A court has ruled that Korea Zinc's move to restrict the voting rights of Young Poong, its largest shareholder, at an extraordinary shareholders meeting in Jan. last year was unlawful. As the first merits ruling to recognize civil tort liability for restricting voting rights as a defense of management control, it is expected to affect future management control disputes.
According to investment banking (IB) industry and legal sources on the 13th, the Civil Division 17 of the Seoul Central District Court (Presiding Judge Jang Ji-hye) on Jan. 10 ruled in part for the plaintiffs in a damages suit filed by Young Poong and MBK Partners against Korea Zinc CEO Park Ki-deok. The court ordered Park to pay 100 million won in damages and delayed interest thereon.
The court found it unlawful that Korea Zinc, ahead of the extraordinary shareholders meeting in Jan. last year, used its overseas affiliate Sun Metal Corporation (SMC) to create a cross-shareholding relationship and, on that basis, restricted Young Poong's voting rights.
Article 369(3) of the Commercial Act provides that if a company holds 10% or more of another company's equity through a subsidiary, the voting rights of the shares that the other company holds in the first company are restricted. Korea Zinc restricted Young Poong's exercise of voting rights on that basis, but the court accepted Young Poong's argument, finding that SMC does not qualify as a subsidiary under Korea's Commercial Act.
The court determined that CEO Park led the voting-rights restrictions to defend the existing management's control and pushed ahead despite recognizing, or being able to recognize, the potential infringement of shareholder rights. It also found there was a high likelihood that, had Young Poong's voting rights been recognized, key agenda items such as appointing outside directors recommended by Korea Zinc would not have passed.
However, Korea Zinc said the ruling only addresses the voting-rights restriction measures at the extraordinary shareholders meeting in Jan. last year. It explained that the voting-rights restrictions at the regular shareholders meeting in Mar. last year are matters whose legality the Supreme Court has already recognized, and that the subject matter and legal issues differ from this ruling.
In response, Young Poong and MBK argued that the regular shareholders meeting case in Mar. last year assessed whether the Commercial Act's voting-rights restriction provisions applied on the premise that a cross-shareholding relationship had already been formed, whereas this case is the first merits ruling to determine the illegality of the act of forming a cross-shareholding relationship by using an overseas affiliate and the CEO's liability for damages, making its nature different.
Young Poong and MBK said, "Acts that artificially restrict the largest shareholder's voting rights on the grounds of defending management control cannot be permitted, and this ruling confirms that the management who led such acts bear legal responsibility."