The direction of the management rights dispute involving Korea Zinc, which has continued for five months since September of last year, is expected to be influenced by the interpretation of the Commercial Act. Depending on how the court judges the issue of Young Poong's acquisition of shares in Korea Zinc's Australian subsidiary, the results of last month's extraordinary shareholders' meeting could be completely nullified, or conversely, Chairman Choi Yoon-beom and the current management might gain the upper hand.
During the hearing on the provisional measures to suspend the validity of the resolutions from Korea Zinc's extraordinary shareholders' meeting held by the 50th Civil Division of the Seoul Central District Court (Chief Judge Kim Sang-hoon) on the 21st, the MBK-Young Poong alliance and Chairman Choi's side were in sharp opposition. MBK-Young Poong argued that Korea Zinc's subsidiary, Sun Metals Corporation (SMC), is a foreign company and a limited liability company; therefore, it does not fall under the regulations concerning cross-shareholding as stipulated in the Commercial Act, and that it was erroneous for Chairman Choi's side to restrict Young Poong's voting rights at the extraordinary shareholders' meeting on that basis.
On the other hand, Chairman Choi's side argued that Young Poong's acquisition of SMC's shares also falls under the cross-shareholding regulation. They acknowledged that SMC is a foreign company, but claimed that it is merely a 'tool' for acquiring Young Poong's shares in Korea Zinc, hence it is irrelevant. Furthermore, they emphasized that SMC is not a limited liability company but a joint-stock company. The outcome of the provisional measures is expected to be announced in early March after this month.
◇ As Young Poong buys shares in Sun Metals Corporation, Young Poong's voting rights at the shareholders' meeting are limited to 29%
According to the investment banking (IB) industry and legal circles, the two sides clashed over two major issues during the hearing held that day. One was whether Young Poong's acquisition of shares in SMC, a foreign company, falls under the cross-shareholding regulations of the Commercial Act, and the other was whether SMC is a limited liability company.
To understand why this issue is important, one must look back to last month's extraordinary shareholders' meeting. On the day before the meeting, on the 22nd of last month, Korea Zinc's Australian subsidiary, SMC, abruptly announced that it acquired 10.33% of Young Poong's shares from the Choi family and Young Poong Precision Corporation (an affiliate of Chairman Choi).
Young Poong already held a 25.42% stake in Korea Zinc. When SMC purchased shares in Young Poong, the effect was that Korea Zinc, the ultimate controlling company of SMC, indirectly acquired shares in Young Poong.
In response, Chairman Choi's side asserted that at the extraordinary shareholders' meeting held the following day, Young Poong could not exercise its voting rights regarding Korea Zinc. This was based on Article 369, Paragraph 3 of the Commercial Act, which prohibits companies from exercising voting rights over each other when they hold more than 10% of each other's shares.
As a result, at the extraordinary shareholders' meeting, Young Poong's voting rights (29% equity) were restricted, and only MBK's voting rights (27.3% after Young Poong's exit) could be exercised. The meeting concluded with a definitive 'victory' for Chairman Choi's side. MBK-Young Poong promptly filed for provisional measures to suspend the decision of the shareholders' meeting.
◇ SMC is indeed a foreign company, but…
The first issue is whether SMC, a foreign company, is subject to the cross-shareholding regulations. The MBK-Young Poong side emphasizes that SMC is a foreign corporation established in Australia. The provision for restricting voting rights in the Commercial Act applies only to companies incorporated under the Commercial Act, and not to foreign companies or limited liability companies.
In other words, because a foreign company named SMC is part of the cross-shareholding structure between Korea Zinc and Young Poong, the principles of domestic law do not apply to SMC and are severed.
Conversely, Chairman Choi's side argues that the fact that Korea Zinc and Young Poong are domestic companies is important, while the fact that SMC is a foreign company is irrelevant, hence the restriction on Young Poong's voting rights was justified.
A representative from Yulchon, the law firm representing Chairman Choi's side, explained, "If Korea Zinc were to purchase shares in Young Poong via SMC, SMC should be viewed as a 'tool' in simple terms," and added, "This subsidiary used as a tool, whether it is a foreign company or a domestic company, is subject to the regulations of the Commercial Act regarding cross-shareholding." They noted that this interpretation applies not only in Korea but also in Japan and Germany.
◇ Is SMC a limited liability company or a joint-stock company?
The second issue is whether SMC is a limited liability company or a joint-stock company. The MBK-Young Poong side argues that SMC's official name is 'Sun Metals Corporation Pty Ltd,' which indicates that SMC is a limited liability company. 'Ltd (Limited)' typically refers to a limited liability company.
In response, Chairman Choi's side refuted, saying, "SMC is a genuine joint-stock company that simply has 'Ltd' in its name," and added, "99% of companies in Australia have names that end with 'Ltd,' so where would you find a country where 99% of companies are limited liability companies?"
Another issue that determines whether SMC is a limited liability company is 'closure.' The MBK-Young Poong side claims, "Fundamentally, a limited liability company refers to a small, closed company, while a joint-stock company refers to a company that can freely transfer shares and raise capital through public offerings to expand its reach," stating that "SMC, being a private limited company with a limited number of shareholders, should indeed be considered a limited liability company."
The MBK-Young Poong side explained that Australia's limited liability company system is derived from British law, and that the corporate law content of Commonwealth countries is mostly similar. They emphasized that there is precedent in Korean Supreme Court rulings that regarded Hong Kong's private limited companies as 'non-public limited companies.' Hence, they argue that SMC, being an Australian company, should also be viewed as a limited liability company rather than a joint-stock company.
◇ “Interfering with grandfather's property rights using grandfather's money”
During the hearing, the MBK-Young Poong side also raised concerns about Chairman Choi's side's 'abuse of defensive rights.' They argued that the sudden acquisition of Young Poong shares through SMC to create a cross-shareholding structure goes against general principles.
A representative from Sejong Law Firm stated, "Assuming that Chairman Choi's side did not violate the law, even if their actions were legal, if it results in socially unfair outcomes, it does not align with the principle of good faith," adding, "Even if the rights are recognized by law, the law should not endorse their use in an anti-social manner."
This representative noted, "As Young Poong is the largest shareholder of Korea Zinc, one can see that one-third of the assets of SMC, a subsidiary of Korea Zinc, belong to Young Poong. From SMC's perspective, it completely prevented Young Poong from exercising its property rights (voting rights) by utilizing Young Poong's (the parent company's) assets. The cross-shareholding regulations were not established for such cases."
Both sides agreed to submit written statements by the 28th. The results of the provisional measures are expected to be announced in the first week of March.