Ahead of Korea Zinc's General Meeting... Controversy Over Cumulative Voting System Emerges [M&A Insights]

Temporary General Meeting of Shareholders of Korea Zinc on the 23rd
Current Management's Proposal for 'Cumulative Voting System' Emerges as Key Issue
MBK and Youngpoong Oppose... Court Hearing Scheduled for the 17th

“The board of directors of Korea Zinc has decided to propose shareholder-friendly and shareholder rights protection agendas (such as the cumulative voting system) at the upcoming extraordinary general meeting of shareholders.”(Choi Yoon-beom, Chairman of Korea Zinc)

“If the cumulative voting system and the cap on the number of directors are introduced at the Korea Zinc shareholders' meeting, it will be virtually impossible for general minority shareholders to appoint directors.”(MBK Partners official)

As the dispute over the management rights of Korea Zinc continues into its fourth month, the Yeongpung-MBK Partners alliance and the current management of Korea Zinc will clash over ‘director appointments’ at the extraordinary general meeting of shareholders scheduled for the 23rd.

A fierce vote battle is expected between the two sides with similar shareholdings, and the key issue rapidly emerging is whether to adopt the ‘cumulative voting system.’ When the current management proposed the adoption of the cumulative voting system as one of the agenda items, the Yeongpung-MBK alliance strongly opposed it. On the 9th, M&A Alssul Sinjap examined the background of why the cumulative voting system, commonly known as a ‘minority shareholder protection device,’ has been brought up in this dispute and analyzed the arguments of both sides.

A Representative Minority Shareholder Protection Device... “Adoption Rate of Cumulative Voting System is 5% Among Domestic Companies with Assets Over 2 Trillion KRW”

The board of directors holds powerful authority within corporate groups. The board exercises important decision-making powers such as disposal of major assets, appointment and dismissal of executives, convening shareholder meetings, and issuing new shares, and directors are elected through shareholder meetings. But what if multiple directors are appointed in a single shareholders' meeting? If each director candidate is voted on separately, the side with fewer shares than the controlling shareholders and their allies will find it difficult to get their preferred candidates onto the board.

However, the situation changes with the implementation of the cumulative voting system. The cumulative voting system is a method where, instead of granting one vote per share for each director appointment, shareholders are given votes equal to the number of directors to be appointed. This allows a certain minority shareholder group to concentrate their votes (voting rights) on specific candidates. This is why the cumulative voting system has been introduced as a representative means to check the monopoly of management rights by controlling shareholders and to protect minority shareholders.

The cumulative voting system has a long history, having been incorporated into the Commercial Act since 1998. However, companies are allowed to voluntarily implement it through their articles of incorporation. Unlike financial companies, public enterprises, or privatized companies, most private companies with a controlling shareholder have not adopted it. Particularly, business circles have emphasized that “foreign speculative capital and corporate raiders could exploit it.”

According to data released last year by Samil PwC, the adoption rate of the cumulative voting system among domestic companies with assets over 2 trillion KRW was only 5%. For companies with assets between 1 trillion and 2 trillion KRW, it was 1%, and for those between 500 billion and 1 trillion KRW, only 2%. For this reason, the amendment to the Commercial Act promoted by the Democratic Party of Korea stipulates that ‘large listed companies cannot exclude cumulative voting through their articles of incorporation.’

Shareholding Difference Only 6-7 Percentage Points... Current Management’s Counterattack with Cumulative Voting System

So how did the cumulative voting system come to be invoked in the dispute between the two families within Yeongpung Group? Since its establishment in 1949, Yeongpung Group has been jointly led by the Jang family (Yeongpung) and the Choi family (Korea Zinc), but after Choi Yoon-beom, the third-generation owner and chairman of Korea Zinc, took office in 2022, conflicts with Jang Hyung-jin, the second-generation advisor of Yeongpung, intensified. In September last year, Yeongpung announced a public tender offer for Korea Zinc in alliance with MBK Partners to secure stable management rights, sparking a fierce competition for share acquisition. Currently, the Yeongpung-MBK alliance holds about 47% of shares, approximately 6-7 percentage points more than Chairman Choi’s side.

Since the current method of appointing directors would likely result in a disadvantage in the vote battle, Korea Zinc’s board decided to propose the adoption of the cumulative voting system and other agendas at the extraordinary shareholders’ meeting on the 23rd. The current management of Korea Zinc emphasized, “Considering that the cumulative voting system is recognized as a representative ‘minority shareholder rights protection measure’ under the Commercial Act to prevent minority shareholders’ voting rights from becoming wasted votes, we have decided to actively accept it.” Chairman Choi also appealed in a recent letter to shareholders, stating, “This extraordinary shareholders’ meeting is a place to determine which management team has proven performance and truly aligns with shareholders’ interests.”

On the other hand, Yeongpung-MBK opposes, arguing that “the cumulative voting system could be abused as a tool in the management rights dispute.” Even if they agree with the system itself, they claim that the attempt to introduce it at this shareholders’ meeting is merely a means for Chairman Choi to defend his management rights. An MBK official said, “The problem is that Chairman Choi’s side is trying to introduce the cumulative voting system solely for their own benefit, knowing realistically that it cannot function as intended at Korea Zinc,” and argued that minority shareholders’ rights could instead be infringed.

They added, “Given the shareholding structure, the first and second largest shareholders hold 80-90% of the shares,” and “the general minority shareholders of Korea Zinc, known to hold shares in the mid-teens percentage-wise, face the practical difficulty of needing to unite a majority to include a specific director candidate on the board,” they explained.

Choi Yoon-beom, Chairman of Korea Zinc, is speaking at a Korea Zinc press conference held on the 13th of last month at the Korea Chamber of Commerce and Industry in Jung-gu, Seoul. Photo by Kim Hyun-min

Currently, Korea Zinc’s board consists of 13 members, and the plan is to limit the number of directors to 19 and newly appoint 7 directors. Yeongpung-MBK aims to appoint 14 directors to secure a majority. Korea Zinc’s articles of incorporation do not currently specify a cap on the number of directors. If a cap is introduced as intended by Korea Zinc’s management, it will inevitably disrupt Yeongpung-MBK’s plan.

Now, market attention is turning to the courts. Yeongpung-MBK filed an injunction on the 30th of last month to prevent the introduction of the cumulative voting system in the director appointment process at this shareholders’ meeting. The court will hold the first hearing on the injunction case to prohibit the agenda on the cumulative voting system proposed by Yeongpung-MBK on the 17th. The court’s decision is expected before Korea Zinc’s extraordinary shareholders’ meeting on the 23rd. If the injunction is dismissed, Yeongpung-MBK will find it difficult to secure a majority on the board, and the management rights dispute with Chairman Choi is likely to be prolonged.