(Aug 12): Former directors of a South Korean tobacco company prevailed in a closely watched shareholder lawsuit over the firm’s handling of treasury shares, a ruling testing the limits of board accountability as the country pushes ahead with sweeping corporate governance reforms.

The Daejeon District Court rejected the compensation claim on Wednesday from Flashlight Capital Partners against KT&G Corp’s former directors, according to the court and the Singapore-based fund, which said it will appeal.

KT&G said it respects the court’s ruling that found the former directors’ decision-making lawful.

The fund has alleged that KT&G transferred one trillion won (RM2.88 billion) in treasury shares over a period of more than 17 years following its privatisation in 2002, a claim that KT&G previously denied. In the lawsuit, Flashlight sought 69.8 billion won in damages from the company’s 18 former directors over the transfers, alleging negligence by the board.

The lawsuit predates South Korean legislation passed this year that generally requires companies to cancel treasury shares within a year as part of a broader reform to strengthen protections for minority shareholders. Still, the case was a closely watched test of how the courts view directors’ responsibility for decisions involving treasury stock.

The changes are part of a broader governance push aimed at narrowing the so-called “Korea Discount", or the persistent valuation gap between Korean companies and their overseas peers.

“A board of directors represents a crucial part of corporate governance reform,” Flashlight founder Sanghyun Lee said before the verdict. “It is a ruling at the most important juncture of South Korea’s corporate governance reform.”

Treasury shares have long been a focus of governance criticism in South Korea. While companies often buy back shares with the stated aim of boosting shareholder returns, they have not always cancelled them. Critics say companies could instead transfer treasury stock to parties friendly to management or controlling shareholders, potentially strengthening their hand in contested shareholder votes.

Flashlight sought to challenge that practice at KT&G, arguing that directors improperly approved transfers of treasury shares to foundations and other entities, including a foundation that had been headed by a former KT&G president. The fund argued those decisions damaged the company and its shareholders and sought to hold the directors personally liable.

KT&G previously said the transfer of treasury shares to foundations was part of its corporate social responsibility efforts. It said it had donated only 993,546 treasury shares, equivalent to 0.88% of outstanding shares, far below the one trillion won in donations claimed by Flashlight, and that the transfers followed appropriate procedures.

Uploaded by Arion Yeow