FCP Files Shareholder Derivative Suit Worth Over 1 Trillion KRW Against KT&G... Company Calls It "One-Sided Claim" (Comprehensive)

"Causing Company Losses Through Free or Low-Priced Treasury Share Donations"
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"All Relevant Procedures Were Duly Followed"

Activist fund Flashlight Capital Partners (FCP) has filed a shareholder derivative lawsuit claiming that KT&G suffered losses worth over 1 trillion won due to the former board of directors' free or low-priced donation of treasury shares, and KT&G has dismissed this as a "one-sided claim," asserting that the treasury share contributions were conducted legally in compliance with all relevant procedures.

On the 20th, FCP issued a press release stating, "We filed a shareholder derivative lawsuit on the 17th to recover the company's losses caused by the former and current KT&G boards donating treasury shares free of charge or at low prices to affiliated foundations and in-house welfare labor funds." FCP explained that in January last year, they requested the board to directly investigate the matter and recover damages regarding the act of 21 KT&G executives donating treasury shares worth 1 trillion won over 17 years since 2002, but KT&G refused, leading to the filing of the shareholder derivative lawsuit.

A shareholder derivative lawsuit is filed by shareholders on behalf of the company to hold directors accountable and recover damages when the company neglects to pursue director liability. If the plaintiff (shareholder) wins, the compensation goes to the company, not the plaintiff. According to the Commercial Act, shareholders holding at least 1% of the total issued shares (0.01% for listed companies) must first request the auditor or audit committee to file a lawsuit, and if the auditor or audit committee does not file within 30 days, the shareholder may file the derivative lawsuit. FCP added, "We have decided to bear all legal costs to improve governance in KT&G and the domestic stock market."

FCP claims that KT&G's treasury share donations were carried out under a meticulous plan since KT&G's privatization in 2002. They argue that while the board neglected its monitoring duties, affiliated foundations secured more than 12% of voting rights (as of the end of 2023), which is more than the largest shareholder, Korea Development Bank.

Regarding this, KT&G stated that the claims are not true. KT&G said, "FCP claims that the company donated treasury shares exceeding 12% of voting rights to affiliated foundations free of charge or at low prices, but in reality, about half of the disposed treasury shares were paid contributions to the employee stock ownership association, where employees directly participate, so these claims are completely unfounded." They added, "From the perspective of procedural legitimacy, all required procedures under the law, including faithful board resolutions and transparent disclosures, were fully complied with." They further explained that the contribution of some treasury shares to public interest corporations and foundations aimed to stabilize workers' livelihoods, improve welfare, and support social contribution activities using dividends.

The two sides also diverged on the direction of KT&G's disposal of previously held treasury shares. FCP pointed out, "KT&G announced in November 2023 that it would cancel 7.5% of treasury shares within three years, but after canceling a small amount early last year, it has taken no action or made any mention of when or how it will cancel the remaining treasury shares, causing many shareholders to feel uneasy."

They continued, "In January 2023, then Senior Vice President (now CEO) Bang Kyung-man made a shocking remark that 'the impact of short-term treasury share cancellation on stock price is limited,' raising growing doubts about why KT&G has not canceled treasury shares so far," suggesting the possibility that KT&G might use treasury shares for purposes other than cancellation.

Lee Sang-hyun, CEO of FCP, said, "KT&G is a textbook case showing why directors' duty of loyalty to shareholders must be introduced," and also announced, "We will disclose CEO Bang Kyung-man's first-year performance report to shareholders next month."

On the other hand, KT&G stated, "We are actively pursuing a treasury share cancellation policy," and rebutted, "We have already completed the cancellation of 3.5 million treasury shares (2.5% of total issued shares) and have communicated faithfully to shareholders that additional cancellation of 5% of treasury shares is planned from this year through 2026. Therefore, the claim that we have taken no action or made no mention of when or how treasury shares will be canceled is completely false." They added, "We express deep concern that unilateral claims by some shareholders may damage the company's image and the original purpose of social contribution, potentially infringing on the common interests of shareholders," and concluded, "We will continue to do our best to enhance corporate value and maximize the interests of all shareholders."