Court Rules "Yeongpung Voting Rights Restriction Unfair"…MBK Wins in Korea Zinc Management Dispute (Comprehensive)

Only Cumulative Voting for Minority Shareholders Accepted
All Korea Zinc-Led Resolutions Invalidated
Newly Appointed Directors Also Suspended
Youngpoong and MBK Likely to Gain Board Control at Regular Shareholders' Meeting

The court suspended the effectiveness of all resolutions from last month's temporary shareholders' meeting of Korea Zinc, except for the introduction of cumulative voting. It ruled that the restriction of the opposing party's voting rights through a circular shareholding structure, as implemented by Chairman Choi Yoon-beom of Korea Zinc, was unfair under the Commercial Act's mutual shareholding restriction method. As a result, at the upcoming regular shareholders' meeting, Youngpoong and MBK Partners will be able to leverage their shareholding superiority to take control of the board of directors.

On the 7th, the Seoul Central District Court Civil Division 50 partially granted the injunction request filed by Youngpoong and MBK to suspend the effectiveness of the resolutions from Korea Zinc's temporary shareholders' meeting. Among the proposals passed at the January temporary meeting, only the introduction of cumulative voting (item 1-1) was recognized as effective. The other proposals?setting an upper limit on the number of directors (1-2), stock split (1-4), appointment of an outside director as board chairperson (1-6), change of dividend record date (1-7), and introduction of quarterly dividends (1-8)?were all invalidated.

The court found that Chairman Choi's side unfairly restricted the voting rights corresponding to 25.4% of Youngpoong's shares, the largest shareholder of Korea Zinc, by using Sun Metal Corporation (SMC), a grandchild company of Korea Zinc.

Prior to the temporary shareholders' meeting in January, Chairman Choi's side abruptly announced that SMC would acquire more than 10% of Youngpoong's shares. This created a 'circular shareholding structure' in Korea Zinc's governance. According to Article 369, Paragraph 3 of the Commercial Act, if Company A holds more than 10% of Company B's shares either directly or through subsidiaries or grandchild companies, then Company B's shares in Company A lose their voting rights. Using this provision, the voting rights of Youngpoong and MBK were blocked the day before the temporary meeting. With this voting rights advantage, they passed all desired agenda items at the temporary meeting the next day and maintained a majority on the board.

In response, Youngpoong and MBK argued that the mutual shareholding voting rights restriction applies only to domestic companies and stock companies, whereas SMC is a foreign company and a limited company, making the voting rights restriction illegal. The court also explained, "Article 369, Paragraph 3 of the Commercial Act applies only if all related companies are stock companies as defined by the Commercial Act," and "It is clear that SMC is not a stock company established under the Commercial Act, and SMC has more characteristics of a limited company." Accordingly, the execution of duties by directors appointed through the temporary shareholders' meeting by Korea Zinc will also be suspended.

With the voting rights of Youngpoong's shares, previously restricted by the mutual shareholding regulation, restored, there is a high possibility that many director candidates recommended by Youngpoong and MBK will be appointed at the regular shareholders' meeting scheduled for the end of this month. By taking control of the board, the momentum may shift in favor of Youngpoong and MBK.

However, one final variable remains. The court only determined whether SMC is a limited company or a stock company, but did not rule on whether domestic Commercial Act provisions apply to foreign corporations. If Chairman Choi transfers the Youngpoong shares held by SMC to SMH, a stock company that is SMC's parent company and a subsidiary of Korea Zinc, the mutual shareholding voting rights restriction could be reactivated. This could lead to renewed litigation and prolong the dispute.

The temporary shareholders' meeting of Korea Zinc is being held on the afternoon of the 23rd at the Grand Hyatt Seoul in Yongsan-gu, Seoul. Photo by Jo Yong-jun