Court Rules "Violation of Articles of Incorporation by Foreign Joint Venture, Therefore Invalid"
The court has put a halt to Korea Zinc's issuance of new shares worth over 500 billion KRW, amid its ongoing management rights dispute with Young Poong.
On June 27, the Civil Agreement Division 22 of the Seoul Central District Court (Presiding Judge Choi Ukjin) ruled in favor of Young Poong in the lawsuit filed against Korea Zinc to nullify the issuance of new shares. This first-instance verdict comes one year and three months after Young Poong filed the lawsuit in March last year.
Previously, in September 2023, Korea Zinc conducted a paid-in capital increase worth 527 billion KRW by issuing 1,045,430 new common shares at a face value of 5,000 KRW each to HMG Global, an overseas corporation jointly established by Hyundai Motor, Kia, and Hyundai Mobis. As a result, HMG Global secured a 5% stake in Korea Zinc, which is considered a friendly stake for Korea Zinc.
The court stated, "The issuance of new shares to HMG Global seriously violated the articles of incorporation and infringed upon the existing shareholders' preemptive rights," and declared, "The issuance of 1,045,430 new common shares at 5,000 KRW each on September 13, 2023, is null and void."
However, the court also noted, "Based solely on the evidence submitted by the plaintiff and the participant, it is insufficient to conclude that the defendant issued the new shares solely for the purpose of defending management rights without any legitimate business necessity, and there is no other evidence to support this."
This lawsuit is expected to impact the ongoing dispute over management rights and shareholding competition between Young Poong and Korea Zinc. If the first-instance ruling is finalized, Korea Zinc's friendly stake will be reduced. Currently, Young Poong, in alliance with MBK Partners, holds a 40.97% stake in Korea Zinc. In contrast, Korea Zinc and its allies hold approximately 34.35%. If the 5% friendly stake is nullified, Korea Zinc's shareholding will be further weakened.
However, a Korea Zinc official stated, "Although we have established a cooperative relationship with Hyundai Motor Group for eco-friendly new businesses, it cannot be said that HMG Global is included as a friendly stake in shareholder voting," and explained, "Since HMG has maintained neutrality at this year's general shareholders' meeting, even if there is a change in HMG Global's shareholding, it will not affect management rights."
Previously, Young Poong argued, "There is no recognized business purpose for issuing new shares to a third party while excluding existing shareholders, making the issuance invalid," and filed the lawsuit in March. Young Poong claimed that the paid-in capital increase was not for raising funds necessary for business operations but rather to maintain the current management's control, which is problematic. Korea Zinc countered that the third-party allocation paid-in capital increase was intended to achieve business objectives, and that the procedure was lawful after sufficient review based on relevant laws, including the Commercial Act, and the company's articles of incorporation.
However, Korea Zinc, through its Australian subsidiary Sun Metals Holdings (SMH), holds more than 10% of Young Poong's shares, establishing a "cross-shareholding" relationship. This acts as a safeguard against unilateral management control by Young Poong. According to the "cross-shareholding restriction" system under the Commercial Act, if two companies each hold more than 10% of each other's shares, they cannot exercise voting rights in the other company.
Both sides are engaged in several other legal disputes beyond this case. Industry observers believe it is unlikely that this lawsuit will end at the first-instance ruling.
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