"Legal Action Over False Information Mentioned... Fierce Struggle Ahead of KT&G Shareholders' Meeting"

KT&G is facing sharp disputes from shareholders ahead of the general meeting that will address the appointment of Bang Kyung-man as the next CEO and the nomination of outside directors. IBK Industrial Bank of Korea, the single largest shareholder holding about 7.11% of the company's shares, has publicly opposed candidate Bang, while activist fund Flashlight Capital Partners (FCP), which holds less than 1% of shares, has repeatedly called for votes against the proposals by pointing out issues with KT&G's governance and profitability. In response, the company has accused FCP of spreading false information and even mentioned the possibility of legal action, creating an atmosphere where this general meeting is turning into a fierce battle.

According to industry sources on the 15th, FCP held an online briefing for domestic shareholders the previous afternoon, stating that if KT&G's governance issues are resolved, the problem of undervaluation of its stock price will be alleviated, and by 2028, the market capitalization could surge up to four times the current level. They urged shareholders to vote against the appointment of Bang Kyung-man, KT&G's Head of the General Division (Senior Vice President), as CEO at this general meeting. FCP has claimed that current KT&G CEO Baek Bok-in and board members since 2001 have caused losses to the company by donating about 10 million shares of KT&G treasury stock to foundations and funds free of charge instead of using them to enhance shareholder value through cancellation or sale. Lee Sang-hyun, CEO of FCP, said, "Through repeated 'self-donations' over more than 10 years, the management has effectively become the largest shareholder controlling 12% of shares," adding, "At every general meeting, the management has 'self-supported' themselves through this 12% stake, and this will inevitably be repeated at this meeting."

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FCP also claimed that KT&G's overseas operations posted losses for two consecutive years in both exported combustible cigarettes and global electronic cigarettes (HNB) from 2020 to 2022. This conclusion was drawn based on KT&G documents reviewed following a court decision in January, from which FCP independently calculated profitability. They estimated operating losses of approximately 70 billion KRW and 59 billion KRW in 2021 and 2022, respectively, in the overseas export combustible cigarette segment. For HNB exports, they estimated operating losses of about 30 billion KRW and 24 billion KRW for the same years. Earlier, when KT&G's CEO candidate recommendation committee confirmed Bang as the next CEO candidate, they highlighted his achievement of leading overseas sales to surpass 1 trillion KRW for the first time during his tenure as head of the global division. FCP appears to have cited these figures to emphasize the lack of substance behind these results.

In response, KT&G stated, "From 2020 to 2022, the combined operating profit from combustible cigarette exports and next-generation product (NGP) exports was approximately 550 billion KRW," adding, "the sales volume, revenue, and operating profit data claimed by FCP are figures that cannot possibly emerge from any form of analysis of the data submitted by the company and do not match the performance reports publicly disclosed on our website at all." Furthermore, regarding criticism of 'self-support' through treasury stock purchases by current and former executives, the company said, "The donation of treasury stock to public interest foundations is aimed at fulfilling social responsibility and ensuring the stability of nonprofit public foundations, and is unrelated to maintaining management control," emphasizing, "If false claims persist, we will have no choice but to take legal action to prevent damage to corporate value."

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The escalating power struggle is largely attributed to KT&G's first-time adoption of a cumulative voting system at this general meeting. This system allows shareholders to cast votes equal to the number of directors to be elected, rather than the traditional one vote per share. Since two directors are to be appointed, shareholders can exercise two votes per share and concentrate their votes on specific candidates. KT&G's board recommended Bang Kyung-man as CEO and Lim Min-gyu (CEO of MK Consulting) as an outside director, while IBK Industrial Bank of Korea nominated Son Dong-hwan (Professor at Sungkyunkwan University Law School) as an outside director candidate.

On the 12th, IBK Industrial Bank of Korea requested shareholders, through a public disclosure titled 'Reference Materials for Proxy Voting,' to support the nomination of outside director candidate Son Dong-hwan, but to oppose the appointments of CEO candidate Bang Kyung-man and outside director candidate Lim Min-gyu. Initially, Lee Sang-hyun of FCP also ran as an outside director candidate but voluntarily withdrew to avoid vote splitting and pledged support for the candidate nominated by IBK. Global proxy advisory firm ISS also released a report on KT&G that day, stating, "Considering that the integrated cumulative voting system will be used in this election, shareholders are encouraged to consolidate their votes to support Son Dong-hwan to increase the representation of dissident members on the board," effectively recommending opposition to the appointment of Bang Kyung-man as CEO.

For KT&G, the movements of the third-largest shareholder, the National Pension Service (NPS), which holds 6.36%, and foreign shareholders are expected to be key variables. In the process of appointing the next chairman of the POSCO Group, another widely held company without a controlling shareholder like KT&G, the NPS decided to support Jang In-hwa, a former POSCO CEO and internal candidate, who made it to the final round.

Meanwhile, KT&G's general meeting will be held on the 28th at the KT&G Human Resources Development Center in Daedeok-gu, Daejeon.

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