Prolonged Goryeo Zinc Management Dispute... Chairman Choi's Price Increase Card, MBK Persuades Institutions

Chairman Choi Yoon-beom, Youngpoong Precision and Korea Zinc Likely to Further Raise Prices
Where Will Institutional Investors Avoiding Uncertainty and Risks Choose?
Korea Zinc Also Launches Fierce Attack Pointing Out Contracts Between MBK and Youngpoong Shareholders

Korea Zinc started trading on the 7th at 777,000 KRW, up 1,000 KRW (0.13%) from the previous trading day. The management rights dispute of Korea Zinc, which began on the 13th of last month, has prolonged, causing slight fluctuations in the stock price. The tender offer price started at 660,000 KRW per share and has currently risen to 830,000 KRW per share. However, the market price remains in the 700,000 KRW range. The tender offer price of Youngpoong Precision, a key company in the Korea Zinc share competition, has also risen from 20,000 KRW to 30,000 KRW, with further increases expected. As of 9:30 AM, the current market price is 33,800 KRW, up 1,950 KRW (6.12%) from the previous trading day. This tender offer battle is characterized by Chairman Choi Yoon-beom of Korea Zinc raising the price, followed immediately by the MBK Partners-Youngpoong alliance matching the price but with more favorable conditions in terms of period, volume, and taxes, like a 'tail-chasing' scenario.

Jericho Partners Holds Board Meeting on the 7th... Chairman Choi Yoon-beom to Raise Tender Offer Price Further

According to the business and investment banking (IB) sectors on the 7th, Jericho Partners, a special purpose company (SPC) established by Chairman Choi, Youngpoong Precision Chairman Choi Chang-gyu, and Korea Zinc Honorary Chairman Choi Chang-young, held a board meeting to discuss raising the tender offer price for Youngpoong Precision and changing the target volume. The Korea Zinc board is also expected to discuss an increase in the tender offer price this week. It is anticipated that Chairman Choi's side will have no choice but to raise the price to a level that MBK and Youngpoong cannot follow, even if it means overextending. MBK and Youngpoong's tender offer for Korea Zinc will end on the 14th. Since this is earlier than Korea Zinc's own tender offer end date (the 23rd), shareholders are more likely to accept either both offers or the MBK-Youngpoong offer that buys first. The tender offer period is an issue, but a bigger obstacle is taxation. If one subscribes to the general tender offer conducted by MBK and Youngpoong, they pay a 0.35% securities transaction tax and 22% capital gains tax on the profit. Korea Zinc's treasury stock acquisition tender offer is subject to dividend income tax, and if financial income exceeds 20 million KRW annually, the highest tax rate can reach 49.5%. Even though both are tender offers, Korea Zinc's treasury stock tender offer is disadvantageous from a tax perspective. The management rights dispute is expected to last longer than initially anticipated. With the minimum purchase quantity condition removed, both sides must buy any shares offered, even if only one share is applied for. Therefore, if both sides accumulate a certain amount of shares without giving up midway, the dispute outcome will not be immediately decided after the tender offer ends, and both sides will hold extraordinary general meetings to engage in a vote battle.

Institutional Investors Avoid Uncertainty and Risks... May Choose Stability Over Price

The side leading the price is clearly Chairman Choi. The problem is that the higher the price goes, the greater the risk becomes. Especially given institutional investors' tendency to avoid uncertainty, they may choose MBK, which has less judicial risk, if a certain return is guaranteed. Currently, the Youngpoong-MBK alliance claims that Korea Zinc's heavy reliance on debt to conduct a large-scale treasury stock tender offer is illegal and constitutes breach of fiduciary duty by the current management, including Chairman Choi. They argue that it causes financial loss to the company for the benefit of specific shareholders and worsens the financial structure. On the 2nd, the Youngpoong-MBK alliance filed an injunction with the Seoul Central District Court to prohibit Korea Zinc's large-scale treasury stock tender offer, which was pushed forward by board resolution without a shareholders' meeting, claiming it violates the Commercial Act. The court ruling is expected as early as the 18th. If the court accepts the injunction, Korea Zinc's treasury stock tender offer process may be halted. According to MBK's assessment, over 95% of other shareholders are institutional investors, and their average purchase price for Korea Zinc shares is estimated at around 450,000 KRW per share. Selling at the current tender offer price (830,000 KRW) would mean an approximately 84% gain over the purchase price. Notably, it has been reported that a Hyundai Motor official, who is a board member, was absent from the recent Korea Zinc board meeting that approved the treasury stock acquisition tender offer, fueling speculation that institutional investors will distance themselves from the legal risks in the Korea Zinc management rights dispute. If Hyundai Motor, previously considered a white knight for Korea Zinc, distances itself not only from the board but also from the extraordinary shareholders' meeting, Korea Zinc may need to accumulate shares equivalent to Hyundai Motor's 5.05% stake.

[Image source=Yonhap News]

Korea Zinc Raises Issue of Possible Invalidity of Shareholders' Agreement as a Counterattack

Meanwhile, Korea Zinc also targeted weaknesses of Youngpoong and MBK in a statement on the 6th. Korea Zinc stated, "There is a significant legal defect in the shareholders' agreement between MBK Partners and Youngpoong, which may render it null and void." Korea Zinc emphasized, "The core of this case is that while two CEOs of Youngpoong are detained due to serious accidents, the board composed only of outside directors illegally concluded a shareholders' agreement with MBK without a special resolution at the shareholders' meeting, disposing of more than half of Korea Zinc shares, which constitute a significant portion of Youngpoong's assets." They argue this creates a serious problem where Youngpoong and its shareholders suffer losses while MBK benefits. The value of Korea Zinc shares held by Youngpoong is estimated at a staggering 3.4774 trillion KRW based on the initial tender offer price of 660,000 KRW, and applying the increased price of 830,000 KRW approaches 4.4 trillion KRW, according to Korea Zinc. Furthermore, Korea Zinc pointed out, "Youngpoong, Jang Hyung-jin, and their special affiliates agreed to jointly exercise voting rights on Korea Zinc shares they hold and to receive call options on some shares, but the detailed contents of the shareholders' agreement have not been disclosed at all." In response, MBK explained, "The call option exercise price is fixed at an agreed price considering Korea Zinc's management rights premium."