acquiring treasury shares at a price inflated above their intrinsic value due to the tender offer premium violates the directors' duty of care and loyalty and constitutes a breach of trust in the course of business.

Even if the share repurchase is for "cancellation," it is normal and reasonable for the trustee securities company to purchase a small quantity within a certain price range after the tender offer when the stock price has reverted to the previous level, minimizing the market impact. Instead of conducting a high-priced tender offer for the purpose of "cancellation," it would be better to buy at market price through a trust contract after the stock price stabilizes post-tender offer and then cancel the shares.

The price at which treasury shares are canceled affects the amount of the company's equity reduction. If treasury shares are canceled, the company's equity decreases by the acquisition cost of the canceled shares. If shares are repurchased and canceled at KRW 800,000 per share, which is higher than the tender offer price, the company's equity will decrease by more than 40% compared to canceling the same quantity of treasury shares at the previous stock price after the tender offer period. This negatively impacts the company's debt ratio and reduces the source of distributable profits for future shareholders.

Furthermore, considering the interim dividend conducted in August this year, the balance of retained earnings available for treasury share acquisition by Korea Zinc's board resolution is only about KRW 58.6 billion. Therefore, to repurchase and cancel a large volume of treasury shares as announced by Korea Zinc, the company would also have to use reserves accumulated through shareholder meeting resolutions for new businesses. If Korea Zinc uses such reserves for cancellation payments by board resolution, it would be an illegal decision violating the shareholder meeting resolution, the highest decision-making body of a stock company.

In a management rights dispute, if a particular director mobilizes substantial company funds to defend management rights through treasury share acquisition, prioritizing their own management rights over shareholder interests, it constitutes a breach of fiduciary duty and duty of loyalty to the company, i.e., Korea Zinc. Additionally, Korea Zinc's decision to conduct a tender offer for share repurchase during the ongoing tender offer period is intended to set the stock price higher than the current tender offer price, which may also constitute market manipulation prohibited under Article 176 of the Capital Markets Act.

A legal industry insider said, "Purchasing a large volume at a price significantly higher than the pre-tender offer market price implies an intention to influence the market price and appears to be aimed at causing confusion among existing investors who wish to participate in the ongoing tender offer."