FSS investigates alleged “greenmail” by private equity firm

KCGI CI

South Korea’s financial watchdog launched an investigation into KCGI Co. over allegations that the private equity fund incurred losses to minority shareholders during a stock purchase for shares in DB HiTek Co.

“The dispute between KCGI and DB HiTek minority shareholders has been a recurring concern,” a senior official from Financial Supervisory Service (FSS) said in a phone interview with Maeil Business Newspaper on Wednesday.

The regulators said they would examine allegations of unfair trading practices made by KCGI, including greenmail, a hostile takeover tactic to secure short-term gains.

KCGI sold 2.5 million shares of DB HiTek to its parent company, DB Inc., through a block trade at 66,000 won ($47) per share during after-market hours on December 28th, 2023. The price was 12 percent higher than the closing price that day.

A non-profit organization for minority stakeholders commented on the transaction, saying, “It is highly unusual for block trades, which are typically carried out at a discount to market prices.” They also highlighted that DB HiTek‘s share price has since dropped by 40 percent from the deal price, depriving minority shareholders of the chance to sell their shares at a premium price, which they might have had if a tender offer had been made.