Seoul’s Strategy on 'Korea Discount' Under Scrutiny Amid Korea Zinc Takeover Battle

The ongoing takeover battle for Korea Zinc is intensifying pressure on South Korea’s government to introduce legislative reforms aimed at improving shareholder protections and addressing the "Korea discount." This term refers to the persistent undervaluation of South Korean companies, largely due to governance issues linked to the dominance of family-run conglomerates (chaebols). The current conflict involves Korea Zinc’s chairman, Yun B. Choi, who recently abandoned a controversial plan to issue new shares in response to a takeover bid from Youngpoong Corp, a company co-founded by Yun’s family, and its partner, private equity group MBK Partners. The announcement of the share issuance plan had angered many investors, especially since it followed a recent share buyback at a 25% higher price, raising concerns about fairness and governance.

The decision to reverse the share issue came after mounting pressure from shareholders and a regulatory probe, which brought international attention to the corporate governance challenges facing South Korea. This episode has highlighted broader concerns about whether voluntary measures, like Korea Zinc’s attempts to boost its stock value, are sufficient to address the deeper issues of governance and shareholder protection. Many investors argue that stronger legislative actions are needed to ensure companies prioritize shareholder interests over management control.

Under Choi’s leadership since 2022, Korea Zinc has entered into cross-shareholding agreements with companies such as LG Chem and Hanwha Corp. While these arrangements were intended to secure stable partnerships for the company’s expansion into sectors like battery materials and hydrogen, critics argue that cross-shareholding practices can undermine corporate governance by insulating management from shareholder interests. Similar practices in Japan have been unwound in recent years, as they were seen as detrimental to corporate transparency and accountability.

Korea Zinc has defended its cross-shareholding strategy, asserting that these deals were necessary to ensure long-term stability. However, the company’s actions have raised concerns about the independence of its board, particularly as it seeks to fend off takeover attempts. Hahm Yong-il, senior deputy governor of South Korea’s Financial Supervisory Service, has emphasized that such moves contribute to investor skepticism regarding board independence and the fair treatment of minority shareholders.

The controversy surrounding Korea Zinc has reignited calls for legislative reform, with the Democratic Party proposing a revision to commercial laws to extend the fiduciary duties of board members to include protecting the interests of shareholders. However, the business community, including conglomerates like Samsung and Hyundai, has expressed concerns that such changes could lead to more shareholder lawsuits and undermine business operations. These debates reflect the growing divide between the need for stronger investor protections and the concerns of family-controlled businesses about losing control.

This battle has underscored the importance of addressing the "Korea discount" by improving corporate governance and increasing transparency in South Korea’s stock market. If the takeover bid by MBK Partners succeeds, it would represent the first hostile takeover of a South Korean company by a private equity firm, potentially sparking a wave of similar activist investor actions across the country. This could lead to fundamental changes in corporate governance practices and offer a path to higher valuations for South Korean companies.