[Initial Insight] The 'Hidden Strategy' Behind Korea Zinc's Governance Restructuring Plan

Serving as Outside Director and Board Chair
MBK and Yeongpung Opposition May Hinder AGM Approval
Difficult to Implement Shareholder-Friendly Pledges to Gain Support from 국민연금 and Other Shareholders

Will the corporate governance restructuring plan for Korea Zinc proposed by Chairman Choi Yoon-beom as a shareholder-friendly measure serve as a justification for other shareholders to support him at the upcoming shareholders' meeting?

Chairman Choi declared that he would step down from the position of chairman of the board and have an outside director take over as chair. This means he intends to withdraw from frontline management and establish a board centered on outside directors who can make neutral decisions for the benefit of the majority of shareholders. However, some in the capital market question whether the neutrality of outside directors can truly be guaranteed while Chairman Choi retains his position. In this regard, it seems difficult for investors to regard this as a meaningful corporate governance reform.

Chairman Choi also proposed a somewhat radical idea. He announced plans to introduce the Majority of Minority Voting (MOM) system, a decision-making structure involving general shareholders excluding the controlling shareholder. He stated, "In matters where the interests of controlling shareholders and minority shareholders conflict, the opinions and public sentiment of minority shareholders can be reflected in board composition and major management decisions," adding, "We are considering ways to recommend certain directors through MOM." MOM has the advantage of increasing the management participation of general shareholders excluding major shareholders, thereby preventing the abuse of power by the largest shareholder. On the other hand, it appears to be an attempt to create a mechanism to check or block the exercise of management rights by the current controlling shareholders, the MBK-Yeongpung alliance.

What investors should note is that both proposals are difficult to realize in practice. Both the appointment of an outside director as board chair and the introduction of MOM require amendments to the articles of incorporation at the shareholders' meeting. According to Article 434 of the Commercial Act, special resolutions at the shareholders' meeting require both approval by at least two-thirds of attending shareholders and at least one-third of the total issued shares. Unless the MBK-Yeongpung alliance, which has increased its stake in Korea Zinc to 39.83%, agrees, amending the articles is virtually impossible. While it may be possible to secure approval from more than one-third of the total issued shares, meeting the two-thirds attendance requirement is difficult. The combined stake of Chairman Choi and his 'white knight' is estimated to be around 35%.

Chairman Choi and his external legal advisors are surely aware of the special resolution requirements. The market interpretation is that the shareholder-friendly governance proposals, which are unlikely to be realized, were put forward to gain justification for support in the upcoming vote battle. The executive officer system proposed by the MBK-Yeongpung alliance also requires a special resolution to amend the articles of incorporation, so if Chairman Choi's side opposes it, it is unlikely to pass. Given that the current board system will remain in place anyway, it is interpreted that the unrealistic governance reform proposals were presented as a rationale to garner support from other shareholders such as the National Pension Service. It appears to be an attempt to get at least one more pro-Choi person onto the board. It is also expected that a public relations campaign will be waged to make general shareholders view MBK-Yeongpung, who opposed shareholder-friendly governance reforms, as adversaries.

Shareholders facing a choice of which way to vote at the shareholders' meeting should carefully examine the sincerity and intentions behind the proposals put forward by Chairman Choi and the MBK-Yeongpung alliance.