After the board of Korea Zinc (KRX:010130) proposed various resolutions that give priority to shareholder values and protections for the rights of shareholders to discuss at next month’s extraordinary general meeting (EGM), MBK Partners and Young Poong have intensified vicious slanders on the board’s resolutions. Such a move rather proves the significance of these resolutions proposed by the board to the extent that they could disrupt the consortium’s attempt to take control of the board at the upcoming session, the only purpose of the consortium throughout its takeover bid. The consortium’s frustration at the resolutions is clearly shown in its contradictory stance on the adoption of cumulative voting, an iconic means of protecting minority shareholders and board diversity.

The consortium asserts that cumulative voting cannot be discussed at the upcoming extraordinary session it had demanded to convene despite its consent to the system itself. That clearly discloses what lies behind the consortium’s attempt. Its emphasis on governance improvements, including greater shareholder values and better financial structure, is just empty rhetoric to cover up the genuine purpose—taking over Korea Zinc.

Even in its press release, the consortium has defined cumulative voting as a means of protecting minority shareholders. Minority shareholder advocacy groups, civic groups, and political circles are seeking to make cumulative voting a legal obligation. However, the consortium opposes the adoption of this protection for minority shareholders in the upcoming session only because the means is disadvantageous to itself. The opposition indicates that the consortium is turning a blind eye to nothing but its resolution for nominating a group of 14 candidates to take control of the board, showing no sign of giving priority to protections for minority shareholders.

Cumulative voting provides protection for minority shareholders as agreed by the consortium

Cumulative voting is an election system where a shareholder has one vote per share, multiplied by the number of directors. As the consortium said in its statement, the method is regarded as a symbolic means of protecting minority shareholders. It ensures board diversity by allowing shareholders to hold the controlling shareholder in check and, if they are united, nominate their favorable candidate as a director.

Minority shareholder advocacy groups and even the market welcome the adoption of cumulative voting. Recently, political circles are making legislative efforts to amend the commercial law to strengthen the rights of minority shareholders.

In the respective annual general meetings (AGM) at KT&G and JB Financial Group in March this year, activist funds successfully took a seat in the boardroom thanks to cumulative voting. It is virtually the only method for shareholders with a minority stake to take a seat in the board controlled by the largest shareholder. That is why no one can disagree that cumulative voting is a symbolic measure to protect the rights of minority shareholders.

If the method is adopted, not only the consortium but also pension funds, institutional investors, and a group of minority shareholders can appoint their preferred candidate as board directors, enhancing diversity in the boardroom. The adoption of this method also represents the willingness of the current board and Chairman Yun B. Choi to surrender their vested rights to a significant degree.

In addition, the resolution for cumulative voting has been proposed in the same way that the consortium made the shareholder resolution. Therefore, it is an issue that deserves discussions and judgments of all shareholders at the upcoming extraordinary session.

Adoption of cumulative voting conditional to amendment to articles of incorporation is proven legitimate by various cases

The consortium asserts that the adoption of cumulative voting could deprive other shareholders of their rights to nominate candidates simply because they were not aware of the adoption. It is a simple objection: it wants to refuse the resolution because it did not expect or failed to predict it.

Article 542-7 of the Commercial Act states that a proposal for cumulative voting should be filed six weeks before a shareholders’ meeting. The law specifies a sufficient period of time given to both a corporation and shareholders for preparation.

Also, when a listed company rules out cumulative voting in the articles of incorporation, shareholders are entitled to propose an amendment to the articles of incorporation for the adoption of cumulative voting as the purpose of a general meeting under the commercial law. Legal circles agree that a shareholder resolution for cumulative voting can be proposed on condition that an amendment to the articles of incorporation is approved, and therefore that the company can propose such a resolution at a shareholders’ meeting.

According to legal interpretations and previous cases, an amendment to the articles of incorporation comes into effect immediately after it is approved by shareholders at a general meeting. Therefore, there is no procedural problem in proposing a follow-up resolution on condition that an amendment to the articles of association is approved. However, the consortium claims that this process is procedurally erroneous. This claim reminds of its two past attempts to seek an injunction against the Company’s tender offer, which have all been dismissed by the court. Legal assertions made by the consortium have been all proven wrong.

In fact, there are many cases where a shareholder resolution was proposed six weeks before a general meeting of shareholders on condition that an amendment to the articles of incorporation is approved at the same meeting. At Hanmi Science’s EGM last month, where nine out of 10 board members were appointed already, a shareholder resolution for appointment of two more directors was proposed on condition that an amendment to the articles of incorporation for an increase in the number of board seats is approved. Moreover, at Hanjin’s AGM in March 2021, a shareholder resolution for two more directors was proposed on condition that the articles of incorporation are amended to increase the number of directors. An extraordinary session at Sambu Engineering in November 2018 is also another similar case of a shareholder resolution conditional upon an amendment to the articles of incorporation. These cases clearly prove the legitimacy of a shareholder resolution proposed as a follow-up to an approved amendment to the articles of association.

Legal circles conclude that a shareholder resolution for cumulative voting is not different from these conditional cases, because the commercial act does not limit a proposal for cumulative voting only to a company that does not rule out cumulative voting in the articles of incorporation.

A company’s growth and future value should take precedence

The board reaffirms its positive stance on executive officer system, proposed by the consortium, irrespective of intention, as they can bring in benefits, such as greater accountability and expertise of the executive function as well as enhanced oversight capabilities of the board. However, it is the consortium who opposes the adoption of the reasonable method because of its obsessive attempt to take control of the board that dwarfs the consistent growth and development of Korea Zinc and protections for the rights of shareholders.

The consortium seems to pay no attention to the fact that cumulative voting and optimal board size – proposed by the board of Korea Zinc – are recommended by global proxy advisers like Glass Lewis and the Institutional Shareholder Services (ISS), as well as other advisory firms, both local and international.

If a group of 14 candidates proposed by the consortium are all appointed, the board will have nearly 30 directors, an unprecedently large and inefficient board that is hardly seen not only in Korea but also across the world. The board has proposed to set the number of directors to 19 to actively reflect recommendations from global proxy advisory firms.

The board of Korea Zinc also proposed drastic measures to improve shareholder values, such as new protections for minority shareholders, quarterly dividend declaration and stock split. The proposals are intended to set the company’s policy to be much friendlier to shareholders by demanding management to respect individual and minority shareholders, offering important information on decisions made by management to minority shareholders upon request, declaring quarterly dividend in addition to current interim dividend, and announcing par-value stock splits to improve access of investors, including minority shareholders.

Chairman Yun B. Choi stated, “The board and management of Korea Zinc are willing to accept any ideas that could be helpful to the company and shareholders.” He added, “It seems that wild accusations made by the MBK-Young Poong consortium against the resolutions proposed by the board are based on its strong belief that the resolution would disrupt its attempt to take control of the board at the upcoming shareholders’ meeting. It is our sincere hope that the upcoming meeting could serve as an opportunity for the consortium to work as partners to discuss the growth and development of Korea Zinc.”

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