Issuing Bonds at 3% but Raising 7% Private Loans
Borrowings Increase by 1 Trillion Won, Interest Expenses of 30 to 40 Billion Won Wasted
No Justifiable Reason for High-Interest Quick Funds
Illegal Decision to Buy Treasury Shares Beyond Limit Without Shareholders' Meeting Resolution
Application for Injunction to Suspend Treasury Share Buyback
MBK Partners, which is engaged in a management rights dispute with Choi Yoon-beom, chairman of Korea Zinc, pointed out that the issuance of corporate bonds worth 1 trillion won by Korea Zinc for the purpose of repurchasing treasury shares is highly likely to constitute breach of fiduciary duty. It was argued that Korea Zinc, which can raise funds at an interest rate in the 3% range, issuing bonds with an interest rate in the 7% range to repurchase treasury shares without an urgent business need is an act that causes losses to the company. Furthermore, it warned that even if funds are raised by issuing corporate bonds, purchasing treasury shares beyond the legal limit of 56.8 billion won set by the board of directors is illegal.
According to the investment banking (IB) industry on the 2nd, Korea Zinc plans to issue private bonds worth 1 trillion won targeting Meritz Securities. The maturity is one year, and the interest rate is known to be around 7%. The industry views Korea Zinc's sudden issuance of 1 trillion won worth of corporate bonds, despite having no history of corporate bond issuance or commercial paper (CP) financing in recent years, as intended for a large-scale treasury share repurchase.
In this regard, the IB industry evaluated that issuing private bonds at excessively high interest rates is highly likely to constitute breach of fiduciary duty by the board of directors. A senior executive in the securities firm's IB division explained, "Korea Zinc's credit rating is a high-grade AA+, and if it issues public bonds in the market, it can raise funds at an interest rate in the low 3% range," adding, "Issuing high-interest private bonds without an urgent business purpose constitutes breach of fiduciary duty by the board."
MBK also pointed out the same issue. It criticized that when the board issues corporate bonds, it should make decisions to minimize interest expenses, but making decisions contrary to the company's interests by wasting 30 to 40 billion won in interest expenses is a clear breach of fiduciary duty. It evaluated that Korea Zinc's board caused unnecessary losses to the company by using treasury share repurchases to defend Chairman Choi Yoon-beom's personal management rights.
It also pointed out that even if Korea Zinc issues corporate bonds, using all the raised funds for treasury share repurchases is a violation of the law. Under the Commercial Act, the board's decision alone allows Korea Zinc to use only about 58.6 billion won for treasury share repurchases. Any repurchases beyond that require a separate resolution at a shareholders' meeting.
According to MBK, Korea Zinc left only 269.3 billion won as retained earnings carried forward at the regular shareholders' meeting held in March this year. This amount is the remainder after disposing of 356.6 billion won from the pre-disposal retained earnings of 625.9 billion won through legal reserves, overseas investment reserves, cash dividends, etc., and represents the maximum limit that can be used for interim dividends and treasury share repurchases by board resolution alone. After deducting amounts used for interim dividends and treasury share trust contracts, the remaining limit is estimated to be 58.6 billion won.
Korea Zinc's articles of incorporation stipulate that discretionary reserves must be separately accumulated when disposing of retained earnings. Accordingly, a portion of operating profits has been customarily reserved for overseas investment reserves and resource business investment reserves for decades. The accumulated reserves amount to 3.414 trillion won (overseas investment reserves) and 3.220 trillion won (resource business investment reserves) as of the end of the first half of this year.
An MBK official said, "To purchase treasury shares beyond the limit, the articles of incorporation must be amended through a shareholders' meeting to allow the use of discretionary reserves," warning, "If the board uses discretionary reserves as funds for dividends and treasury shares solely by board resolution, the directors will be subject to breach of fiduciary duty and damages lawsuits." He also stated, "Purchasing treasury shares at a price inflated by a public tender offer violates the directors' duty of care and constitutes breach of fiduciary duty," and added, "We have filed a provisional injunction with the Central District Court requesting Korea Zinc to halt the public tender offer procedure for the purpose of acquiring treasury shares."
An IB industry official analyzed, "It seems that Korea Zinc's board is taking considerable risks by making several legally questionable decisions to defend Chairman Choi Yoon-beom's management rights," adding, "The background behind these decisions indicates that Chairman Choi himself has not secured sufficient funds for management rights defense."
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