Korea Corporate Governance Forum: "Korea Zinc's Paid-in Capital Increase, Capital Market Disruption"

Forum "Hyundai Motor's Shareholders' Meeting Vote Expected to Be Abstained"
"Hanwha's Kim Dong-kwan Advises LG's Koo Kwang-mo to Separate Public and Private Matters"

The Korea Corporate Governance Forum commented on the 31st that "the completely unexpected large-scale paid-in capital increase by Korea Zinc is a market-disrupting act from the perspective of the capital market."

The forum expressed concern, stating, "It is important to consider the perspective of the remaining shareholders," and warned that "it will increase negative perceptions of Korean companies in the international financial market."

Regarding the Korea Zinc board's resolution the previous day to issue 3.73 million new shares for the paid-in capital increase, the forum said, "It was a megaton-level shock to shareholders," and strongly criticized it as "a self-destructive strategy where treasury shares were purchased at 890,000 KRW through borrowing, and shares are being issued at 670,000 KRW (planned price) through the capital increase." They added, "If the owners of the company are considered to be the (entire) shareholders, this is an unthinkable idea."

The previous day, Korea Zinc's stock price plummeted to the lower limit and closed at 1,081,000 KRW. The forum stated, "Companies should pursue value-up through growth and shareholder returns," and added, "Increasing predictability and improving governance raise valuations and promote the development of the capital market." They continued, "The paid-in capital increase amounting to 2.5 trillion KRW was completely unpredictable from the perspective of the standard shareholders," and advised, "Financial authorities should closely monitor the Korea Zinc board's resolution from the perspectives of 'predictability' and 'investor protection'."

Professor Namwoo Lee of Yonsei University Graduate School of International Studies (Chairman of the Korea Corporate Governance Forum) is being interviewed on the 6th at Align Partners in Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

On the 29th, Boeing in the United States announced that it would conduct a paid-in capital increase worth approximately 21 billion USD (28 trillion KRW) to improve its financial structure. Boeing is currently experiencing a halt in aircraft assembly due to strikes, and losses are accumulating. Boeing had already informed the market weeks ago about the possibility of a capital increase and increased borrowing, so shareholders had already anticipated it, and the stock price actually rose on the day of the announcement.

The forum said, "The 'predictability' where management builds trust and communicates with shareholders is a core virtue of listed companies." In particular, they mentioned, "Korea Zinc stated the need for financial structure improvement from the perspective of the necessity of the capital increase, but I want to ask the company management and board whether they failed to anticipate this point when they conducted the large-scale treasury stock purchase and cancellation that caused this financial condition."

They also said, "Since the beginning of this year, the Yoon Seok-yeol administration has encouraged value-up of listed companies, but this board resolution is judged to be a capital market disruptive act that 'destroys value,' as seen from the stock price plunge," and added, "This is not limited to Korea Zinc alone, and there is concern that it will increase negative perceptions of Korean companies in the international financial market."

The forum expressed deep regret over the Korea Zinc board's resolution for three reasons: ▲concerns about dilution of remaining shareholder value ▲whether procedural legitimacy was secured, including the necessity of the capital increase, the method of determining the public offering price, and opinions from third-party experts ▲concerns about the board's independence and fiduciary duty to protect shareholders.

They continued, "The basic principle of decision-making in financial theory is to maximize the interests of existing shareholders, not new shareholders or those who sell and leave," and criticized, "Korea Zinc should have done the opposite of the current behavior by issuing shares at a high price and purchasing treasury shares at a low price to maximize existing shareholders' interests."

Additionally, they said, "The controlling shareholders of Hyundai Motor, Hanwha, and LG Group, who are classified as allies of Chairman Choi Yoon-beom, must have been greatly surprised by the disclosures and news," and claimed, "The non-executive director dispatched from Hyundai Motor has repeatedly been absent from Korea Zinc board meetings. It is presumed that Hyundai Motor will abstain or be absent in the capital increase and shareholder meeting vote battles." They also advised, "We hope that Hanwha Vice Chairman Kim Dong-kwan and LG Chairman Koo Kwang-mo will distinguish between public and private matters and avoid the mistake of helping acquaintances with general shareholders' money rather than their personal funds."