[Invest&Law] FCP Strengthens Offensive Against KT&G... "Files Shareholder Derivative Suit Worth 1 Trillion Won"

One Year After FCP's 'Request to File Lawsuit'...
"Lawsuit Amount 1 Trillion Won"
Key Issue: 'Is the Foundation Donation Act a Loss to the Company?'

The conflict between KT&G and activist fund Flashlight Capital Partners (FCP) over the disposal of treasury shares has escalated into a 'shareholder derivative lawsuit.' With the lawsuit amounting to around 1 trillion won and both sides holding parallel positions on the disposal of treasury shares, a fierce legal battle is expected in court.

On the 20th, FCP announced, "We filed a shareholder derivative lawsuit on the 17th to recover damages to the company related to KT&G's board of directors donating treasury shares free of charge or at low prices to affiliated foundations and in-house welfare labor funds." A shareholder derivative lawsuit is a suit filed by shareholders against management who caused damage through illegal execution of duties. In the case of listed companies, shareholders holding more than 0.01% of shares for six months can file such lawsuits. Since KT&G's headquarters is located in Daejeon, this shareholder derivative lawsuit will proceed at the Daejeon District Court where the complaint was submitted.

One Year After FCP's 'Request to File Lawsuit'... "Lawsuit Amount 1 Trillion Won"

Earlier, FCP stated, "Twenty-one former KT&G executives donated treasury shares worth about 1 trillion won over 17 years since 2002, and the KT&G board of directors should directly investigate the matter and recover damages," demanding the company file a lawsuit in January last year. FCP claimed that the related donations have been carried out under a meticulous plan since KT&G's privatization in 2002. They argued that the board neglected its supervisory duties at the time and that affiliated foundations secured more than 12% of voting rights as of the end of last year.

However, KT&G responded, "The disposal of treasury shares was for the public interest purpose of fulfilling corporate social responsibility. It cannot be seen as an attempt by management to maintain control." They also emphasized ▲ the recognized business necessity for mutual growth such as stabilizing the livelihood and welfare of partner company workers ▲ the donation scale and conditions are not excessive considering the financial status ▲ all legal procedures and disclosures were followed.

FCP, filing the lawsuit about a year later, stressed, "All damages awarded will belong to KT&G," and added, "We have decided to bear all legal costs to improve the governance structure of KT&G and the domestic stock market."

Key Issue: 'Is the Foundation Donation Act a Loss to the Company?'

In court, a fierce dispute is expected over the purpose and function of the treasury share disposal. An FCP representative stated, "KT&G must prove that the company did not suffer damages due to the donation to the foundation."

On the other hand, KT&G maintains that "FCP's claims are unilateral false allegations." A KT&G representative said, "We donated some treasury shares to public interest corporations for the purpose of fulfilling corporate social responsibility, stabilizing workers' livelihoods and welfare, and mutual growth. The scholarship and welfare foundations create social value through long-term and sustainable social contribution activities using their dividends."

They also noted, "About half of the disposed treasury shares correspond to paid-in contributions to the employee stock ownership association, where employees directly participate," and added, "From the perspective of procedural legitimacy, all legally required procedures, including faithful board resolutions and transparent disclosures, were fully complied with."

On the same day, both sides also held opposing views on the 'treasury share cancellation policy.' KT&G currently holds about 13% of treasury shares excluding the donated amount. KT&G emphasized, "We have already completed the cancellation of 3.5 million treasury shares (2.5% of total issued shares) and have communicated faithfully to shareholders about additional cancellations of 5% of existing treasury shares planned from this year through 2026."

However, an FCP representative pointed out, "Risks related to governance have not been resolved." They added, "KT&G announced it would cancel 7.5% of treasury shares within three years, but after canceling a small amount early last year, there has been no action or mention about when and how the remaining treasury shares will be canceled, causing many shareholders to feel uneasy." They further stated, "Even if cancellations occur three times by next year, 7.5% of shares will remain. The largest shareholder, Industrial Bank of Korea, holds about 7.3%, but KT&G has yet to disclose any concrete plans regarding these substantial shares."

Meanwhile, KT&G is preparing for its regular shareholders' meeting in March. Lee Sang-hyun, CEO of FCP, raised the offensive tone along with the news of filing the shareholder derivative lawsuit, stating, "Next month, we will disclose to shareholders the first-year performance report of KT&G President Bang Kyung-man." Last October, FCP attempted to acquire Korea Ginseng Corporation, a KT&G subsidiary in the ginseng business, for 1.9 trillion won, but KT&G rejected the offer, stating, "FCP unilaterally disclosed the acquisition proposal for Korea Ginseng Corporation without prior discussion," and emphasized that "Korea Ginseng Corporation's health functional food business is one of KT&G's three core businesses."

This content was produced with the assistance of AI translation services.