[Business & Issues] 'Baedang Ganeung Iik' Emerging as the Core of the Goryeo Zinc Management Dispute

Fierce Battle Over Tender Offer
Legal Dispute Over Amount of Distributable Profit

[Image source=Yonhap News]

The battle for management control between Choi Yoon-beom, chairman of Korea Zinc, and the MBK-Youngpoong alliance is intensifying, causing significant fluctuations in Korea Zinc's stock price. As both sides have successively raised their public tender offer prices, shareholders' actions have become divided. In particular, a legal dispute is ongoing over the amount of 'distributable profits,' the source of funds for Korea Zinc's treasury stock repurchase, which has emerged as a key issue in this management control conflict. This suggests that future stock price volatility will be very high. Experts warn that, given the judicial risks and the phase of increased volatility, a cautious approach is necessary.

MBK-Youngpoong VS Korea Zinc, Strategic Battle Over Public Tender Offer Price... Stock Price Volatility Increases

On the 11th, Korea Zinc announced that it would raise the public tender offer price for its treasury stock from the previous 830,000 KRW to 890,000 KRW. The quantity of treasury stock to be acquired was also increased from about 15.5% to 17.5% of the total issued shares. Accordingly, the scale of funds allocated for the treasury stock repurchase rose from 2.6635 trillion KRW to approximately 3.2245 trillion KRW. Including the 2.5% purchase volume by co-buyer private equity fund Bain Capital, the total reaches 20%, effectively making the entire floating stock volume a target for purchase.

Following the announcement, the stock price fluctuated but closed slightly higher. Korea Zinc's stock price, which had been oscillating since the start of trading on the 11th, closed at 794,000 KRW, up 0.63% from the previous session. On the 9th, the MBK-Youngpoong alliance declared that it would maintain its public tender offer price at 830,000 KRW without further increases. However, with Chairman Choi's side raising the offer price, analyses suggest that the public tender offer competition has effectively concluded.

Currently, Korea Zinc's stock price has surged 42.8% from 556,000 KRW on the 12th of last month, when the MBK-Youngpoong alliance proposed a public tender offer at 660,000 KRW per share, indicating that future stock price volatility is expected to be very high. If investors who entered aiming for gains from the management control dispute and tender offer price increases begin to realize profits en masse, the stock price could quickly fall back to the previous 500,000 KRW range.

Legal Dispute Over Calculation of Distributable Profits... Why the Articles of Incorporation Became Controversial

With the public tender offer competition settled for now, the main issue in the management control dispute has shifted to 'judicial risk.' The final outcome is expected to hinge on how the Seoul Central District Court rules on the injunction request filed by the MBK-Youngpoong alliance on the 2nd to halt the treasury stock public tender offer. A particularly contentious issue is the method of calculating 'distributable profits,' the source of funds for Korea Zinc's treasury stock repurchase.

The MBK-Youngpoong alliance argues that Korea Zinc's treasury stock public tender offer scale, which amounts to around 3 trillion KRW, exceeds the legal limit for treasury stock acquisition and is therefore illegal. According to the MBK-Youngpoong alliance, Korea Zinc's treasury stock acquisition limit, i.e., distributable profits, is only 58.6 billion KRW, which is much smaller than the approximately 6.1 trillion KRW claimed by Chairman Choi's side.

The reason for the large discrepancy in the distributable profits figures between the two sides lies in their differing calculation methods. Under the Commercial Act, distributable profits refer to the undistributed retained earnings, which is the net assets (total capital) minus the legal reserves (capital surplus and earned surplus reserves). However, in practice, when calculating a company's distributable profits, companies typically also exclude voluntary reserves set aside for specific future purposes, such as new business or investments, from retained earnings before calculating distributable profits.

[Image source=Financial Supervisory Service Electronic Disclosure System]

As of the end of last year, Korea Zinc's retained earnings totaled 7.3477 trillion KRW. When excluding the legal reserves of 49.6 billion KRW and voluntary reserves of 6.634 trillion KRW, the resulting undistributed retained earnings amount to 625.9 billion KRW. The MBK-Youngpoong alliance claims that after excluding interim dividends and retained earnings reserves from this 625.9 billion KRW, the actual amount available for treasury stock repurchase by board resolution is only 58.6 billion KRW. They further argue that including voluntary reserves in distributable profits requires approval by the general shareholders' meeting.

Article 42-2 of Korea Zinc's articles of incorporation states that when determining the amount of interim dividends, "voluntary reserves set aside for specific purposes by the articles of incorporation or shareholders' resolution up to the previous fiscal year" are also excluded from distributable profits.

On the other hand, Chairman Choi's side argues that this clause applies only to the calculation of interim dividends and is unrelated to the calculation of distributable profits for treasury stock repurchase. Since the Commercial Act does not require excluding voluntary reserves, distributable profits can be considered as high as around 6 trillion KRW.

It is uncertain which argument the court will accept. Since voluntary reserves do not represent actual cash held by the company but rather an accounting figure within an allowable range, it is expected to be challenging to judge the legality of a large-scale treasury stock repurchase that could undermine the company's financial soundness. Korea Zinc disclosed on the 4th that of the funds for the public tender offer, 585.9 billion KRW are from internal funds, and 2.5071 trillion KRW are borrowed funds, raising concerns that financial soundness will significantly deteriorate after the treasury stock repurchase.

Shaken Individual Investors... "Beware of Judicial Risks and Increased Volatility"

Experts warn that with the public tender offer competition in the Korea Zinc management control dispute now settled, attention must be paid to increased volatility. Judicial risks remain, and given the enormous financial burden following the public tender offer, cautious investment is necessary.

Kang Jin-hyuk, a researcher at Shinhan Investment Corp., said, "With MBK halting the increase in the tender offer price, the bidding competition is nearing its end, leaving only investors' decisions and legal dispute procedures. Regardless of who wins, existing shareholders will bear the financial burden, and the uncertainty caused by the management control dispute may disrupt new business investments and major management decisions." He added, "Ultimately, the key in this dispute is the judgment of minority shareholders and investors. Shareholders will decide whether and how to participate in the tender offer based on tax advantages or disadvantages and shareholder return aspects."

The market already fears that regardless of which side wins this management control dispute, it will be difficult to avoid the 'winner's curse.' Both MBK and Korea Zinc have committed trillions of won in funds during the public tender offer process, incurring annual interest expenses exceeding 100 billion KRW. Korea Zinc, in particular, is expected to see a significant rise in its debt ratio, raising concerns that future business expansion and investments may be hindered.