Activist investor Flashlight Capital Partners has lost a closely watched legal challenge against former directors of South Korean tobacco giant KT&G, in a case that tested the extent of board accountability over treasury shares, according to a report by Bloomberg.
The decision comes as Seoul pushes through sweeping corporate governance reforms.
The Daejeon District Court on Wednesday rejected Flashlight’s claim for damages against 18 former KT&G directors. The Singapore-based investment firm said it plans to appeal the decision.
KT&G welcomed the ruling, saying the court had determined that the former directors acted lawfully in making the decisions at the centre of the dispute.
Flashlight had alleged that KT&G transferred around KRW1tn ($706m) of treasury shares over the 17 years following the company’s privatisation in 2002. The activist sought KRW69.8m in damages, arguing that the directors had been negligent in approving the transactions and that the transfers harmed shareholders.
At the heart of the case was the use of treasury stock, an issue that has become increasingly contentious as South Korea attempts to strengthen shareholder rights and tackle the so-called “Korea Discount” that has historically depressed valuations of domestic companies relative to international peers.
The lawsuit was filed before legislation introduced this year generally requiring Korean companies to cancel treasury shares within 12 months of acquisition. The reforms are intended to prevent companies from using treasury stock in ways that could favour management or controlling shareholders and undermine minority investors.
Flashlight argued that KT&G directors had approved transfers of treasury shares to foundations and other organisations, including one previously led by a former KT&G president. The fund claimed those decisions were detrimental to the company and its shareholders and that the directors should be held personally responsible.
The case was therefore closely watched as a potential test of whether directors could face greater legal exposure for corporate decisions involving treasury stock, particularly as South Korea seeks to improve governance standards.
Flashlight founder Sanghyun Lee had described the case as a critical moment for the country’s governance overhaul, arguing that boards have a central role to play in improving corporate accountability.
Treasury shares have become a particular focus of activist investors in South Korea. Although companies frequently cite shareholder returns as a reason for conducting buybacks, retaining rather than cancelling repurchased shares can give management greater flexibility to deploy the stock in transactions that critics say may benefit controlling interests.
