Korea Zinc's unexpected massive equity capital
increase causes serious market disruptions
“Interests of the existing shareholders must be the primary consideration”
The Korea Zinc board's resolution on October 30th to issue 3.73 million new shares through a rights offering was a severe shock to its shareholders. The company's strategy of share buyback at W890,000 through debt financing and then issuing new shares at W670,000 (tentative) is a self-destructive move, in our view. This decision completely ignores the interests of shareholders, who are ultimately the owners of the company. As a result, Korea Zinc's stock price plummeted by the daily limit down of-30%, closing at W1,080,000, on October 30th. The unexpected W2.5 trillion equity capital increase has raised concerns among existing shareholders regarding the predictability and fairness of management decisions. Financial regulators must carefully review the BoD’s decision to ensure its legitimacy and investor interests are protected.
Boeing announced on October 29th that it would raise approximately $21 billion through a public share offering to strengthen its financial position. The company has been facing significant financial challenges due to a prolonged strike that has halted aircraft production. However, having previously signaled the possibility of both debt and equity capital raising,Boeing's announcement was largely anticipated by investors, leading to a positive share price reaction. This underscores the importance of predictability and effective communication between management and shareholders, which are essential qualities for a public company.
In light of the necessity of an equity capital increase to address Korea Zinc's alleged financial challenges, we would like to inquire whether the company's management and the BoD anticipated the current financial situation when they authorized the large-scale share buyback a few weeks ago.
The Yoon administration has been actively promoting value-up enhancement for listed companies since the beginning of this year. However, today's board decision, as reflected in the sharp share price decline, seems to be a clear case of value destruction and market disruption. This incident goes beyond Korea Zinc and raises concerns about the potential negative impact on the perception of Korean corporates by global investors.
Our Forum expresses deep concerns regarding Korea Zinc's board resolution for the following three reasons:
1. Concerns over the dilution of value for existing shareholders;
2. Questions regarding the necessity of the equity capital increase, the methodology used to determine the offering price, and whether the third-party expert opinions were considered to ensure the fairness of the process; and
3. Concerns about the independence and fiduciary duties of the board, particularly the independent directors who may have failed to fulfill fiduciary duties.
Principles of finance are that the primary objective of corporate management should be to maximize the value for existing shareholders, not new shareholders or those who are selling their shares. The dilution of shareholder value can lead to a vicious circle of declining share prices and increased volatility. Based on standard finance textbooks, Korea Zinc should issue new shares at a premium and buy back shares at a discount, instead. This is exactly the corporate governance principle that the proposed revision to the Commercial Act aims to establish.
The controlling shareholders of Hyundai Motor, Hanwha, and LG, often considered allies of Chairman Choi of Korea Zinc, must have been surprised by latest announcements and news. A director representing Hyundai Motor has already skipped several Korea Zinc board meetings. We believe that Hyundai Motor will likely abstain from participating in the forthcoming equity capital increase and a shareholder meeting to elect new directors proposed by MBK Partners. Hopefully, Hanwha Vice Chairman Kim and LG Chairman Koo will distinguish between personal and corporate matters and avoid the mistake of using shareholders' money to help a friend.
The Korea Zinc incident has underscored the urgent need for amendments to the Commercial Code. If directors remain solely loyal to the company and controlling shareholders, neglecting their duty of loyalty to minority shareholders, there is a risk of similar incidents occurring in the future. To prevent such occurrences, it is crucial to promote director education programs that focus on essential topics such as the protection of shareholder rights and the importance of board independence.
October 31, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee
Korea Zinc's unexpected massive equity capital
increase causes serious market disruptions
“Interests of the existing shareholders must be the primary consideration”
The Korea Zinc board's resolution on October 30th to issue 3.73 million new shares through a rights offering was a severe shock to its shareholders. The company's strategy of share buyback at W890,000 through debt financing and then issuing new shares at W670,000 (tentative) is a self-destructive move, in our view. This decision completely ignores the interests of shareholders, who are ultimately the owners of the company. As a result, Korea Zinc's stock price plummeted by the daily limit down of-30%, closing at W1,080,000, on October 30th. The unexpected W2.5 trillion equity capital increase has raised concerns among existing shareholders regarding the predictability and fairness of management decisions. Financial regulators must carefully review the BoD’s decision to ensure its legitimacy and investor interests are protected.
Boeing announced on October 29th that it would raise approximately $21 billion through a public share offering to strengthen its financial position. The company has been facing significant financial challenges due to a prolonged strike that has halted aircraft production. However, having previously signaled the possibility of both debt and equity capital raising,Boeing's announcement was largely anticipated by investors, leading to a positive share price reaction. This underscores the importance of predictability and effective communication between management and shareholders, which are essential qualities for a public company.
In light of the necessity of an equity capital increase to address Korea Zinc's alleged financial challenges, we would like to inquire whether the company's management and the BoD anticipated the current financial situation when they authorized the large-scale share buyback a few weeks ago.
The Yoon administration has been actively promoting value-up enhancement for listed companies since the beginning of this year. However, today's board decision, as reflected in the sharp share price decline, seems to be a clear case of value destruction and market disruption. This incident goes beyond Korea Zinc and raises concerns about the potential negative impact on the perception of Korean corporates by global investors.
Our Forum expresses deep concerns regarding Korea Zinc's board resolution for the following three reasons:
1. Concerns over the dilution of value for existing shareholders;
2. Questions regarding the necessity of the equity capital increase, the methodology used to determine the offering price, and whether the third-party expert opinions were considered to ensure the fairness of the process; and
3. Concerns about the independence and fiduciary duties of the board, particularly the independent directors who may have failed to fulfill fiduciary duties.
Principles of finance are that the primary objective of corporate management should be to maximize the value for existing shareholders, not new shareholders or those who are selling their shares. The dilution of shareholder value can lead to a vicious circle of declining share prices and increased volatility. Based on standard finance textbooks, Korea Zinc should issue new shares at a premium and buy back shares at a discount, instead. This is exactly the corporate governance principle that the proposed revision to the Commercial Act aims to establish.
The controlling shareholders of Hyundai Motor, Hanwha, and LG, often considered allies of Chairman Choi of Korea Zinc, must have been surprised by latest announcements and news. A director representing Hyundai Motor has already skipped several Korea Zinc board meetings. We believe that Hyundai Motor will likely abstain from participating in the forthcoming equity capital increase and a shareholder meeting to elect new directors proposed by MBK Partners. Hopefully, Hanwha Vice Chairman Kim and LG Chairman Koo will distinguish between personal and corporate matters and avoid the mistake of using shareholders' money to help a friend.
The Korea Zinc incident has underscored the urgent need for amendments to the Commercial Code. If directors remain solely loyal to the company and controlling shareholders, neglecting their duty of loyalty to minority shareholders, there is a risk of similar incidents occurring in the future. To prevent such occurrences, it is crucial to promote director education programs that focus on essential topics such as the protection of shareholder rights and the importance of board independence.
October 31, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee