Hello, this is attorney Kim Kwang-sik of Cheongchul Law Firm.

During the control contest between Korea Zinc and its largest shareholder, Young Poong and MBK Partners, a central issue was whether Korea Zinc could lawfully restrict Young Poong's voting rights under Article 369(3) of the Commercial Act after creating a "cross-shareholding" relationship by having an offshore affiliate acquire Young Poong shares. Two rulings reaching opposite conclusions were handed down in the first and second halves of 2026.

In April 2026 the Supreme Court, in injunction proceedings concerning the annual general meeting, held the restriction lawful. In July 2026, however, the Seoul Central District Court held in the main action concerning an extraordinary general meeting that the restriction was unlawful, and went so far as to impose damages liability on the representative director. The conclusions diverged because the courts assessed differently whether the offshore affiliate qualified as a "subsidiary" under the Commercial Act.

This post examines the purpose of the cross-shareholding voting restriction, the key difference that split the two rulings, the impact of the unlawfulness finding on the representative director and on the shareholder resolution, and the points listed companies and management should check.

[Question] In a control contest, if a company has an affiliate acquire shares in its largest shareholder to create a "cross-shareholding" relationship, can it block that shareholder's votes? Why did the courts diverge in the Korea Zinc case, and what liability follows an unlawful restriction?

[Answer]

1. Background — "cross-shareholding" as a card in a control contest

To counter intervention by its largest shareholder, Young Poong and MBK Partners, Korea Zinc's management used an Australian affiliate to acquire Young Poong shares, creating a relationship in which the two companies held each other's stock. It then sought to restrict the voting rights attaching to Young Poong's Korea Zinc shares under Article 369(3) of the Commercial Act. In practice, the structure was created by the offshore affiliate acquiring roughly a 10.33% stake in Young Poong, held by persons related to Chairman Choi Yun-beom, for approximately KRW 57.5 billion.

The restriction became contentious at the extraordinary general meeting in January 2025 and the annual general meeting in March 2025, and Young Poong and MBK pursued both injunction proceedings and a main action challenging the validity of the resolutions.

▶ Card news summary Amid a control contest, Korea Zinc used an offshore affiliate to buy Young Poong shares, creating a cross-shareholding, then relied on the Commercial Act to block its largest shareholder's votes.

2. What the cross-shareholding restriction is — Article 369(3) and the meaning of "subsidiary"

Article 369(3) of the Commercial Act provides that where a company, together with its parent and subsidiaries, or a subsidiary alone, holds more than one tenth of the total issued shares of another company, the shares of that company or its parent held by the other company carry no voting rights. The provision prevents distortion of governance through voting rights exercised without genuine capital contribution.

The crux is the scope of "subsidiary." Under Article 342-2, a company holding more than 50 out of 100 of another company's total issued shares is the parent, and the company so held is the subsidiary. Where Korea Zinc held Young Poong shares through an offshore affiliate, therefore, the restriction could be justified only if that affiliate qualified as a "subsidiary" under the Commercial Act. That is precisely where the two rulings parted company.

▶ Card news summary To restrict votes under the cross-shareholding rule, the offshore affiliate holding the stake must qualify as a "subsidiary" — more than 50% held by the parent.

3. Two divergent rulings — SMH (lawful) and SMC (unlawful)

In April 2026, in the injunction proceedings concerning the annual general meeting, the Supreme Court found that the Australian holding company (SMH) had been shown to be of the same or the most similar type to a stock company under Korean law, and so qualified as a "subsidiary." The restriction on Young Poong's votes at the March 2025 annual general meeting was accordingly held lawful, and Young Poong and MBK's re-appeal was dismissed.

In July 2026, by contrast, the Seoul Central District Court reached the opposite conclusion in the main action concerning the extraordinary general meeting. It found that the Australian affiliate holding the stake (SMC) had a closed structure — share transfers restricted in principle, a cap on the number of shareholders, and a requirement to convert to a public company upon listing — making it closer to a limited liability company than to a Korean stock company, in which shares transfer freely and shareholder numbers are unrestricted. It followed that SMC had not been sufficiently shown to be a "subsidiary" under Article 369(3), and the restriction premised on that status was unlawful.

▶ Card news summary The same rule produced different outcomes: SMH, resembling a stock company, qualified as a subsidiary and the restriction was lawful; the closed-structure SMC did not, and the restriction was unlawful.

4. What the unlawfulness finding means — director liability and defects in the resolution

The Seoul Central District Court ordered Park Ki-deok, the representative director of Korea Zinc, to pay KRW 100 million in consolation money plus delay damages for unlawfully restricting Young Poong's votes at the extraordinary general meeting. The court found that the representative director had committed an intentional tort, and treated the restriction not as a mere procedural defect but as conduct materially affecting the outcome of the meeting. It considered it highly likely that, had Young Poong voted normally, the proposal capping the number of directors and the appointment of outside directors nominated by Korea Zinc would not have passed.

This shows that an unlawful voting restriction can lead not only to personal damages liability for the representative director, but also to the resolution itself being exposed to rescission or nullity. A measure adopted to defend control may return to the company and its management as a far greater legal risk.

▶ Card news summary The court found an intentional tort by the representative director and awarded KRW 100 million. An unlawful restriction can taint the resolution and trigger personal liability.

5. What listed companies and management should check

First, where cross-shareholding is used through an offshore affiliate, the "subsidiary" requirement must be verified rigorously in advance. As these rulings show, whether the local entity's legal form is of the same or a similar type to a Korean stock company decides the outcome, so the affiliate's articles, share transfer restrictions and shareholder composition must be examined closely. Second, note that share transfers after the record date will rarely avoid or create a voting restriction retrospectively.

Third, an unlawful restriction is not only a ground for rescinding or nullifying a resolution but can expand into damages and breach-of-duty risk for the representative director, so legality review must precede the design of any control defence. Fourth, as shown by the KFTC's issuance of an examination report on suspected offshore circular shareholding at Korea Zinc, cross-shareholding and circular shareholding structures can raise issues under competition law as well as the Commercial Act, requiring an integrated review.

▶ Card news summary Verify the affiliate's "subsidiary" status, manage the record date, and weigh resolution defects, management liability and competition law rules on circular shareholding.

The Korea Zinc and Young Poong case shows concretely when the cross-shareholding voting restriction is lawful and when it is not. The outcome turned not on whether the rule was invoked, but on whether the affiliate holding the stake met the statutory definition of a subsidiary. Because the tools surrounding voting rights in a control contest are as risky as they are powerful, precise legality review in advance is essential.

Cheongchul Law Firm advises across corporate governance — responding to control contests, reviewing the legality of the exercise and restriction of voting rights, diagnosing Commercial Act and competition law risk in cross-shareholding and circular shareholding structures, injunction and main proceedings on the validity of resolutions, and advice on director and representative director liability. Please contact us whenever you need support on cross-shareholding or a control contest.