KT&G "Responds" to Commercial Act Amendment...What About Lotte Corporation, With the Most Treasury Shares?

KT&G Board Resolves to Cancel All Treasury Shares
Lotte Corporation on Alert Over Potential Disposal of 27% Treasury Stake

KT&G has decided to cancel all of the approximately 11 million treasury shares it currently holds. The decision came immediately after the National Assembly passed the "third amendment to the Commercial Act," which mandates the cancellation of treasury shares within one year of acquisition. It is drawing attention as the first case in which the intent of the legal amendment has been directly reflected in an actual management decision.

According to the retail industry on the 26th, KT&G announced on the 26th that it held a board meeting at its headquarters in Gangnam-gu, Seoul the previous day, where it resolved to convene the 39th regular general meeting of shareholders and decided to cancel all 10,866,189 treasury shares it currently holds. This corresponds to 9.5% of the total number of shares issued. Based on the previous day's closing price of 179,700 won, the amount is approximately 1.9 trillion won.

A view of KT&G's Sejong factory. Provided by KT&G.

The recently passed amendment to the Commercial Act stipulates that when a company acquires its own shares, it must cancel them within one year. This measure reflects criticism that treasury shares have been used as a means of securing friendly stakes or defending management control.

KT&G has also decided not to hold treasury shares on a standing basis for the purpose of employee compensation going forward. Instead, it will directly purchase up to 30,000 shares on the market and dispose of them immediately. After disposal, the number of treasury shares held by the company will be "zero."

The additional cancellation of 10,866,000 shares is expected to improve earnings per share (EPS) as the number of shares in circulation decreases. When the number of shares issued declines, earnings per share increase even if the total amount of profit remains the same. The ownership ratio and share of earnings attributable to existing shareholders will also expand.

Earlier, in 2024 KT&G announced a shareholder return plan worth 3.7 trillion won over four years, consisting of 2.4 trillion won in dividends and 1.3 trillion won in share repurchases and cancellations. From 2024 through last year, it paid out 1.2 trillion won in dividends and repurchased and cancelled 9.05 million treasury shares worth 1.1 trillion won. It also completed the cancellation of 10.1 million treasury shares it had previously held. Including the new share repurchases and cancellations, the total volume of treasury share cancellations amounts to 14.3% of the total number of shares issued as of the end of 2023, or a total of 19.15 million shares.

A KT&G official said, "We submitted the agenda item to cancel all treasury shares in reflection of the intent of the amended Commercial Act," adding, "We will continue to enhance both corporate value and shareholder value based on our competitive edge in corporate governance."

The retail industry is watching closely to see whether KT&G's preemptive move will spread to other large conglomerates. Among retail conglomerates, Lotte Corporation has the highest proportion of treasury shares. In October 2017, during the process of restructuring its governance into a single holding company, Lotte Corporation acquired treasury shares amounting to 32.5%. This occurred as it went through a series of spin-offs and mergers involving Lotte Confectionery, Lotte Shopping, Lotte Chilsung Beverage, Lotte Foods and others.

Subsequently, in June last year, it disposed of about 5% of its treasury shares, worth 147.6 billion won, to Lotte Property & Development, and currently holds 27.37%. Compared with other major retail conglomerates, whose treasury share ratios are below 10%, this is still a high level.

Lotte Corporation has already announced a plan to raise its average shareholder return ratio to 35% or more by 2028 through cash dividends and share cancellations. Following the passage of the latest amendment to the Commercial Act, it is reportedly reviewing the specific timing and methods of implementation. The amended Commercial Act will take effect immediately upon promulgation after a Cabinet meeting.

Meanwhile, KT&G will also submit a partial amendment to its Articles of Incorporation at this shareholders' meeting. It plans to add "printing and printing-related business" to its business purposes in preparation for launching commercial production at the Sejong Plant. It will also introduce electronic general meetings of shareholders. Pursuant to Article 542-14 of the Commercial Act, certain shareholders will be allowed to participate in resolutions electronically from remote locations. The method of exercising voting rights by proxy will also be expanded to "written documents or electronic documents."

Regulations related to the board of directors will also be revised. The existing title "outside director" will be changed to "independent director," and the names of related committees will be updated accordingly. The application method of the cumulative voting system will also be adjusted. Until now, when directors were appointed by cumulative voting, the representative director and other directors were classified into separate groups, but this provision has been deleted. By allowing the representative director and ordinary directors to be elected together, the company aims to enhance the effectiveness of minority shareholders' exercise of voting rights. The number of audit committee members elected separately will be increased to two. The retirement benefit rules for inside directors and executive officers will be integrated into a single "executive retirement benefit payment regulation." In addition, a new provision regarding the holding and disposal of treasury shares has been established to clearly state that the company may hold or dispose of its own shares only for management purposes or within the scope permitted by law.