Kim Kwang-il, center, a partner at MBK Partners, speaks during a press conference at Lotte Hotel Seoul, Sept. 19. Yonhap
The alliance between private equity firm MBK Partners and Young Poong filed a shareholder derivative lawsuit against the board of directors of Korea Zinc, seeking approximately 700 billion won ($497 million) in damages.
According to sources in legal circles, Thursday, Young Poong recently submitted a complaint to the Seoul Central District Court, arguing that the Korea Zinc directors, who approved a tender offer and a hastily made capital increase plan, failed to fulfill their duty of due care, resulting in losses of 673.2 billion won for the company, and therefore should be required to pay the corresponding amount in compensation.
The MBK-Young Poong alliance has been in a fierce battle with the world's largest zinc smelter and its chairman, Choi Yun-beom, over management rights.
Currently, the MBK side owns the largest share of Korea Zinc, holding a 39.83 percent stake following its tender offer and on-market purchases. Choi's side is estimated to hold around 34.65 percent after the treasury share buyback.
MBK claimed that the Korea Zinc board conducted the tender offer to buy back treasury shares at approximately 890,000 won per share, even though the firm's stock price was around 560,000 won per share at the time.
As a result, the company incurred a loss equivalent to the difference per share multiplied by the total number of shares purchased, which amounted to 2,040,030 shares.
This amount does not include interest expenses on corporate bonds or commercial papers the firm issued, or loans it borrowed from financial institutions to finance the share buyback.
Given that the board recently decided to cancel the capital increase plan aimed at raising 2.5 trillion won to repay the loans, the claim amount could increase if annual interest expenses, estimated at around 100 billion won, are factored in.
The zinc smelter withdrew the capital increase scheme on Wednesday after facing inspections by the Financial Supervisory Service (FSS), the country's financial watchdog, for causing significant confusion and misunderstandings among investors.
Korea Zinc Chairman Choi Yun-beom bows during a press conference at the Korea Chamber of Commerce and Industry in central Seoul, Wednesday. Yonhap
According to MBK, of the 13 members on the Korea Zinc board, 10 directors, including Choi, are being sued.
A shareholder derivative lawsuit is filed by shareholders on behalf of the company when it fails to hold directors accountable for their responsibilities. This type of lawsuit seeks to recover losses caused by directors' actions or negligence. If the plaintiffs (shareholders) win, the compensation awarded goes to the company, not to the plaintiffs themselves.
The latest lawsuit filed by the MBK alliance came after it vowed to keep working to hold the current management of the zinc smelter fully accountable for pushing for the share buyback and causing irreversible and significant damage to the company.
On Oct. 21, after the Seoul court dismissed its second injunction request aimed at halting the smelter's treasury stock buyback, MBK said, “Unlike the provisional injunction, which required a swift decision, the main lawsuit allows sufficient time to thoroughly examine and clarify the issues and illegality surrounding the share buyback.”
Also on Thursday, FSS Gov. Lee Bok-hyun said that Korea Zinc's withdrawal of its capital increase plan would not impact the ongoing inspection, affirming his intent to continue the probe.
“As the case is already under investigation for potential unfair trading concerns, it would be highly inappropriate to conclude the matter prematurely without going through each stage of the process,” he told reporters after concluding an overseas investor relations conference in Hong Kong.