[Two Faces of Treasury Stock Trading] ① Pretending to Care for Shareholders... Ultimately Benefiting Only Major Shareholders

Defense of Management Rights through Share Buybacks and Exchanges
Flood of Requests from Minority Shareholders and Institutions for 'Share Cancellation'

"While it is welcome that the company has increased dividends and announced a plan to repurchase treasury shares worth 100 billion KRW, it is problematic if the treasury share repurchase is used for other purposes such as securing friendly stakes. Treasury share repurchases can only be returned to shareholder value when accompanied by cancellation." On the 30th of last month, KCGI, an activist fund led by CEO Kang Sung-bu, announced that it had acquired a 7.05% stake in DB HiTek and demanded the cancellation of treasury shares and the formation of an independent board of directors at DB HiTek.

Not only activist funds but also individual investors have voiced similar opinions at several shareholders' meetings held this year. 'Treasury share cancellation' is one of the key themes in this year's capital market. Although companies repurchase treasury shares under the name of shareholder returns, they have been using treasury shares to defend the management rights of major shareholders or to strengthen voting rights. While companies emphasize that treasury share repurchases are for shareholder returns, repurchases without cancellation are criticized as mere rhetoric.

KT shareholders' meeting held on March 31 at the KT Research and Development Center in Seocho-gu, Seoul. Photo by Dongju Yoon doso7@

Exchange After Treasury Share Repurchase... Used for Management Rights Defense

The most representative way companies use treasury shares as a means to defend management rights is through treasury share exchanges. After repurchasing treasury shares, they exchange them with companies friendly to the controlling shareholders to mutually strengthen control.

Last year, Hyundai Motor Company exchanged treasury shares worth 750 billion KRW with KT (with a 5-year disposal restriction). Hyundai Motor and Hyundai Mobis currently hold 4.69% and 3.1% of KT shares, respectively. KT also holds 1.04% and 1.46% of Hyundai Motor and Hyundai Mobis shares, respectively.

The stated purpose of this treasury share exchange was business synergy. However, securities firms view this as securing friendly voting rights. Hyundai Motor Group faces challenges in restructuring its governance. The Fair Trade Commission prohibits cross-shareholdings among large conglomerate affiliates. Hyundai Motor Group currently has a circular shareholding structure: Hyundai Mobis → Hyundai Motor → Kia → Hyundai Mobis. Chairman Chung Eui-sun needs to resolve the circular shareholding issue.

Hyundai Motor attempted to restructure governance through the spin-off of Hyundai Mobis in 2018, but it failed due to shareholder opposition. This is why the market does not view the KT and treasury share exchange purely as a business purpose. Treasury shares originally have no voting rights. However, when treasury shares are sold, voting rights are restored. Companies that have experienced management disputes or have low ownership by the owner family mainly engage in treasury share exchanges.

However, treasury share exchanges are not favorable to shareholders because dividends are diluted through the share exchange. The dividends allocated to the exchanged treasury shares reduce the dividends for existing shareholders. For example, the KT shares held by Hyundai Motor and Hyundai Mobis amount to about 7.79%. Based on KT's dividend per share (DPS) of 1,960 KRW this year, this results in a reduction of approximately 155 KRW per share.

If the company repurchases treasury shares from the market equivalent to the exchanged amount, the diluted dividend value can be restored. KT has announced plans to repurchase about 7.7% of its shares as treasury shares from the market but has not disclosed a specific timeline.

The Magic of Treasury Shares and Strengthening Voting Cohesion for Major Shareholders

The surge in decisions on spin-offs this year is also a background for the growing calls for treasury share cancellation. Unlike physical spin-offs, in a stock spin-off, shares of the newly established company are created according to the shareholding ratio. At this time, treasury shares, which originally have no voting rights, become shares with voting rights. This is called the 'magic of treasury shares.' For major shareholders, it is a useful means to restructure governance into a holding company system and expand control over the newly established company.

Lee Sang-heon, a researcher at Hi Investment & Securities, explained, "At the time of the spin-off, the shareholding relationship between the two companies is automatically formed without a separate share acquisition process," adding, "Instead of paying money to acquire shares, the major shareholder strengthened control by using treasury shares, which are distributable profits."

The large proportion of treasury shares is also pointed out as advantageous to controlling shareholders. There is an interpretation that the voting cohesion of major shareholders is strengthened in shareholder meetings' 'special resolutions.'

Important matters such as amendments to the company’s articles of incorporation, dismissal of directors and auditors, issuance of convertible bonds (CB) or exchangeable bonds (EB) to parties other than shareholders, and acquisition of goodwill affecting business are decided by 'special resolutions.' Special resolutions require approval by at least one-third of the total issued shares and two-thirds of the attending shareholders.

Researcher Lee Sang-heon explained, "Votes for and against special resolutions are usually close, but if the proportion of treasury shares is high at 15% or more, it tends to favor the controlling shareholder," adding, "This is because voting rights that might oppose the controlling shareholder are excluded to the extent of treasury shares."

These cases are cited as factors for the 'Korea discount.' In the U.S., when companies repurchase treasury shares, stock prices generally rise because repurchases mostly lead to cancellations. When treasury shares are canceled, the total number of shares decreases, resulting in an increase in earnings per share (EPS). This is a decisive difference from domestic companies. Hwang Se-woon, a senior researcher at the Korea Capital Market Institute, said, "The conflict of interest between major shareholders and minority shareholders stems from the practice of not canceling treasury shares after repurchase," adding, "Treasury share repurchases must lead to cancellations to truly result in shareholder returns, so it is necessary to express opinions encouraging treasury share cancellations, especially among institutional investors."

This content was produced with the assistance of AI translation services.