How Korea’s treasury share reform diverges from global norms

Business community warns reform could undermine financial soundnesss, takeover defenses

View of the dealing room of Hana Bank in Seoul on Friday (Yonhap)

The Democratic Party of Korea’s push to mandate that listed companies cancel treasury shares is raising questions over compatibility with global standards, as major economies generally allow companies to hold such shares under certain conditions.

The concerns come as the Democratic Party, leveraging its majority control at the unicameral parliament, seeks to pass the third revision to the Commercial Act, requiring companies to retire treasury shares within fixed deadlines. Treasury shares are shares reacquired by the issuing company after buybacks.

President Lee Jae Myung has put broader corporate reform initiatives at the center of his “Kospi 5000” agenda, aimed at eliminating the so-called “Korea discount.” The low valuation of Korean companies’ stock, compared to international peers, is thought to be due to weakness in corporate governance.

Several versions of bills to amend the Commercial Act and the Capital Markets Act on treasury shares are already on the table. While the current law regulates how companies can acquire their own stocks, it does not specify how those shares should be disposed of. The proposed revisions either focus on newly acquired shares, requiring them to be retired immediately or within one year, or mandate that existing holdings be retired within six months to five years of the law’s enactment.

Proponents argue the measure would boost earnings per share by reducing the total share count and strengthen investor confidence. But it is causing headaches for South Korean conglomerates, which have long relied on treasury shares as a shield against hostile takeovers.

Business communities have raised concerns about the mandatory nature of the plan. The Korea Chamber of Commerce and Industry, in a report released last week, urged lawmakers to take a cautious approach, noting the revision could complicate restructuring in key industries, damage financial soundness and expose companies to threats against managerial control.

Korea vs. world

The KCCI also stressed that most major economies, including the UK, Japan and the US, allow companies to hold and cancel treasury shares at their discretion, and do not impose blanket obligations like those pursued by Korea.

In the US, companies typically have discretion over treasury shares. There is no federal US law or US Securities and Exchange Commission rule mandating cancellation, but they are mostly handled at the state level.

Most states, including Delaware and New York — home to many of the large companies — allow companies to hold and reacquire treasury shares, leaving the decision to cancel to the board of directors as stipulated in company resolutions.

California is an exception, where the concept of treasury shares was abolished decades ago. Repurchased treasury shares are treated as unissued, effectively considering them cancelled by default.

The United Kingdom also allows companies to keep and cancel treasury shares, with the company and board having discretion over when and how many.

Japan permits treasury shares without a cancellation mandate, granting authority to the board or shareholder approval, depending on the corporate governance structure.

Germany, meanwhile, has stricter rules: companies are permitted to hold treasury shares, but must dispose of shares exceeding 10 percent of capital within three years, or face automatic cancellation.

According to the KCCI, treasury stock ownership among the top 30 companies by market capitalization is higher in the US, UK and Japan than in Korea.

The average treasury stock ratio of Korea’s top 30 companies stood at just 2.31 percent, far lower than the US' 2.54 percent, Japan's 5.43 percent and the UK's 4.93 percent.

Industry observers say that while countries like the US and Japan permit a range of defense mechanisms, such as poison pills, golden shares and dual-class voting rights, Korea lacks such mechanisms and has solely relied on treasury shares to shield against hostile takeovers.

“Developed economies in other countries are allowed to practice at least two anti-takeover mechanisms, where Korea has virtually none other than treasury shares,” said an industry official. “New revision should be paired with stronger defensive mechanisms, or Korean companies will become even more vulnerable.”

Kang Seok-koo, head of the research division at the KCCI, also stressed the importance of discussing measures to defend the management rights of companies.

"Making treasury share cancellation mandatory could run counter to the development of the capital market and only create side effects, so a cautious approach is needed," he said.

"Rather than mandating cancellations, what is needed now is a serious discussion on ensuring fairness in the disposal process, under the premise of introducing measures to defend management rights."