62.5% of Companies Oppose Third Commercial Act Amendment Mandating Retirement of Treasury Shares

The South Korean government and the ruling party are pushing for a third amendment to the Commercial Act, which would require companies to retire their treasury shares. However, more than half of listed companies holding treasury shares have expressed opposition to this proposal.

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On November 12, the Korea Chamber of Commerce and Industry announced the results of a survey conducted on 104 listed companies holding more than 10% of their shares as treasury stock. According to the survey, 62.5% of respondent companies opposed mandatory retirement of treasury shares. A neutral stance was taken by 22.8%, while only 14.7% supported the introduction of such a mandate.

Companies cited several issues with making retirement of treasury shares mandatory: inability to utilize treasury shares for various management strategies such as business restructuring (29.8%), weakening of defenses against hostile takeovers (27.4%), reduced incentives to acquire treasury shares leading to negative effects on stock price support (15.9%), and a less favorable business environment compared to foreign legislative examples (12.0%).

The survey also found that mandatory retirement of treasury shares would broadly reduce companies’ incentives to acquire them. If retirement were made mandatory, 60.6% of companies said they would have no plans to acquire treasury shares, far outnumbering those with acquisition plans (14.4%) or those still considering acquisition (25.0%). Among the 39.4% of companies with plans or under consideration, more than half (56.2%) said they would reduce the scale of future acquisitions, while 36.5% would proceed as planned, and only 7.3% would increase their acquisitions.

The Korea Chamber of Commerce and Industry believes that making retirement of treasury shares mandatory could negatively affect the capital market. In fact, multiple studies have shown that the short-term stock return for one to five days following treasury share acquisition is 1 to 3.8 percentage points higher than the market average, and the long-term return for six months and one year after disclosure of treasury share acquisition is 11.2 to 19.66 percentage points and 16.4 to 47.91 percentage points higher than the market, respectively, confirming the stock price support effect. Shin Hyunhan, professor at Yonsei University School of Business, pointed out, "If expectations are overly focused on a one-off stock price increase from retirement, companies may lose the long-term effect of repeated treasury share acquisitions for stock price support."

There are also calls to revisit the current proposed amendments, which would impose a mandatory retirement period not only for newly acquired treasury shares but also for those already held. 67.6% of respondent companies opposed mandatory retirement of existing treasury shares. However, some (20.3%) argued that only a disposal obligation, not retirement, should be imposed on existing treasury shares. Additionally, 23.0% suggested that only treasury shares acquired within distributable profits should be retired, while those acquired for specific purposes such as mergers should be exempt. Only 9.4% supported imposing a full retirement obligation on all existing treasury shares.

On the other hand, the majority of respondent companies (79.8%) agreed to fairer disposal of newly acquired treasury shares instead of making retirement mandatory. 20.2% did not agree. Currently, third-party allotment of new shares is permitted only when necessary for management reasons such as the introduction of new technology or improvement of financial structure. The suggestion is to apply similar standards to the disposal of treasury shares, allowing third-party disposal only when justified. Choi Seungjae, professor of law at Sejong University, stated, "With the amendment to the Commercial Act expanding directors' duty of loyalty, it has become virtually impossible for companies to arbitrarily dispose of treasury shares to third parties. Rather than focusing on mandatory retirement, it would be more desirable to emphasize fair disposal, enabling companies to use treasury shares freely for business restructuring and reorganization."

Looking at major overseas cases, there are few countries that regulate the holding of treasury shares. In Germany, if the proportion of treasury shares exceeds 10% of capital, the excess must be disposed of within three years, and if not disposed of within the period, it must be retired. In the United States, United Kingdom, and Japan, 58 out of the top 30 companies by market capitalization in each country (64.4%) hold treasury shares. Even on average, the proportion of treasury shares held by companies in South Korea (2.95%) is lower than in the United States (24.54%), Japan (5.43%), and the United Kingdom (4.93%).

Kang Seokgu, Head of the Research Division at the Korea Chamber of Commerce and Industry, stated, "Mandatory retirement of treasury shares, which could restrict corporate management activities and negatively impact the capital market, should be approached with caution. Considering the original intent of institutional reform, fair disposal alone would be sufficient to achieve the legislative purpose without the need for mandatory retirement."

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