Kim Kwang-il, center, a partner at MBK Partners, speaks during a press conference at Lotte Hotel Seoul, Sept. 19. Yonhap

Korea Zinc's corporate governance has been severely undermined under the leadership of Chairman Choi Yoon-beom, private equity firm MBK Partners said Wednesday, alleging Choi sought to privately exploit and take control of the world's largest zinc smelter rather than prioritizing shareholders' interests.

This has been effectively undermining the authority of the board of directors, which is the fundamental decision-making body of a corporation, MBK added.

MBK's comments came amid a fierce battle over Korea Zinc's management rights, as the private equity firm has formed a coalition with the smelter's largest shareholder, Young Poong.

"If the board of directors of Korea Zinc had functioned properly, it would have been unthinkable for the firm to invest 560 billion won ($421 million) in OneAsia Partners, make the investment used for stock price manipulation in SM Entertainment and acquire the fully capital-impaired Igneo Holdings at 580 billion won," an MBK official said.

Young Poong, which was co-founded by Chang Byung-hee and Choi Ki-ho in 1949, established the smelter in 1974, and since then, the two families have maintained a unique business partnership. But a management dispute has strained the relationship since 2022 as the current Korea Zinc chairman, the grandson of co-founder Choi, has been seeking independence from Young Poong.

This has led to the Chang family agreeing to hand over 50 percent plus one share of Young Poong's 33.1 percent stake in Korea Zinc to MBK, with the private equity firm conducting a tender offer for up to 14.6 percent of Korea Zinc's shares by Oct. 4.

Currently, the Choi family holds a 15.6 percent stake in Korea Zinc.

MBK accused Choi Yoon-beom of investing approximately 560 billion won of Korea Zinc's funds into OneAsia Partners, a company run by his middle school classmate. This amount is approximately 1.4 times the total annual labor cost of Korea Zinc, which stands at 376.2 billion won.

MBK said over 80 to 90 percent of the capital contributions to the eight funds managed by OneAsia Partners were entirely provided by Korea Zinc, but the total loss on the investment is estimated at 137.8 billion won, or minus 24.8 percent, as of June.

Separately, about 100 billion won of the smelter's funds is currently under investigation for being allegedly used for stock price manipulation of SM Entertainment, resulting in Chairman Choi being reported to the prosecution last year on charges of violating the Capital Market Act, embezzlement and breach of trust.

When the smelter acquired Igneo Holdings, a U.S. e-waste recycling firm, which was in a state of complete capital impairment, for approximately 580 billion won, the board of directors of Korea Zinc was also rendered ineffective and failed to function properly, according to MBK.

Smartkarma, a Singapore-based investment research firm, sided with MBK, saying that the private equity firm's concerns regarding Korea Zinc were "legitimate."

"All in all, the poor investment by Korea Zinc in the past several years remains one of the most pressing concerns on the company," the research firm said in its report. "MBK's concerns on OneAsia Partners is especially important since many of the investments made by OneAsia Partners do not make financial sense."

The Korean Corporate Governance Forum, an association of shareholder activists, also said MBK's tender offer for Korea Zinc is welcomed from a capital market perspective, as it provides an opportunity for shareholders of undervalued domestic listed companies, like Korea Zinc, to reassess their rights, including exercising voting rights on major matters such as appointing directors at shareholder meetings.

From a corporate governance perspective, the association noted, "It is only logical for Chairman Choi to first promise to prioritize the protection of general shareholders' interests, including those of the National Pension Service, foreign investors and individual shareholders, before seeking assistance from groups led by his acquaintances such as Hanwha, LG and Hankook Tire."

The association then urged the boards of Hanwha, LG Chem and Hankook Tire to sell their respective stakes in Korea Zinc — 8 percent, 2 percent and 1 percent — on the market as these investments are unrelated to their core operations.

Executives and employees from Korea Zinc chant slogans opposing MBK Partners' tender offer during a press conference at Gran Seoul, Tuesday. Yonhap

Korea Zinc, meanwhile, has recently submitted an application to the Ministry of Trade, Industry and Energy to designate its technology as a national core technology, a status funded by the state to protect vital industries. Companies that possess national core technologies must obtain government approval before being acquired by foreign firms.

The move is widely seen as an attempt to fend off a potential takeover by the Young Poong-MBK coalition, as difficulty in selling a company to foreign entities ultimately impacts the business strategy of a private equity firm, which seeks to realize profits through a resale.

Kim Kwang-il, a partner at MBK, highlighted, however, that his firm is not planning to sell the smelter to foreign countries such as China, and therefore the Korea Zinc's application and the potential government approval do not hinder MBK's takeover efforts at all.

“We have experiences in the case of Doosan Machine Tools, as its technology was designated as a national core technology, too. We did not have any problem at the time,” Kim said.

MBK acquired Doosan Machine Tools in 2016 and sold it in 2021 to the domestic automotive parts company DN Automotive.

During a press conference, Sept. 19, Kim stressed that his firm hopes one of the domestic conglomerates will take ownership of Korea Zinc afterward as it is a key national industry.