High-stakes battle for Korea Zinc opens door for more hostile takeovers

South Korean conglomerates brace for new era of corporate control disputes

Illustrated using ChatGPT Dall-E 3

The high-stakes battle over control for Korea Zinc, the world’s leading non-ferrous metal producer, was the most significant event that shook South Korea’s mergers and acquisition market in 2024. While disputes over corporate control are not uncommon in South Korea, it was unprecedented for a conglomerate with assets worth 13 trillion won ($9 billion) to face a hostile takeover attempt from a domestic private equity firm.

The market predicts that the Korea Zinc case is just the beginning and that more companies will likely be exposed to similar hostile takeover attempts this year. MBK Partners, the private equity firm that teamed up with Young Poong to launch a tender offer for Korea Zinc, has denied claims that the bid is a hostile takeover as it teamed up with the smelter’s largest shareholder.

While there is room for debate, many argue that it meets the criteria of a hostile takeover since Korea Zinc Chairman Choi Yun-beom has long maintained control of the board and company management.

The extraordinary general meeting of shareholders scheduled for March 23 is expected to determine which side will take the lead in the dispute. Regardless of the outcome, the Korea Zinc case has reshaped public perceptions of hostile M&A attempts in the country. Once viewed as the domain of a few activist hedge funds, hostile takeover attempts have now entered the mainstream, with deep-pocketed private equity funds openly challenging traditional chaebol leadership structures.

Korea’s leading conglomerates have every reason to be alarmed by the Korea Zinc case. Many conglomerates are in the process of passing control from second and third-generation leaders to the next generation, a transition that has weakened governance structures centered on majority shareholders.

Unlike their Anglo-American counterparts, where the separation of ownership and management is standard practice, Korean chaebols are run by family owners with relatively low ownership stakes, typically in the 10% to 20% range. This leaves them vulnerable to external challenges from private equity firms and activist investors.

Hansol Chemical, a Korean specialty chemicals and materials maker, has been exploring ways to address its governance vulnerabilities for years. Chairman Cho Dong-hyuk and Vice Chairman Cho Yeon-ju, both second and third-generation heirs, collectively own just 15% of the company’s shares. In 2015, Hansol Chemical lost its position as the largest shareholder to KB Asset Management. The company explored a deal to swap Vice Chairman Cho’s stake with DI Dongil’s treasury stock last year, but the deal ultimately fell through.

DI Dongil, the fabrics and textile manufacturer that discussed the stake swap with Hansol Chemical, has also struggled with governance vulnerabilities. Its majority shareholders hold less than 20% of the company. DI Dongil narrowly avoided a management crisis last year when minority shareholders attempted to replace its audit committee. Although the motion was defeated with 60% of the vote, just shy of the 67% needed for approval, it underscored the growing influence of institutional and foreign investors, including the National Pension Service. In response, DI Dongil has been rushing to roll out shareholder-friendly policies to restore investor confidence.

Analysts warn that companies where the largest shareholder has a relatively low stake and a narrow lead over the second-largest shareholder are especially prone to management control disputes.

Na Jung-hwan, an NH Investment & Securities analyst, cited game developer NCSoft as an example. “NCSoft’s largest shareholder, CEO Kim Taek-jin, owns just 11.9% of the company, while Saudi Arabia’s Public Investment Fund (PIF) holds 9.3%, and Netmarble controls 8.9%,” he said. Although PIF and Netmarble describe their stakes as “strategic investments,” NCSoft’s relatively low ownership of the largest shareholder exposes it to hostile takeovers. Other companies flagged as vulnerable by Na include Hyundai Elevator, GC Holdings, Kumho Petrochemical, Hankuk Carbon, Asia Holdings, and Ananti.

[Noh Ja-woon]

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