Tender offer on Korea Zinc contributes to development of Korean capital market
"Chairman Yun B. Choi should prioritize protecting minority shareholders who are true owners"
According to the CFA Institute, the value of a financial security is determined by not only its claim on the company’s future earnings but by the rights associated with that security.
In our view, MBK Partners' bid to take over Korea Zinc has been met with wide support from the capital markets, as it could trigger a reassessment of the “various shareholder rights” at undervalued Korean listed companies. These rights grant shareholders the authority to participate in corporate governance matters, including the election of directors, the right to make shareholder proposals, and the approval of capital transactions.
Family businesses, when managed with a strong focus on shareholder value, can be successful. Numerous examples from Europe, the United States, and Southeast Asia demonstrate that family- owned companies can achieve long-term operating outperformance and strong share appreciation. Unfortunately, family businesses often face challenges when they transition to the third generation. In Korea, the transition to third-generation leadership at Samsung Group and Hyundai Motor Group has resulted in vastly different outcomes in terms of corporate performance and share price. Yun B. Choi, who chairs the board of directors at Korea Zinc, is another notable example of a third-generation business leader. His father Honorary Chairman Choi Chang-gul majored in business administration; his uncle Honorary Chairman Choi Chang-young majored in metallurgy; and his youngest uncle, Honorary Chairman Choi Chang-geun studied mining and minerals engineering, the three brothers collectively built Korea Zinc into a world-class non-ferrous metals company, demonstrating their exceptional leadership as the second generation of the family. However, the third-generation management, Yun B. Choi, has yet to prove his management capabilities. Since taking office as CEO in 2019 (and later as Group Chairman and BoD Chairman in 2022), he has not been successful in enhancing corporate value, facing challenges such as declining profitability and rising debt. During this period, Korea Zinc share has underperformed even the sluggish KOSPI during the period. Despite recent shareholder-friendly initiatives, the share price remained relatively stagnant, likely due to investor concerns over its growing debt burden, aggressive investment plans, and governance practices.
Prior to requesting support from his associates at Hanwha, LG, and Hankook Tire, Chairman Choi should first commit to placing the interests of the National Pension Service, domestic institutional investors, foreign investors, and retail investors, at the forefront of his efforts. The boards of directors of Hanwha, LG Chem, and Hankook Tire should sell their non-core equity investments in Korea Zinc, which amount to 8%, 2%, and 1%, respectively of the company’s outstanding shares. These investments were made under the pretense of a business partnership but are unrelated to their core businesses, in our opinion. Furthermore, Hyundai Motor Group, a shareholder with a 5% stake and a board member of Korea Zinc, should place the sale of its Korea Zinc shares on the agenda of its next board meeting. Apple and Google, despite their strong partnership, do not engage in cross- shareholding practices. Given Japan's efforts to reduce cross-shareholdings to enhance corporate governance, it is concerning that major Korean companies are expanding cross-shareholdings using treasury shares, which challenges market principles, shareholder interests, and government policies.
Korea Zinc’s BoD should act independently to ensure that decisions are made in the best interests of minority shareholders. As part of fiduciary duties, the board must conduct a mid-term review of the W582 billion investment case involving Igneo Holdings, a US e-waste recycling company and to request a post-investment report on the W556 billion private equity investment in One Asia Partners.
At the same time, we urge MBK Partners to make a full tender offer for all outstanding shares of Korea Zinc, instead of a partial one. This is the most effective way to safeguard the rights of minority shareholders and enhance corporate governance. While legislative changes are needed, Korea is an outlier among developed countries in allowing for such practices.
The controlling shareholders and the management, must always remain vigilant (like the expression “keep the CEO on his/her toes”) to deliver strong business performance and maintain high valuations for the goods of shareholders. This is the reason why leaders like Tim Cook of Apple, Jensen Huang of NVIDIA, and Satya Nadella of Microsoft have earned the unwavering trust of their shareholders.
September 27, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee
Tender offer on Korea Zinc contributes to development of Korean capital market
"Chairman Yun B. Choi should prioritize protecting minority shareholders who are true owners"
According to the CFA Institute, the value of a financial security is determined by not only its claim on the company’s future earnings but by the rights associated with that security.
In our view, MBK Partners' bid to take over Korea Zinc has been met with wide support from the capital markets, as it could trigger a reassessment of the “various shareholder rights” at undervalued Korean listed companies. These rights grant shareholders the authority to participate in corporate governance matters, including the election of directors, the right to make shareholder proposals, and the approval of capital transactions.
Family businesses, when managed with a strong focus on shareholder value, can be successful. Numerous examples from Europe, the United States, and Southeast Asia demonstrate that family- owned companies can achieve long-term operating outperformance and strong share appreciation. Unfortunately, family businesses often face challenges when they transition to the third generation. In Korea, the transition to third-generation leadership at Samsung Group and Hyundai Motor Group has resulted in vastly different outcomes in terms of corporate performance and share price. Yun B. Choi, who chairs the board of directors at Korea Zinc, is another notable example of a third-generation business leader. His father Honorary Chairman Choi Chang-gul majored in business administration; his uncle Honorary Chairman Choi Chang-young majored in metallurgy; and his youngest uncle, Honorary Chairman Choi Chang-geun studied mining and minerals engineering, the three brothers collectively built Korea Zinc into a world-class non-ferrous metals company, demonstrating their exceptional leadership as the second generation of the family. However, the third-generation management, Yun B. Choi, has yet to prove his management capabilities. Since taking office as CEO in 2019 (and later as Group Chairman and BoD Chairman in 2022), he has not been successful in enhancing corporate value, facing challenges such as declining profitability and rising debt. During this period, Korea Zinc share has underperformed even the sluggish KOSPI during the period. Despite recent shareholder-friendly initiatives, the share price remained relatively stagnant, likely due to investor concerns over its growing debt burden, aggressive investment plans, and governance practices.
Prior to requesting support from his associates at Hanwha, LG, and Hankook Tire, Chairman Choi should first commit to placing the interests of the National Pension Service, domestic institutional investors, foreign investors, and retail investors, at the forefront of his efforts. The boards of directors of Hanwha, LG Chem, and Hankook Tire should sell their non-core equity investments in Korea Zinc, which amount to 8%, 2%, and 1%, respectively of the company’s outstanding shares. These investments were made under the pretense of a business partnership but are unrelated to their core businesses, in our opinion. Furthermore, Hyundai Motor Group, a shareholder with a 5% stake and a board member of Korea Zinc, should place the sale of its Korea Zinc shares on the agenda of its next board meeting. Apple and Google, despite their strong partnership, do not engage in cross- shareholding practices. Given Japan's efforts to reduce cross-shareholdings to enhance corporate governance, it is concerning that major Korean companies are expanding cross-shareholdings using treasury shares, which challenges market principles, shareholder interests, and government policies.
Korea Zinc’s BoD should act independently to ensure that decisions are made in the best interests of minority shareholders. As part of fiduciary duties, the board must conduct a mid-term review of the W582 billion investment case involving Igneo Holdings, a US e-waste recycling company and to request a post-investment report on the W556 billion private equity investment in One Asia Partners.
At the same time, we urge MBK Partners to make a full tender offer for all outstanding shares of Korea Zinc, instead of a partial one. This is the most effective way to safeguard the rights of minority shareholders and enhance corporate governance. While legislative changes are needed, Korea is an outlier among developed countries in allowing for such practices.
The controlling shareholders and the management, must always remain vigilant (like the expression “keep the CEO on his/her toes”) to deliver strong business performance and maintain high valuations for the goods of shareholders. This is the reason why leaders like Tim Cook of Apple, Jensen Huang of NVIDIA, and Satya Nadella of Microsoft have earned the unwavering trust of their shareholders.
September 27, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee