Young Poong (000670) and MBK Partners lost the first-round ruling in a shareholder derivative suit challenging Korea Zinc's (010130) tender offer for its own shares. The court held that even if Korea Zinc's management decided on the buyback to defend control of the company, the directors cannot be held liable for damages as long as the decision did not fall outside a reasonable range.
The 30th Civil Division of the Seoul Central District Court, presided over by Chief Judge Kim Seok-beom, ruled against the plaintiff on the 22nd in the damages suit Young Poong brought against 10 directors, including Korea Zinc Chairman Choi Yoon-birm.
In September 2024, Young Poong joined MBK Partners in launching a tender offer for Korea Zinc shares at 830,000 won each. Korea Zinc's board responded in October that year by resolving to buy back its own shares at 890,000 won apiece to defend control of the company.
Young Poong then filed the derivative suit. Under Article 403 of the Commercial Act and related provisions, a shareholder holding at least 1% of a company's total outstanding shares may demand that the company sue its directors to hold them accountable. Young Poong argued that Korea Zinc inflicted about 670 billion won ($470 million) in losses on the company by buying back its own shares at a price above its normal trading level. The claim was that Choi and other executives breached their duties of care and loyalty by making an unreasonable decision to preserve their own positions.
The court, however, found that the decision by Korea Zinc's management did not breach those duties. Directors have discretion in making management judgments, the court said. It added that if directors gather, review and examine reasonably available information without violating the law, and then make a business judgment in the reasonable belief that it serves the company's best interests, they bear no liability for damages unless the substance of that judgment is grossly unreasonable.
"The directors, who viewed the tender offer by the Young Poong side as a threat to Korea Zinc, made the decision after reviewing outside legal advice and court injunction rulings, without violating the statutory procedures and restrictions on the acquisition of treasury shares," the court said. Because the decision took into account the premium on the tender offer price and the financing plan, among other factors, it cannot be deemed grossly unreasonable and therefore does not amount to a breach of the duties of care and loyalty, the court said.
The court also found no violation of the laws and the articles of incorporation governing limits on treasury share purchases. Young Poong had argued that using a discretionary reserve set aside for a specific purpose by a shareholders' resolution to buy the shares violated Article 462, Paragraph 1 of the Commercial Act. That provision requires that capital stock and the total of accumulated capital reserves and earned surplus reserves be deducted in calculating the amount available for dividends.
The court said the rule on the ceiling for treasury share purchases "is merely a provision restricting the total amount, in accounting terms, that may be acquired," adding that "whether the provision has been violated cannot be argued on the basis of which account served as the source of the funds used to acquire the shares." It further noted that a discretionary reserve for a specific purpose is not among the items enumerated in that provision of the Commercial Act, so using it as a funding source for treasury share purchases cannot be treated as a legal violation.
"While the company's articles of incorporation bar the use of a discretionary reserve for a specific purpose as a source for interim dividends, that provision cannot be applied by analogy to the acquisition of treasury shares," the court said, concluding that the use of the funds did not violate the articles either.