The ongoing takeover battle for Korea Zinc is intensifying pressure on the South Korean government to implement legislative reforms aimed at enhancing investor protections in a market dominated by family-run conglomerates, known as chaebols.
Korea Zinc’s chairman, Yun B. Choi, recently abandoned a controversial plan to issue new shares intended to counter a takeover bid from the co-founding family’s Youngpoong Corp and private equity partner MBK Partners. This decision came after significant shareholder backlash and a regulatory investigation into the company’s governance practices.
Investors expressed concerns about the company’s strategy under Choi, who became chairman in 2022. Korea Zinc had engaged in cross-shareholding agreements with major firms like LG Chem and Hanwha Corp, raising questions about the use of company funds to bolster control rather than pursuing joint ventures or alternative contracts. Critics argue that such practices can insulate management from shareholder interests, echoing similar concerns in Japan where cross-shareholdings are being unwound.
Hahm Yong-il, senior deputy governor of the Financial Supervisory Service, noted that Korea Zinc’s actions have diminished investor confidence in board independence. The regulator is currently investigating the previously proposed share issue, even after its cancellation.
The need for legislative changes to protect minority shareholders and enhance board independence is becoming increasingly urgent. The ruling Democratic Party has proposed revisions to commercial law to extend fiduciary duties to shareholders, citing the Korea Zinc situation as a catalyst for long-overdue reforms. However, opposition from President Yoon Suk Yeol’s People Power Party and business groups raises concerns about potential vulnerabilities to foreign hedge fund attacks if such laws are amended.
Yoon has previously pledged to address the “Korea discount,” a phenomenon where South Korean companies are valued lower than their international counterparts due to low dividends and governance issues. Currently, the KOSPI index trades at a price-to-book multiple of 0.87, significantly below averages for Japanese and U.S. companies.
In light of the takeover battle, Choi has committed to stepping down as chairman and implementing measures to protect minority shareholders, preparing for a critical shareholder meeting early next year. If successful, the bid by Youngpoong and MBK would mark the first hostile takeover of a South Korean company by a private equity firm, potentially setting a precedent for similar disputes across approximately 200 listed companies.
The rise of activist investors in South Korea, although traditionally met with resistance, has seen a notable increase in campaigns from 2019 to 2023, suggesting a shift in the investment landscape. Experts believe that the developments surrounding Korea Zinc could serve as a pivotal moment for corporate governance reforms in South Korea.