One month before the temporary shareholders' meeting of Korea Zinc (scheduled for Jan. 23 next year), the group of Chairman Choi Yun-beom is sharply opposed to the alliance of MBK Partners and Youngpoong. Chairman Choi's side has raised a concentrated voting system as the first agenda and presented a proposal for the appointment of directors based on its passage, while MBK-Youngpoong claims there is illegality in this. In contrast, Chairman Choi's side argues that there are no legal issues.
The concentrated voting system is a mechanism by which each shareholder receives as many voting rights as there are board candidates and can allocate them to specific candidates when selecting directors. Unlike a simple voting system where major shareholders can appoint a large number of desired directors, it strengthens the voting rights of minority shareholders. The Democratic Party has proposed an amendment to the Commercial Act that would make the introduction of a concentrated voting system mandatory for listed companies with total assets of more than 2 trillion won, but there is also significant opposition due to potential side effects.
◇ A shareholder with 100 shares can cast 2,000 votes for one candidate if there are 20 candidates.
According to the investment banking (IB) industry and business circles on the 24th, Korea Zinc has confirmed the agenda for the temporary shareholders' meeting the day before and revised the announcement of the meeting resolution. The concentrated voting system appears from agenda item 1-1. YuMi Development, a subsidiary of Chairman Choi's group, has presented a proposal to amend the articles of incorporation for the introduction of the concentrated voting system. Currently, like most corporations, the articles of incorporation exclude the concentrated voting system, and this proposal aims to change that.
The concentrated voting system is a method of voting that grants as many voting rights as there are directors to be appointed for each share of stock. In cases with multiple director candidates, the voting rights can be concentrated or distributed among one or several candidates. If directors are appointed through a simple voting method, all directors are elected according to the will of the major shareholder who owns the majority of the shares. However, by using the concentrated voting method, minority shareholders can concentrate their voting rights and elect the directors they recommend, preventing all directors from being appointed according to the intentions of the major shareholder.
For example, suppose there are 20 candidates for internal, external, and other non-executive director positions. A shareholder with 100 shares can cast 100 voting rights for each candidate through a simple voting system. However, if the concentrated voting system is introduced, this shareholder would have a total of 2,000 voting rights (100 shares X 20 candidates). They could distribute these votes across multiple director candidates or allocate all to one candidate. Therefore, it allows minority shareholders to unite and place their preferred candidates on the board, making it difficult for major shareholders to structure the board solely with their desired candidates.
If the concentrated voting system is introduced, the more candidates there are, the easier it becomes for minority shareholders to elect directors that align with their intentions. If there is only one candidate, shareholders must hold more than 50% of the equity to place their desired candidate on the board.
If there are two candidates for director, this 'minimum equity holding ratio' drops to 33%. If there are N candidates, minority shareholders must hold at least 100/(N+1)% of the equity to concentrate their voting rights on a chosen candidate to ensure their election. If there are 20 candidates, minority shareholders can place their preferred candidate on the board with just 4.7% equity.
Industry insiders believe that the concentrated voting system proposed by Chairman Choi as agenda item 1-1 has a chance of being approved. Originally, the amendment to the articles of incorporation requires a special resolution at the shareholders' meeting, so 'at least two-thirds of the stock represented by shareholders in attendance and at least one-third of the total issued shares must vote in favor for it to pass.'
However, with the 'amendment of articles of incorporation to introduce a concentrated voting system,' the situation changes. Regardless of how much equity shareholders hold, their voting rights are limited to 3% of the total issued shares based on the so-called '3% rule.' This means that both MBK Partners and Youngpoong can exercise only up to 3% of their voting rights when voting on whether to introduce the concentrated voting system. In contrast, the Choi family, whose equity is distributed among several individuals, do not fall under the '3% rule' and thus are not limited in their voting rights.
◇ MBK 'The proposal for director appointment premised on the amendment of the articles of incorporation is likely to violate the Capital Markets Act.'
The point being raised by MBK-Youngpoong is not the agenda item 1-1 itself, but the proposals that are premised on the passage of item 1-1.
Agenda item 2 is 'the appointment of 7 directors based on concentrated voting with a limit of 19 directors.' It is based on the premise that the proposal to introduce a concentrated voting system will be approved. If it is rejected, directors will be appointed using the existing simple voting method.
Agenda item 3 is also 'the appointment of directors based on concentrated voting without a cap on the number of directors.' Likewise, it is based on the premise of passing agenda item 1-1.
In response, MBK-Youngpoong, citing opinions from legal experts, stated, 'Even if the shareholders' proposal for an amendment to the articles of incorporation concerning the introduction of the concentrated voting system is valid, the shareholders' proposal regarding director appointments through the concentrated voting method is ineffective.'
The evidence presented by MBK-Youngpoong is Article 382-2, Paragraph 1 and Article 542-7, Paragraph 2 of the Commercial Act. It states, 'Unless otherwise provided in the articles of incorporation, a request to appoint directors through a concentrated voting method can be made to the company.'
MBK-Youngpoong has focused on the phrase 'unless otherwise provided in the articles of incorporation.' A spokesperson for MBK interpreted this as stating that 'the articles of incorporation must not exclude the concentrated voting system at the time a request to appoint directors through a concentrated voting method is made.' In other words, since Korea Zinc was not allowed to introduce the concentrated voting system as per the articles of incorporation at the time of proposing the director appointment based on the concentrated voting method (on the 23rd), the proposal for director appointment based on that system is invalid.
MBK Partners claimed through legal representatives that 'the shareholders' proposal from YuMi Development to appoint directors using the concentrated voting method is a violation of the principle of shareholder equality and was made with arbitrary intent to manipulate the results of the voting exercise.'
Additionally, MBK holds the position that it is problematic that Korea Zinc concealed such shareholder proposals until the 20th, when the shareholders eligible to exercise votes at the temporary meeting were confirmed. MBK stated, 'If the shareholders who proposed the concentrated voting system from YuMi Development and Chairman Choi hid the introduction of the concentrated voting agenda while gathering equity, they would have traded with significant information unknown to other investors,' adding, 'This could be seen as a disturbance of market order under the Capital Markets Act.'
◇ Korea Zinc 'These are ridiculous claims that interfere with our plans to control the board.'
Chairman Choi's side dismissed MBK-Youngpoong's claims as 'nonsense.' A representative of Korea Zinc said, 'The concentrated voting system is a mechanism to protect the rights of minority shareholders and ensure the diversity of the board, but it seems that MBK-Youngpoong has determined that it would hinder their plans to control the board.'
Chairman Choi's side pointed out that in the shareholders' meetings of KT&G and JB Financial Group held this year, activist funds successfully appointed desired directors using the concentrated voting system, stating, 'It is practically the only system that allows entry into the board with a low equity ratio when major shareholders control the board.'
Chairman Choi's side maintains that there are no legal issues with the proposal for director appointment premised on the introduction of the concentrated voting system. A representative from Korea Zinc stated, 'Once the amendment to the articles of incorporation is approved at the shareholders' meeting, its effectiveness takes immediate effect, so it is possible to propose subsequent items under the condition that the amendment is passed.' They also noted that they sufficiently consulted with Kim & Chang Law Office before presenting this agenda item.