Flashlight Capital urges KT&G to sue its directors for negligence

Singapore-based investment management firm Flashlight Capital Partners Pte. (FCP) has urged South Korean tobacco maker KT&G Corp. to sue its incumbent and former directors, including the chief executive, over improper corporate governance unaligned with shareholder interests.

In a letter sent to KT&G’s audit committee chief on Jan. 10, FCP requested the Korean tobacco company to file a lawsuit against 21 internal and outside directors, seeking compensation for their failure to oversee the “improper use of treasury stocks” to the detriment of shareholder interests.

The 21 directors include current CEO Baek Bok-in, who assumed the post in 2015, and former CEO Min Young-jin.

FCP said KT&G has repurchased its shares from the market through share buyback programs since 2001 and granted them to foundations and funds established and operated by inside directors, including Baek and Min, and KT&G's outside directors, making the organizations the largest shareholding group with a combined 9.6% stake as of the end of September 2023.

The share grant, which requires approval at a shareholders’ meeting, was executed only through decisions by KT&G’s board of directors, the Singapore-based private equity firm said.

FCP said 10.85 million KT&G treasury shares transferred to the foundations and funds were used to strengthen the incumbent and former CEOs’ management control.

The activist firm asked KT&G to decide by Feb. 10 whether or not to file a suit against the 21 executives to seek nearly 1 trillion won ($747 million) in compensation.

The amount is based on the valuation of 10.85 million shares at the closing share price of 90,600 won on Jan. 9.

If KT&G’s board of directors decides against a lawsuit, FCP will take legal action as a representative shareholder joined by other like-minded shareholders, sources said.

FCP owns a minority stake in KT&G.

FIRST SUIT AGAINST OUTSIDE DIRECTORS IN KOREA

If legal action is taken, it would mark the first time for an activist fund to sue external directors of a Korean company for dereliction of duty.

Founded by The Carlyle Group’s former Seoul office chief Sanghyun Lee in 2020, FCP is an investment management firm focused on improving corporate governance and unlocking long-term value at its portfolio companies.

Legal battles between activist funds and Korean firms over weak corporate governance have largely been directed at chief executives, including cases of Schindler Holding AG versus Hyundai Elevator Co., and an alliance of retail investors versus KT Corp.

Analysts said KT&G has become a major target of activist funds due to the weak structure of its outside director group, which lacks industry expertise.

Of KT&G’s six external directors, Lim Min-kyu, CEO of SK Materials Co., is the only one with relevant industry experience.

According to a recent Korea Economic Daily survey of 44 incumbent and former external directors of KT&G served since 2001, 12 were business executives while 17 were university professors. The rest were from the legal community, politicians and former government officials.

“Appointing people without proper industry experiences or expertise as outside directors is like asking them to only play the role of a rubber stamp,” said Kim Gyu-sik, former head of the Korea Corporate Governance Forum.

KT&G has faced several legal battles with FCP.

Last October, FCP filed a court injunction against the tobacco maker, seeking the disclosure of information related to the firm’s export business profitability and dubious global distribution contracts with Philip Morris International (PMI).

Write to Hun-Hyoung Ha and Dong-Hui Park at hhh@hankyung.com

In-Soo Nam edited this article.