MBK and Young Poong consider injunction against Korea Zinc's voting changes

During the extraordinary general meeting of shareholders for Korea Zinc on the 23rd, the proposal to introduce a cumulative voting system raised by Chairman Choi Yoon-beom's side was passed. On this day, the Young Poong and MBK Partners alliance, which had its voting rights restricted by Chairman Choi, is expected to respond with an injunction to suspend the effectiveness of the shareholders' meeting resolution.

In addition, a criminal complaint is being considered against Chairman Choi for responsibility in causing a subsidiary company to unnecessarily acquire equity in Young Poong Precision Corporation, along with violations of the Fair Trade Act and the Foreign Exchange Transactions Act.

◇ Likely to fight at the March regular shareholders' meeting… If the injunction is granted, cumulative voting will be invalid

On the 23rd, according to investment banks (IB) and the legal community, MBK and Young Poong are seriously considering applying for an injunction to suspend the effectiveness of the extraordinary general meeting resolutions in court soon.

At the extraordinary general meeting of shareholders for Korea Zinc held at the Grand Hyatt Hotel in Yongsan, Seoul, the proposed amendment to the articles of association for allowing the cumulative voting system (Agenda Item 1-1) was passed. In the meeting, Park Gi-deok, the representative of Korea Zinc who serves as the chair of the board, restricted Young Poong's voting rights (which account for 29%), allowing only the voting rights held by MBK to be exercised. As Young Poong's absence changed the denominator, MBK's voting equity ratio is now 27.3%.

MBK and Young Poong are actively reviewing the option of immediately responding with an injunction to suspend the effectiveness of the shareholders' meeting resolution. An injunction to suspend the effectiveness of a shareholders' meeting resolution is intended to stop the effectiveness of a resolution when there are defects in the methodology or content of the resolution or the convening procedure. This means that they intend to invalidate not only the proposed introduction of the cumulative voting system passed at that meeting but also the appointment of directors by Chairman Choi's side.

In order to increase the chances of the injunction being granted, the MBK and Young Poong sides plan to stay at the meeting until the end to exercise even MBK's voting rights. One lawyer stated, "Staying at the shareholders' meeting and casting a dissenting vote makes it clear that we do not agree with the chair (Representative Park)'s proceedings."

The severity of the chair's infringement on shareholder rights is also expected to influence the injunction's outcome. In this shareholders' meeting, the voting ratio of Young Poong, whose rights have been restricted, reaches 29%. Therefore, legal experts explain that the degree of infringement on shareholder rights can be deemed serious.

However, whether MBK and Young Poong will request a separate shareholders' meeting remains undecided. If the shareholders' meeting concludes smoothly without conflict, it diminishes the justification for the court to permit a separate meeting. Also, as the regular shareholders' meeting in March approaches, it is uncertain whether the court will allow another extraordinary meeting. A request for a meeting must be followed by a six-week wait.

Therefore, MBK and Young Poong are considering competing at the regular shareholders' meeting instead of calling a separate extraordinary meeting. If the injunction to suspend the effectiveness of the shareholders' meeting resolution is granted before the regular meeting, directors can be elected through a simple voting method rather than cumulative voting. Since a simple vote is enacted when a majority of voting rights are secured, this would be extremely favorable for MBK and Young Poong, who hold a combined total of 46.7% of voting rights.

Earlier, on the 21st, the Seoul Central District Court ruled that the election of directors using the cumulative voting method was illegal. This decision came because the articles of association of Korea Zinc explicitly excluded cumulative voting at the time when shareholders from Yumi Development proposed its introduction. Therefore, the election of directors based on the premise of allowing cumulative voting was deemed impossible at this extraordinary general meeting, leading to a situation where MBK and Young Poong's victory was almost certain.

◇ "To avoid violations of the Fair Trade Act, engaging in illegal acts… considering criminal charges"

MBK and Young Poong believe that the restrictions placed on Young Poong's voting rights by Chairman Choi's side are illegal in several aspects.

The day before, Chairman Choi's side abruptly formed a circular investment structure among affiliates to prevent Young Poong from exercising its voting rights as a shareholder of Korea Zinc. Korea Zinc controls its subsidiary, Sun Metal Corporation (SMC), through its Australian intermediary holding company, Sun Metal Holdings, and SMC acquired 10.33% of Young Poong's equity from the Choi family and Young Poong Precision Corporation.

As a result, both Korea Zinc and Young Poong came to hold more than 10% of each other's equity. Young Poong already holds 25.42% (based on the number of issued shares) of Korea Zinc's equity. The Commercial Act (Article 369, Paragraph 3) prohibits companies from exercising voting rights over each other when they own more than 10% of each other’s equity.

MBK and Young Poong are first reviewing the option of criminally charging Chairman Choi's side for violating the Fair Trade Act. The current Fair Trade Act only defines circular investments among domestic affiliates as illegal, so creating a funding ring by including the overseas affiliate SMC itself is not legally problematic. However, Article 36 of the Fair Trade Act states that abusing circular investments so as to be 'illegal' is a violation. Therefore, acts that exploit the original intent of the law also fall under violations of the Fair Trade Act.

A legal source noted, "If Chairman Choi's side has deliberately utilized foreign affiliates to evade the circular investment regulation in the Fair Trade Act while having several subsidiaries in Korea, this could be viewed as a circumvention of the Fair Trade Act."

However, it is ambiguous whether 'utilizing foreign affiliates' is included in the general illegal acts defined by the Fair Trade Commission. Therefore, it cannot be guaranteed whether MBK and Young Poong can criminally charge Chairman Choi's side for violating the Fair Trade Act.

Furthermore, it is unclear who should be designated as the target for the criminal charge. The 'direct perpetrator' of the Fair Trade Act violation is Park Ki-deok, the representative of Korea Zinc, but it needs further examination whether Chairman Choi can be deemed an 'accomplice.'

A lawyer remarked, "Park Ki-deok's term will expire in March, so there would not have been a reason for him to execute such actions," and stated, "It seems reasonable to view Chairman Choi as an accomplice."

◇ “The Australian affiliate spent an unnecessary 57.5 billion won to buy Young Poong shares”

MBK and Young Poong also believe that Chairman Choi's side has violated the Commercial Act. An MBK official stated, "SMC is a foreign corporation established in Australia and is a limited company, thus the regulations regarding voting rights restrictions under the Commercial Act apply only to companies established under the Commercial Act and not to foreign companies or limited liability companies. Thus, unilaterally restricting Young Poong's voting rights would be a violation of the Commercial Act."

Another lawyer explained, "Under normal circumstances, it would be appropriate to first request the court to determine if 'Korea Zinc and Young Poong holding reciprocal shares means that voting rights can be exercised,' and it is unreasonable for the chair to unilaterally restrict a specific shareholder's voting rights."

This lawyer also stated, "From Chairman Choi's perspective, attempting to avoid violations of the Fair Trade Act by utilizing overseas companies has created vulnerabilities under the Commercial Act."

MBK and Young Poong believe there are also allegations of breach of trust against Chairman Choi's side. Despite SMC's management having no business reason to acquire Young Poong shares, it is argued that they unnecessarily spent 57.5 billion won to protect the management rights of the large shareholder.

In this case, it can be claimed that SMC's director committed breach of trust. Currently, the SMC board of directors only includes Park Ki-deok and Lee Sung-chae, an executive director of Korea Zinc. Originally, Chairman Choi and Executive Director Choi Ju-won were also on the board, but both have stepped down as of the 10th.

The fact that SMC is an Australian company could be a stumbling block making it difficult to file breach of trust allegations. However, a legal source stated, "Although SMC is a foreign company, the executives are Korean, and the funding for the equity acquisition very likely came from a Korean company, so it seems plausible that breach of trust allegations could be applicable."

Additionally, MBK and Young Poong plan to review whether Chairman Choi's side has violated the Foreign Exchange Transactions Act. An overseas subsidiary must report in advance to acquire domestic Korean won securities, and failing to go through the prior reporting procedure would constitute illegality.

Moreover, there is also a possibility of filing a lawsuit for damages against Chairman Choi's side. The legal community believes that instead of claiming damages incurred by Young Poong, SMC can accuse that it incurred damages.