KT&G faces another legal battle with Korean activist fund

Singapore-based private equity firm Flashlight Capital Partners Pte. said Monday that it has filed court injunctions against KT&G Corp., beginning another legal battle against the world’s fifth-largest tobacco maker in a sign of strengthened shareholder activism. 

The court injunction on Oct. 6 seeks the disclosure of information related to the South Korean tobacco maker’s export business profitability, global distribution contracts with Philip Morris International (PMI) and $19 million reported as consulting fees, according to Flashlight Capital’s statement.  

The activist fund, which in March claimed that KT&G should introduce quarterly dividend payouts, extended an open letter to the cigarette maker in April to urge enhanced transparency in the company’s profitability export businesses. But KT&G responded in May that such disclosure would be delayed until more accurate data is available to protect shareholders’ interest, according to Flashlight Capital.

“How does concealing information safeguard shareholders?” asked Sanghyun Lee, Flashlight Capital founder and a former head of the Carlyle Group’s Seoul office.  

KT&G’s overseas sales make up 55% of its total cigarette business, and the export average selling price for key regions is much lower than the price in Korea, the activist fund said. The tobacco maker has stopped disclosing the price information in each market since 2021, leaving shareholders in the dark, Flashlight Capital added.

The PE firm also said KT&G’s extension of its heat-not-burn products’ global distribution contract with PMI to 2038, which was signed in January, has resulted in an absence of transparency on the contract’s potential risks.

“Can you imagine that Hyundai Motor Group would ever sign a partnership with Toyota Motor to export Korean electric vehicles for 15 years?” said Lee, criticizing the industry tie-in with a rival group. The activist fund has demanded that KT&G export the products independently, not via a partnership with an industry competitor.

In addition, Flashlight Capital asked for clarification on $19 million worth of consulting fees in the fourth quarter of 2022.

Global investment bank UBS revealed the figure in its February report, citing that the fees were paid to companies including the Goldman Sachs Group Inc., Boston Consulting Group, Deloitte Touche Tohmatsu Ltd. and Korea’s premiere law firm Kim & Chang.

Under Korea’s Commercial Act, a shareholder owning 3% or more of total issued and outstanding shares can request rights to inspect and copy the books, records and accounts of the company.

Flashlight Capital holds around a 1% stake in KT&G, which means the activist fund needs the agreement of minority shareholders holding around 2% ownership in aggregate.

Write to Jun-Ho Cha at chacha@hankyung.com

Jihyun Kim edited this article.