On the 23rd, the temporary shareholders' meeting of Korea Zinc ended in victory for Chairman Choi Yun-bum, but the prolonged management dispute has become inevitable. With the largest shareholder, MBK Partners-Young Poong, announcing legal action, it could take three more years depending on the progress.
The dispute between MBK-Young Poong and Chairman Choi is expected to proceed through two paths. Both sides will first contest the validity of the resolutions passed during the temporary shareholders' meeting. MBK-Young Poong will file for a preliminary injunction to suspend the resolution's effectiveness. If the injunction is granted, the winning side will shift to MBK-Young Poong, as their chances of winning at the regular shareholders' meeting in March will increase. If this happens, Chairman Choi's camp will likely file a lawsuit to annul the resolutions from the regular shareholders' meeting, meaning a prolonged dispute becomes unavoidable.
Both sides also plan to dispute whether Chairman Choi's camp has violated the Fair Trade Act. MBK-Young Poong has stated its intention to criminally accuse not only Chairman Choi but also his family and Park Ki-deok, the president of Korea Zinc, for alleged violations of the Fair Trade Act. For MBK-Young Poong to return the circular investment structure created by Chairman Choi's camp to its original state and eliminate potential future disputes, they must win this lawsuit. If Chairman Choi's side does not succeed here, they could face severe criminal penalties along with the loss of management rights over Korea Zinc, making it essential for them to win.
◇ 'Restriction on voting rights for mutual shares, is there an exception for foreign companies?
According to the investment banking (IB) industry on the 24th, MBK-Young Poong plans to file for an injunction soon to nullify the results of the temporary shareholders' meeting held the previous day. They intend to invalidate both the introduction of cumulative voting and the limitations on the number of directors, as well as the appointment of seven directors from Chairman Choi's side.
The reason MBK-Young Poong must respond swiftly with an injunction is that there is not much time left until the regular shareholders' meeting in March. They plan to first suspend the effectiveness of the resolutions from the temporary shareholders' meeting via the injunction and then re-engage at the regular shareholders' meeting. If the injunction is granted, the introduction of cumulative voting and the limitations on the number of directors will become null and void, allowing them to elect directors through a simple voting process where a majority equity stake is sufficient for approval. In this case, with MBK-Young Poong holding an equity stake of 46.7%, they would effectively emerge victorious.
MBK-Young Poong has cited 'errors in company law' regarding Chairman Choi's camp strategy as a basis for nullifying the resolution from the temporary shareholders' meeting. On the day before the temporary shareholders' meeting, Korea Zinc's 100% subsidiary, Sun Metal Corporation (SMC), suddenly announced that it had acquired 10.33% of Young Poong's shares from Chairman Choi's family and Young Poong Precision Corporation. As Young Poong already held 25.42% of Korea Zinc's shares, this acquisition prevented Young Poong from exercising voting rights over Korea Zinc, which is why Young Poong's voting rights were restricted during the temporary shareholders' meeting and why Chairman Choi's camp could achieve a complete victory.
According to Article 369(3) of the Commercial Act, if two companies hold more than 10% of each other's equity, they are prohibited from exercising voting rights over the other company. This is referred to as 'mutual shares.' However, MBK-Young Poong argues that Korea Zinc and Young Poong do not fall under this provision. SMC is a foreign corporation established in Australia, and a limited company, so the restriction on voting rights under the Commercial Act only applies to companies established under the Act and not to foreign companies or limited companies.
In this context, the legal representative for Chairman Choi, Ko Chang-hyun of Kim & Chang Law Firm, rebutted at the temporary shareholders' meeting, saying, "The provision of the Commercial Act that exempts foreign companies is merely regulatory and supervisory in nature for companies operating domestically," and noted that "there is also a legal interpretation by the Ministry of Justice that includes foreign subsidiaries under 'company subsidiaries' under the Commercial Act."
However, MBK countered that this claim is equally absurd. Kim Gwang-il, vice chairman of MBK, stated, "The provision exempting foreign companies applies not only under specific regulatory circumstances," adding that "there are also court precedents related to this issue."
◇ If Chairman Choi loses at the regular shareholders' meeting, the lawsuit for nullifying the resolution is expected to be prolonged... possibly up to three years
If the preliminary injunction to suspend the effectiveness of the resolutions from the shareholders' meeting is granted to MBK-Young Poong and they win at the regular shareholders' meeting in March, Chairman Choi's side will then need to attempt declaring the effectiveness of the regular shareholders' meeting null.
A legal industry source noted, "However, it is highly probable that Chairman Choi's camp will respond not with a 'preliminary injunction' but with a main lawsuit." If they were to file a preliminary injunction like MBK-Young Poong, it would likewise be heard in the 50th Civil Division of the Seoul Central District Court (under Director General Kim Sang-hoon), making it almost impossible to grant another preliminary injunction for Chairman Choi's camp if MBK-Young Poong's injunction is granted.
For the court to grant MBK-Young Poong's injunction, it must determine that the 'restriction of Young Poong's voting rights due to mutual shares' is not recognized under the Commercial Act. In other words, the ruling must state that foreign companies are not subject to restrictions on voting rights even when holding mutual shares. If the court makes such a ruling, it is virtually impossible for Chairman Choi's side to receive a contrasting judgment in the next injunction they may apply for after the regular shareholders' meeting.
Therefore, if Chairman Choi's side loses at the regular shareholders' meeting in March, legal experts predict that their next course of action will have to be a lawsuit for 'cancellation of the shareholders' meeting resolution.' They suggest that this could lead to another round of judgments in a different court, indicating a potential litigation battle lasting two to three years.
◇ MBK says, 'Even if we lose the injunction, we can win in the Fair Trade Act lawsuit... we have plenty of time'
What could happen if MBK-Young Poong loses this injunction to suspend the effectiveness of the shareholders' meeting? In this case, MBK-Young Poong must win against the criminal suit for alleged violations of the Fair Trade Act imposed by Chairman Choi's camp. This lawsuit is expected to take at least six months and potentially up to a year.
A representative from MBK stated, "If we win the lawsuit for the Fair Trade Act violation, the restrictions on Young Poong's voting rights will be lifted," adding that "while the annulment of Young Poong's voting rights will not retrospectively apply to the results of the temporary shareholders' meeting (it will not automatically revert the results), at future shareholders' meetings, Young Poong will be able to exercise its voting rights."
In this case, MBK-Young Poong must elect directors through a cumulative voting method in upcoming shareholders' meetings. They cannot immediately appoint as many directors as they want to as the company, but with their current equity stake (combined 46.7%), they can gradually seize control of the board of directors over time, meaning they will bring in one director at a time over a long term.
Vice Chairman Kim stated, "Our fund (the sixth blind fund mobilized for this management dispute) has a 10-year maturity, and we can extend it twice for one year each, so we have plenty of time," adding, "Having already invested a significant amount, I will do my best to rectify the company even if it takes several more years."
He emphasized, "On the other hand, Chairman Choi has little time left, as his term as director expires next March."
◇ Did Chairman Choi violate Article 36 of the Fair Trade Act?
There is another reason why MBK-Young Poong must win the lawsuit for violations of the Fair Trade Act. If the circular investment structure between Korea Zinc and Young Poong, caused by the acquisition of shares in SMC, is not restored, it may lead to future disputes again.
MBK-Young Poong claims that Chairman Choi's actions are violations of the Fair Trade Act for the following reasons. Article 36 of the Fair Trade Act states, "No one should engage in activities that evade the provisions from Article 18, Paragraphs 2 to 5 and Articles 19 to 25." According to Article 42 of the Fair Trade Act Enforcement Decree, the types of 'illegal acts' include "acquiring or possessing shares of a company using the name of another while having shares in its affiliated company. "
Vice Chairman Kim emphasized during a press conference that Chairman Choi's camp directly violated Article 36 of the Fair Trade Act. He interpreted 'self' in Article 42 of the Enforcement Decree as Korea Zinc, 'affiliated company' as Young Poong, and 'third party' as SMC. In other words, he stated that "Young Poong's shares that are held by Korea Zinc were acquired at Korea Zinc's expense using SMC's name."
MBK has stated that it will report Chairman Choi, President Park, and the Choi family to the Fair Trade Commission and the prosecution. Vice Chairman Kim said, "This act was carried out by Korea Zinc, and SMC lent its name," adding, "When the corporations, Korea Zinc and SMC, took action, there must have been decision-makers, and those decision-makers are Chairman Choi and President Park."
Chairman Choi and President Park are officials of Korea Zinc and also have held past and current positions at SMC. Chairman Choi stepped down from the board of SMC in mid-month, while President Park remains at SMC. MBK claims that the Choi family can be held as accomplices since they sold Young Poong shares to SMC this time.
According to Article 124 of the Fair Trade Act, violating Article 36 and engaging in unlawful activities can lead to imprisonment or fines. Article 129, Paragraph 3 states, "The Prosecutor General may notify the Fair Trade Commission and request a prosecution."