🚨 Youngpoong Attempts to Recover Voting Rights Through Stock Dividends... Legal Controversy Intensifies

Today Korean Economic News | 2025.03.31

📌 Youngpoong Attempts to Recover Voting Rights Through Stock Dividends... Legal Controversy Intensifies

💬 Youngpoong recently decided on a stock dividend of 0.04 shares per share at its shareholders' meeting to dissolve its cross-shareholding relationship with Korea Zinc and recover voting rights. However, Korea Zinc responded by purchasing additional shares to rebuild the cross-shareholding relationship, intensifying the legal dispute between the two companies.

1️⃣ Easy Understanding

I'll explain the background of the cross-shareholding issue between Youngpoong and Korea Zinc, the current situation, and why this matters.

Cross-shareholding refers to when two companies own each other's shares. For example, Company A owns shares in Company B, and simultaneously, Company B owns shares in Company A. Korean commercial law restricts voting rights when this cross-shareholding exceeds a certain percentage (30%). This measure is designed to prevent distortions in corporate governance.

Youngpoong and Korea Zinc have maintained a cross-shareholding relationship for many years. Youngpoong owned about 18% of Korea Zinc's shares, while Korea Zinc owned about 32% of Youngpoong's shares. According to legal regulations, the portion of Korea Zinc's shares in Youngpoong exceeding 30% could not exercise voting rights.

Recently, Youngpoong decided to issue stock dividends instead of cash dividends at its shareholders' meeting. The dividend was 0.04 shares per share, meaning shareholders with 100 shares would receive an additional 4 shares. This increases the total number of issued shares, naturally diluting Korea Zinc's ownership percentage in Youngpoong to below 30%. If this happened, Korea Zinc would not be able to exercise voting rights for all of its Youngpoong shares.

In response, Korea Zinc purchased additional Youngpoong shares in the market to maintain its ownership above 30%. This effectively neutralized Youngpoong's stock dividend strategy.

As a result, both companies are engaged in legal battles against each other. Youngpoong claims that Korea Zinc's additional share purchase violates the Fair Trade Act, while Korea Zinc counters that Youngpoong's stock dividend unfairly infringes on minority shareholders' interests and is an improper defensive measure for corporate governance.

This dispute is not merely a fight between two companies but could become an important case for Korean corporate governance. It involves various issues including governance problems in conglomerates with restrictions on cross-shareholding, protection of shareholder rights, and the legitimacy of management defense measures.

The outcome of this case could influence the governance strategies of other companies in similar situations. It also has significant implications for corporate management transparency and enhancing shareholder value. Investors need to carefully examine how such governance disputes might affect the corporate value and stock prices of these companies.

2️⃣ Economic Terms

📕 Cross-Shareholding

Cross-shareholding refers to a relationship where two companies own each other's shares.

According to Article 369, Paragraph 3 of the Commercial Act, if a company owns more than 10% of the total issued shares of another company, that other company cannot exercise voting rights for the shares it owns in the first company.
Cross-shareholding is regulated due to concerns about governance distortion and capital hollowing.

📕 Stock Dividend

A stock dividend is a method where a company distributes its own shares to shareholders as dividends instead of cash.

From the company's perspective, it has the advantage of compensating shareholders without cash outflow.
From the shareholders' perspective, the number of shares held increases, but the total share value does not change significantly due to the dilution effect.

📕 Voting Rights Restriction

Voting rights restriction means legally limiting the exercise of shareholders' voting rights under certain conditions.

Voting rights may be restricted for cross-shareholdings, treasury stocks, and shares owned by specially related persons under certain conditions.
This is an institutional measure to ensure fairness and transparency in corporate governance.

📕 Corporate Governance Defense

Corporate governance defense refers to various strategies and measures taken by current management to maintain control.

Various defense mechanisms exist, including stock dividends, treasury stock purchases, poison pills, and golden shares.
While these can contribute to management stability, they can be controversial due to the possibility of damaging shareholder value.

3️⃣ Principles and Economic Outlook

💡 Legal Principles and Economic Significance of Cross-Shareholding and Voting Rights Restrictions

Let's examine the legal principles and economic significance of regulations related to cross-shareholding.
- First, we need to understand the legal background and purpose of cross-shareholding regulations. Article 369, Paragraph 3 of the Commercial Act stipulates that "if a company, its parent company, or its subsidiary owns more than one-tenth of the total issued shares of another company, the shares that the other company holds in the company or its parent company shall have no voting rights." This is a measure to prevent artificial capital formation and governance distortion through cross-shareholding. If cross-shareholding were permitted without restrictions, companies could expand voting rights through mutual shareholding without substantial capital investment. This could undermine the basic principle of capital markets—"the unity of risk and ownership"—and strengthen the leverage effect where a small number of controlling shareholders control companies with minimal capital. Additionally, holding each other's shares without substantial capital can lead to "capital hollowing," which could also be problematic from a creditor protection perspective.
- Second, we should examine the historical context of Korean conglomerate governance and cross-shareholding. Korean conglomerates have traditionally shown governance characteristics where a small number of controlling shareholders control the entire group through complex circular shareholding structures. In such structures, cross-shareholding was an important means of strengthening control. However, as corporate governance improvement became a major task after the 1997 financial crisis, regulations on circular shareholding and cross-shareholding were strengthened. In particular, the 2014 amendment to the Fair Trade Act prohibited new circular shareholding, and many conglomerates have since resolved their circular shareholding structures. However, existing cross-shareholding relationships still remain in many cases, leading to occasional governance disputes. The case of Youngpoong and Korea Zinc can be understood as a typical cross-shareholding dispute in this context.
- Third, let's analyze the governance utilization of stock dividends and the mechanism of voting rights dilution strategies. Stock dividends are a method where companies distribute their own shares to shareholders instead of cash, generally used as a means to secure financial flexibility. From a governance perspective, however, stock dividends can be used as a strategic tool to change the voting rights structure. When stock dividends are implemented, the total number of issued shares increases, and existing shareholders' ownership percentages are proportionally diluted. In Youngpoong's case, a stock dividend of 0.04 shares per share can be seen as an attempt to increase the number of issued shares to reduce Korea Zinc's ownership below 30%. This is part of a management defense strategy utilizing the voting rights restriction provisions of the Commercial Act. When the stock dividend is implemented, Korea Zinc's ownership in Youngpoong would be automatically diluted to below 30%, and this would result in restricted voting rights for all of Korea Zinc's Youngpoong shares.
- Fourth, we need to consider the economic significance of such cross-shareholding disputes and their impact on market efficiency. Complex governance structures, including cross-shareholding, can undermine market transparency and efficiency. Investors find it difficult to accurately assess the true value and risks of companies due to complex control relationships, which is often cited as one cause of the "Korea discount." Additionally, there's a possibility of intensified conflicts of interest (agency problems) between controlling shareholders and minority shareholders. Controlling shareholders can exercise more voting rights than their actual economic stake through cross-shareholding, increasing incentives for pursuing private benefits. This can lead to decision-making focused on maintaining control rather than maximizing corporate value. On the other hand, there's also a counterargument that management stability can be beneficial for long-term investment and strategic decision-making. The argument is that long-term investment and innovation are possible without the threat of hostile takeovers.
The cross-shareholding dispute between Youngpoong and Korea Zinc provides important implications beyond a simple conflict between two companies, highlighting fundamental issues in Korean corporate governance and directions for improvement. Legally, it makes us reconsider the purpose and application of voting rights restriction provisions for cross-shareholding; economically, it raises issues of governance transparency and capital market efficiency; and from a corporate management perspective, it addresses the balance between management defense and shareholder value enhancement.

Let's analyze the strategic actions and their implications in the management dispute between Youngpoong and Korea Zinc.
- First, we need to deeply analyze Youngpoong's stock dividend strategy and intentions. The stock dividend strategy chosen by Youngpoong can be seen as a subtle method to restrict Korea Zinc's voting rights without cash outflow. Generally, cash dividends provide shareholders with actual economic benefits but entail cash outflow from the company. Stock dividends, on the other hand, allow companies to distribute dividends to shareholders without cash outflow. Youngpoong decided on a relatively high ratio of 0.04 shares per share, which effectively increases the total number of issued shares by about 4%. This proportionally dilutes all shareholders' ownership percentages, with Korea Zinc's ownership in Youngpoong expected to decrease from 32% to about 30.8%. However, since this figure still exceeds 30%, Youngpoong might have planned to use additional methods to further reduce Korea Zinc's ownership. For example, they could further increase the number of issued shares through employee stock options or third-party allotment capital increases. This strategy by Youngpoong demonstrates a new case of using stock dividends as a governance defense mechanism.
- Second, let's examine Korea Zinc's response strategy and the legal and economic implications of additional share acquisitions. Korea Zinc responded to Youngpoong's stock dividend decision by purchasing additional Youngpoong shares in the market. This was a strategic response to maintain a voting rights restriction clause by raising the diluted ownership back above 30%. While this was a necessary measure for Korea Zinc to maintain its influence over Youngpoong, this response raises several legal and economic issues. First, there's the question of whether additional share acquisition between companies belonging to a conglomerate with cross-shareholding restrictions is permitted under the Fair Trade Act. The Fair Trade Act prohibits cross-shareholding between companies in such conglomerates, but there's room for interpretation as to whether strengthening existing cross-shareholding relationships falls under this prohibition. Economically, the question arises whether such additional share purchases, which use company resources for governance disputes, align with the management goal of maximizing shareholder value. Especially from minority shareholders' perspective, there may be questions about whether such resource allocation contributes to the company's long-term value enhancement.
- Third, we need to analyze the issues in the legal dispute between the two companies and possible legal outcomes. The legal dispute between Youngpoong and Korea Zinc encompasses several legal issues. The first issue is the legitimacy of the stock dividend. Whether Youngpoong's stock dividend is part of a legitimate dividend policy or an improper action solely intended to restrict Korea Zinc's voting rights is in question. Stock dividends are a legal form of dividend under the Commercial Act, but if their purpose is to infringe on a specific shareholder's rights, they could violate the "principle of shareholder equality" or the "principle of good faith." The second issue is the legitimacy of Korea Zinc's additional share purchases. Whether this constitutes strengthening cross-shareholding prohibited under the Fair Trade Act, or a legitimate exercise of rights in response to Youngpoong's improper actions, could be an issue. The third issue involves the interpretation and application of Article 369, Paragraph 3 of the Commercial Act on voting rights restrictions. The court's interpretation of how ownership changes due to stock dividends affect voting rights restrictions, and how additional share purchases modify these legal effects, is important. This legal dispute is a complex case at the intersection of Korean company law and fair trade law, and the court's judgment could influence the governance strategies of other companies in similar situations.
- Fourth, we need to consider the impact of such management disputes on the corporate value and shareholders of both companies. Management disputes can temporarily undermine a company's management stability and increase uncertainty. This can increase stock price volatility and investors' risk premiums. Additionally, when management attention and company resources are allocated to governance disputes instead of core businesses, business competitiveness may weaken. In the long term, such disputes might lead to improved corporate governance, but the process can involve considerable costs and confusion. From minority shareholders' perspective, careful observation is needed to determine whether such disputes will lead to enhanced shareholder value or remain merely wasteful conflicts over control. Particularly in the non-ferrous metals industry, which is both companies' core business and faces intense global competition, it's important to minimize the negative impact of such internal disputes on competitiveness.
The dispute between Youngpoong and Korea Zinc is an important case showing how governance conflicts in Korean companies unfold and are resolved. It provides insights in various aspects, including the strategic use of stock dividends and share acquisitions, the complexity of legal issues, and the impact of such disputes on corporate value. The outcome of this case will serve as an important precedent for decision-making by companies in similar situations in the future.

💡 Institutional Directions for Improving Corporate Governance and Enhancing Shareholder Value

Let's explore the institutional directions for improving corporate governance and enhancing shareholder value as suggested by the Youngpoong-Korea Zinc case.
- First, legal regulations regarding cross-shareholding and voting rights restrictions need clarification. Current Commercial Act and Fair Trade Act contain regulations on cross-shareholding and circular shareholding, but there are still unclear aspects in their application and interpretation. In particular, more clear criteria are needed regarding how voting rights restriction provisions in Article 369, Paragraph 3 of the Commercial Act apply when ownership percentages change due to stock dividends or capital increases. Such legal uncertainties cause disputes between companies like Youngpoong and Korea Zinc, potentially leading to unnecessary legal costs and management instability. Legislatively, more specific provisions on the acquisition or disposal of shares, capital increases, and stock dividends by companies in cross-shareholding relationships are needed to increase predictability. Additionally, improving coherence between the Commercial Act and Fair Trade Act and eliminating regulatory blind spots are required.
- Second, enhancing disclosure and expanding shareholder participation for corporate governance transparency is important. Complex governance structures like cross-shareholding make it difficult for investors to understand companies' actual control relationships and risks. To improve this, governance-related disclosures should be strengthened, with transparent information provided on voting rights restrictions and controlling shareholders' influence. Also, it's desirable to promote general shareholders' participation in decision-making through expanded adoption of electronic voting in shareholders' meetings, cumulative voting, and activation of shareholder proposals. In the case of Youngpoong and Korea Zinc, if such transparency and participation mechanisms were strengthened, conflicts around cross-shareholding issues might have been managed more effectively. Particularly, active participation from institutional investors and minority shareholders can check unilateral decision-making by controlling shareholders and contribute to balanced governance development.
- Third, an institutional framework that seeks balance between management defense and shareholder value is needed. Youngpoong's stock dividend strategy can be seen as a management defense measure, but the impact of such defense strategies on shareholder value is complex. Management stability can help with long-term investment and strategy formulation, but excessive defense can weaken management accountability and damage shareholder value. Therefore, clear criteria and procedures are needed to evaluate the legitimacy and appropriateness of management defense measures. For example, institutional mechanisms could be established that require independent evaluation by the board of directors and shareholder approval for major management defense measures, or that review whether defense measures align with the interests of the company and shareholders as a whole. Such institutional balance would help prevent unnecessary disputes and focus on the essential goal of maximizing corporate value.
- Fourth, improving incentive structures for long-term corporate value enhancement is important. The dispute between Youngpoong and Korea Zinc tends to focus on short-term control rather than long-term corporate value. To address this issue, it's important to establish incentive structures that allow management and shareholders to focus on long-term corporate value enhancement. Management compensation systems should be linked to long-term value creation rather than short-term performance, and policies promoting long-term responsible investment by institutional investors are needed. Additionally, environmental, social, and governance (ESG) factors should be systematically reflected in corporate evaluations and investment decisions to encourage sustainable corporate operations and value creation. Such long-term oriented approaches will provide a foundation for more constructively resolving governance issues like cross-shareholding.
The cross-shareholding dispute between Youngpoong and Korea Zinc is an important case showing the challenges and improvement directions of Korean corporate governance. Through this case, we can reaffirm the importance of clarifying legal regulations, enhancing governance transparency, balancing management defense and shareholder value, and focusing on long-term value. Such institutional improvements will contribute to increasing the efficiency and reliability of the entire Korean capital market, beyond simply resolving disputes between specific companies.

4️⃣ In Conclusion

The cross-shareholding dispute between Youngpoong and Korea Zinc provides important implications for Korean corporate governance issues and directions for improvement. Youngpoong attempted to induce voting rights restrictions by diluting Korea Zinc's ownership percentage through stock dividends, while Korea Zinc responded with additional share purchases, escalating into a legal dispute.

At the core of this case is Article 369, Paragraph 3 of the Commercial Act on cross-shareholding voting rights restrictions. This provision is designed to prevent distortion of corporate governance and artificial capital formation, but there are still unclear aspects in its application and interpretation. This legal uncertainty can cause disputes between companies and undermine market efficiency.

It's also noteworthy that stock dividends were used as a means of management defense. Stock dividends are originally a way to compensate shareholders without cash outflow, but in this case, they were used as a strategic tool to restrict a specific shareholder's voting rights. This raises questions about the balance between management defense and shareholder value enhancement.

Such disputes can negatively impact both companies' management stability and shareholder value in the short term. There's a risk that business competitiveness could weaken as management attention and resources are allocated to governance disputes rather than core businesses. In the non-ferrous metals industry, where global competition is fierce, such internal disputes could be burdensome for both companies.

To improve these issues in the future, clarification of regulations related to cross-shareholding, enhancement of governance transparency, expansion of shareholder participation, and improvement of incentive structures focused on long-term corporate value are needed. These institutional improvements will help prevent unnecessary disputes and contribute to increasing the efficiency and reliability of the Korean capital market.

🚨 Youngpoong Attempts to Recover Voting Rights Through Stock Dividends... Legal Controversy Intensifies ​