1 Trillion Won Lawsuit Warning and Tender Offer Demand... Activist Funds Heating Up Since Early Year

KT&G Shareholder FCP Announces 'Trillion-Won Class Compensation Lawsuit'
Align Partners Sends Shareholder Letter "Implement Shareholder Returns"
Trend of Increasing Activism... Mixed Positive and Negative Evaluations

As the shareholder meeting season approaches in about two months, the activities of 'activist funds' are intensifying. Flashlight Capital Partners (FCP), a Singapore-based activist fund, has announced a 'trillion-won lawsuit,' claiming that KT&G donated its treasury shares to its public interest foundation free of charge. Align Partners, which stood out in last year's acquisition battle for SM Entertainment (SM), has already sent shareholder letters to bank holding companies, conducting a shareholder return campaign. Activist funds refer to investors who demand improvements in corporate management directions and exert influence over governance or decision-making.

'Lawsuit Pressure', 'Tender Offer Urging'... Active Since Early This Year

According to the investment banking (IB) industry on the 24th, FCP sent a lawsuit claim letter to KT&G's audit committee on the 10th, stating that if they do not file a lawsuit against current and former directors within a month, they will directly file a civil lawsuit as shareholder representatives demanding compensation from the board. FCP claims that "since 2001, 10.85 million treasury shares were donated free of charge to foundations and funds, causing approximately 1 trillion won in damages to the company and shareholders." The amount of damages claimed by FCP is calculated by multiplying 10.85 million shares by the recent stock price (90,600 won). In response, KT&G stated, "We contributed some treasury shares to fulfill corporate social responsibility," and "At the time of contribution, the board of directors resolved the related agenda in accordance with relevant laws and proper procedures."

Align Partners recently sent shareholder letters to seven domestic listed bank holding companies. The letters included demands to implement shareholder return policies aligned with previously announced policies at the settlement board meeting and to change the board composition, which is excessively concentrated in academia, to include various experts. This is the second time Align Partners has taken activist actions against banks, following last year’s campaign demanding increased dividends. In fact, all four major financial holding companies increased their dividend amounts, which was seen as a success for Align Partners.

Besides FCP and Align, several other activist funds have started shareholder activism early. After the management dispute at Namyang Dairy Products ended with a victory for Hahn & Company, Cha Partners urged a tender offer to buy out minority shareholders at 820,000 won per share. Cha Partners argued that shareholders suffered losses due to management vacancies during the litigation period. As of the closing price on the 23rd, Namyang Dairy Products’ stock price was 578,000 won.

'Resolving Korea Discount' vs 'Corporate Raiders'

Domestic activist fund activities are becoming increasingly active. According to a report released last year by the Korea Capital Market Institute, the number of companies targeted by shareholder activism increased from 34 in 2021 to 37 in 2022, and to 50 by the first half of 2023. A 'shareholder value exchange-traded fund (ETF)' was also created, focusing on these companies.

Opinions on activist funds are divided between positive views that they act as 'Robin Hood' helping to resolve the Korea discount (undervaluation of the Korean stock market) and negative views that they are 'corporate raiders' excessively pursuing short-term profits. Goldman Sachs analyzed last year that shareholder activism and efforts to improve corporate governance help increase corporate value and stock prices. "In the past, Korean companies focused on protecting domestic companies from foreign investors, but recent shareholder proposals are actively led by individual investors and domestic funds," it noted.

However, there are also considerable voices of caution regarding side effects. Hwang Se-woon, Senior Research Fellow at the Korea Capital Market Institute, said, "Despite their positive role, there are criticisms that shareholder activism funds focus excessively on short-term performance and cause management instability, increasing unnecessary costs for companies. It is important for investors to carefully judge whether active shareholder proposals are made in a way that enhances the long-term sustainability of companies."