Activist fund targets Samsung unit S1 in test of Korean governance reforms

S1

Tue 09:20

Flashlight seeks detail on CEO appointments, pushes for independent directors
Fund says steep discount reflects governance failures within Samsung Group
Security company's stock has consistently lagged KOSPI
S1 says CEOs chosen based on 'expertise and leadership', dividend 'above market average'
By Gregor Stuart Hunter
SINGAPORE, June 23 (Reuters) - Activist investor Flashlight Capital Partners is seeking changes to the board at South Korean security company S1 Corp 012750.KS, taking on a unit of the powerful Samsung conglomerate in an early test of corporate law reforms.
The Singapore-based fund will also demand greater disclosures on how executives are selected and remunerated, and may push for a seat on the board, its CEO Sanghyun Lee told Reuters.
Flashlight has built a stake of around $40 million in S1, reflecting some 2% of its market capitalisation, Lee said, declining to be more specific.
The activist campaign represents one of the first against an affiliate of Samsung - the biggest of many family-run "chaebol" conglomerates that dominate economic life in South Korea - since amendments were passed to the country's Commercial Act last year, including stronger board accountability, ​mandatory treasury share cancellation and new independent director requirements.
The revisions were designed to address the so-called "Korea Discount" - the tendency for local firms to have lower valuations than global peers due to the chaebols' opaque structures. 
Flashlight plans to unveil a shareholder proposal around October calling for the appointment of independent directors, the creation of a share price target and five-year strategy, and the distribution of cash on S1's balance sheet. 
Lee sent a letter on Tuesday to its board outlining the demands.
"Korea's Commercial Act requires directors to treat all shareholders fairly and equitably," Lee - a former Korea head at Carlyle Group - wrote in the letter, which was reviewed by Reuters. 
However, the board has "prioritised the interests" of Samsung Group, "while failing to give sufficient consideration to the interests of the remaining 80% of shareholders."
Samsung Group owns 20.6% of S1 shares, according to the company's website. S1 also holds 11% of its own stock as treasury shares, a practice that critics say allows company management to exercise a defence against hostile takeovers.
An S1 spokesperson said in a statement that the company will review "the best ways to enhance corporate value ... in a balanced manner whenever any shareholder makes proposals for our development, and we will communicate with the market accordingly".
The spokesperson also cited record revenue and operating profit last year, and a dividend payout "well above the market average".
Samsung did not respond to Reuters request for comment. 
S1 shares have slumped throughout most of the past decade and are down 2.4% year-to-date, even as the KOSPI has almost doubled this year, hitting record highs as investors piled into memory chipmakers Samsung Electronics 005930.KS and SK Hynix 000660.KS.
S1's annual general meeting is usually held in March.
Flashlight's Lee criticized what he called a "revolving door" of CEOs, all of whom were picked from within the Samsung conglomerate, and none of whom had prior experience in the security industry. 
S1's spokesperson said the company uses "a systematic evaluation and nurturing process based on internal regulations to identify multiple inside director candidates", all of whom have "proven expertise and leadership".
Lee in 2022 launched a campaign against KT&G Corp 033780.KS, South Korea's No.1 tobacco company, and ultimately succeeded in appointing a director to its board, marking a rare victory by an outside investor in a proxy battle in South Korea.

 (Reporting by Gregor Stuart Hunter; Editing by Sumeet Chatterjee and Kevin Buckland)
 ((gregor.hunter@thomsonreuters.com))