The activist fund Flashlight Capital Partners (FCP) filed a shareholder derivative lawsuit, stating that KT&G's former and current boards caused the company to incur a loss of approximately 1 trillion won through the donation of their own shares at no cost or at a low price. KT&G countered that this is FCP's "one-sided claim," claiming that the donation of shares was conducted legally, following all necessary procedures.
FCP announced in a press release on the 20th that it filed a shareholder derivative lawsuit on the 17th to recover the company's losses from the former board's donation of company shares to a foundation and an employee welfare fund at no cost or at a low price.
FCP explained that it had asked the board to investigate the actions of 21 KT&G executives who donated company shares worth approximately 1 trillion won over 17 years from 2002, but KT&G refused this request, leading to the filing of the shareholder derivative lawsuit.
A shareholder derivative lawsuit is filed by a shareholder on behalf of the company when the company neglects to hold directors accountable. If the plaintiff (shareholder) wins, the compensation goes to the company, not the plaintiff.
According to the Commercial Act, shareholders who own more than 1% of the total number of issued shares (0.01% for listed companies) must first ask the auditor or audit committee to file a lawsuit. If the auditor or audit committee does not file a lawsuit within 30 days, the shareholder can proceed with the derivative lawsuit.
FCP added that it has decided to cover all legal costs to improve governance at KT&G and in the domestic stock market.
FCP claims that the donation of KT&G's shares has been conducted under a meticulous plan since the company’s privatization in 2002. They argue that the board neglected its oversight duties while a foundation under the company secured more than 12% of voting rights (as of the end of 2023), which is more than the largest shareholder, Industrial Bank of Korea.
In response, KT&G denied the claims, saying they were not true.
KT&G stated that "FCP claimed the company donated its own shares totaling over 12% of voting rights to subsidiaries and foundations at no cost or at a low price, but in reality, half of those shares were related to paid grants to employee stock ownership associations where employees contributed directly, and such claims are entirely false," adding, "In terms of procedural legitimacy, all legal procedures required by law were followed, including thorough progress of board resolutions and transparent disclosures."
It was stated that donating some of the company's shares to public corporations and foundations aimed to stabilize workers' living conditions, enhance welfare, and utilize dividends for social contribution activities.
Both sides have remained at an impasse regarding KT&G's plan for disposal of its held treasury shares.
FCP pointed out that "KT&G announced in November 2023 that it would retire 7.5% of its treasury shares within three years, but after retiring a small amount early last year, they have taken no action or made any mention of when or how they would retire the remaining treasury shares, causing many shareholders to feel anxious."
They added, "During January 2023, Senior Vice President Bang Kyung-man (now the CEO) made a shocking comment that 'the effect of treasury share buybacks to boost short-term stock prices is limited,' amplifying questions about the lack of progress in retiring treasury shares, suggesting KT&G may intend to use them for purposes other than retirement."
Lee Sang-hyun, CEO of FCP, stated, "KT&G is a textbook case that demonstrates why the board's duty of loyalty to shareholders should be implemented," announcing, "Next month, I will disclose the results of CEO Bang Kyung-man's first year to shareholders."
In contrast, KT&G refuted, stating, "We are pursuing an active treasury stock retirement policy, having already completed the retirement of 3.5 million shares (2.5% of the total issued shares), and we have duly communicated to shareholders that additional retirements of 5% of our existing treasury shares are scheduled from this year through 2026, thus the claim that we have taken no action or made any mention of when or how we would retire treasury shares is also completely false."
They further expressed, "We are deeply concerned that unilateral claims from some shareholders may undermine the company's image and the original purpose of social contributions, and may infringe upon the common interests of all shareholders," pledging, "We will continue to do our best to enhance corporate value and maximize the interests of all shareholders."