Court Recognizes Need for New Shares for Eco-Friendly Business
But Rules "HMG Global Is Not a Foreign Joint Venture Corporation"
Youngpoong: "Decision Reaffirms Legal Force of Articles of Incorporation"
Korea Zinc Explains 'Foreign Joint Venture Corporation' Provision in Articles
Youngpoong has won the first trial in the lawsuit it filed against Korea Zinc seeking to nullify a new share issuance. The court ruled that Korea Zinc’s issuance of new shares to HMG Global, an affiliate of Hyundai Motor Group, was invalid as it violated the company’s articles of incorporation. As a result, the 527 billion won paid-in capital increase, which is at the center of the management rights dispute, has lost its legal effect, and this is expected to have a significant impact on the future shareholding structure and control of the company.
The court dismissed the provisional injunction filed by Youngpoong and MBK Partners against Korea Zinc, requesting permission to exercise voting rights at the shareholders' meeting. On the 28th, company officials are proposing to enter the Korea Zinc shareholders' meeting scheduled to be held at the Mondrian Hotel in Yongsan-gu, Seoul. This shareholders' meeting is expected to have a high possibility of disruption. 2025.03.28 Photo by Yoon Dongjoo
According to the legal community on the 27th, the Civil Agreement Division 22 of the Seoul Central District Court (Presiding Judge Choi Wookjin) ruled in favor of Youngpoong in the lawsuit filed against Korea Zinc to invalidate the new share issuance. This first-instance verdict comes one year and three months after Youngpoong filed the lawsuit in March of last year.
As a result, the approximately 5% stake in Korea Zinc held by HMG Global has been extinguished, widening the gap between the shares held by Youngpoong and MBK Partners, who are in a management rights dispute, and those held by Korea Zinc Chairman Choi Yoonbum and his allies. Korea Zinc immediately announced its intention to appeal, plunging the management rights battle surrounding Korea Zinc further into uncertainty.
Previously, in September 2023, Korea Zinc conducted a paid-in capital increase worth 527 billion won by issuing 1,045,430 new common shares with a face value of 5,000 won each to HMG Global, an overseas entity 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 the company.
Youngpoong welcomed the court’s ruling. In a statement, Youngpoong said, “This ruling clearly confirms that the act of Chairman Choi, the management agent of Korea Zinc, issuing new shares to HMG Global in violation of the company’s articles of incorporation, is legally null and void. This decision reaffirms the binding force of the articles of incorporation and the principle of protecting shareholder rights. Chairman Choi and the Korea Zinc management forced through a third-party allotment paid-in capital increase in violation of the standards and procedures set out in the articles of incorporation, under the pretext of protecting all shareholders’ rights, and today’s court ruling is the result of that.”
The statement continued, “Both the investors who participated in the paid-in capital increase, trusting in the incorrect explanation by Chairman Choi and management that all procedures under the articles of incorporation were properly followed, and the existing shareholders who suffered disadvantages due to the illegal capital increase, have all become victims. Chairman Choi pushed ahead with the paid-in capital increase despite foreseeing this outcome, driven by the improper motive of expanding his friendly forces to strengthen his management control.”
Korea Zinc, for its part, stated immediately after the ruling, “In the appellate trial, we will explain in detail the purpose and meaning of the provisions in the articles of incorporation related to foreign joint venture corporations, and seek to have the legitimacy of the new share issuance recognized.”
The Korea Zinc Articles of Incorporation and 'Foreign Joint Venture Corporation' at the Center of the Legal Dispute
This ruling is seen as being heavily influenced by the interpretation of Korea Zinc’s articles of incorporation and the relevant provisions of the Commercial Act. Previously, Youngpoong argued that Korea Zinc’s new share issuance was not for 'business necessity' but rather for the purpose of defending management control, and that HMG Global did not qualify as a foreign joint venture corporation. The court sided with Youngpoong on the latter point.
Article 418 of the Korean Commercial Act stipulates that, in principle, new shares must be allocated to existing shareholders to protect their preemptive rights, and that third-party allotments are only permitted as an exception, in accordance with the articles of incorporation, and only when necessary to achieve the company’s business objectives. Reflecting this, Korea Zinc’s articles of incorporation limit third-party allotments to 'foreign joint venture corporations.'
The court found that HMG Global does not qualify as a 'foreign joint venture corporation' as defined in the articles of incorporation, and that the new share issuance violated the articles and infringed upon the preemptive rights of existing shareholders.
The first-instance court stated, “From a literal interpretation, a 'foreign joint venture corporation' refers to a corporation established jointly by Korea Zinc and another company, under foreign law as the governing law. HMG Global is not a corporation in which Korea Zinc participated as an investor, and therefore does not qualify as a 'foreign joint venture corporation.'” The court continued, “The new share issuance to HMG Global constitutes a serious violation of the articles of incorporation and infringed upon the preemptive rights of existing shareholders. Therefore, the issuance of 1,045,430 new common shares with a face value of 5,000 won on September 13, 2023, is declared null and void.”
Korea Zinc argued, “The 'foreign joint venture corporation' provision in the articles of incorporation refers to a 'foreign investor under the Foreign Investment Promotion Act.' If the defendant issues new shares to a foreign investor and thereby establishes a business cooperation relationship, the two companies are, in a broad sense, in a joint venture relationship, so the 'foreign joint venture corporation' should be interpreted as 'the counterparty corporation in the joint venture (a foreign investor under the Foreign Investment Promotion Act).'”
However, the court rejected Korea Zinc’s argument, stating, “A 'foreign investor' does not inherently include the concept of a 'joint venture,' which requires joint investment by two or more companies.”
The extraordinary general meeting of shareholders of Korea Zinc is taking place on the afternoon of the 23rd at the Grand Hyatt Seoul in Yongsan-gu, Seoul. Photo by Jo Yongjun
Youngpoong Seeks a 'Turnaround' in the Management Rights Dispute
Industry observers believe that if this ruling is finalized, it could create a favorable situation for Youngpoong and MBK Partners in the ongoing management rights dispute. Currently, Youngpoong, in alliance with MBK Partners, holds about 43?46% of Korea Zinc’s shares. In contrast, the Korea Zinc side, including friendly shares, is known to hold about 34?39%. If HMG Global’s 5% stake in Korea Zinc disappears, the Korea Zinc side’s shareholding could be further weakened.
However, this shareholding gap does not immediately translate into voting power at the shareholders’ meeting. Ahead of the regular shareholders’ meeting in March, Korea Zinc transferred its shares in Youngpoong to its Australian subsidiary, Sun Metals Holdings (SMH), forming a cross-shareholding structure: Korea Zinc → SMH → Youngpoong → Korea Zinc. As a result, the 25.42% stake in Korea Zinc held by Youngpoong, which is allied with MBK Partners, was neutralized.
Youngpoong sought to dissolve this cross-shareholding by establishing a limited liability company, YPC, with MBK Partners and transferring its 25.42% stake in Korea Zinc to YPC. However, under Article 368 of the Commercial Act, the list of shareholders eligible to vote at the shareholders’ meeting was fixed as of December 31 of last year, so YPC cannot exercise shareholder rights at this year’s extraordinary shareholders’ meeting.
A Korea Zinc official stated, “Our company and Hyundai Motor Group have formed a cooperative relationship for eco-friendly new businesses, but HMG Global cannot be considered part of the friendly shares for the shareholders’ meeting vote. HMG has maintained a neutral stance at this year’s shareholders’ meeting, so even if there is a change in HMG Global’s shareholding status, it will not affect management control.”
Additionally, at the previous regular shareholders’ meeting, Korea Zinc passed measures such as the 'cumulative voting system,' which allows shareholders to allocate as many votes as there are director candidates per share, enabling them to concentrate votes on one or a few candidates. This created a more favorable situation for Korea Zinc.
With the cumulative voting system, shareholders can concentrate their voting rights on a specific candidate or distribute them among several candidates. Directors are elected in the order of the highest number of votes received, and Chairman Choi’s side already holds a majority on the Korea Zinc board, so industry observers do not believe Youngpoong and MBK Partners can easily reverse the situation.
There are still various variables, including ongoing legal disputes between Korea Zinc and Youngpoong. The Supreme Court’s decision is pending on the 'cross-shareholding restriction,' on which the lower courts ruled in favor of Korea Zinc. Youngpoong has also filed a further appeal regarding the appellate court’s decision to suspend the effect of resolutions at Korea Zinc’s regular shareholders’ meeting. Furthermore, the fact that Homeplus, managed by MBK, is currently facing a business crisis and has become a significant financial burden could also be a negative factor for Youngpoong and MBK Partners.
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