As we noted in a previous legal update (Link), the Financial Services Commission of Korea (the “FSC”) had announced on January 30, 2024 plans to improve the treasury stock system for listed companies (Link). In furtherance of such plans, the FSC pre-announced on June 4, 2024 proposed amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA,” and the “Enforcement Decree”) and the Regulation on Securities Issuance and Disclosure (the “Regulation”) (Link). The government approved the proposed amendment to the Enforcement Decree at a cabinet meeting held on December 24, 2024, with such amendment to take effect on December 31, 2024 (Link). The FSC also approved the proposed amendment to the Regulation on December 11, 2024, and the amendment came into effect immediately upon approval.

The key improvements to the treasury stock system for listed companies under the amendment to the Enforcement Decree and the proposed amendment to the Regulation (the final amendment to the Regulation approved by the FSC has not yet been released to the public) are summarized as follows:
 

• In the event of a merger with a listed company, the surviving company may not allot new shares resulting from the merger or transfer its treasury stock as consideration for the merger with respect to Merged Shares or the treasury stock of the non-surviving company.
   

• In the event of a spin-off or spin-off merger of a listed company, the company newly established by simple spin-off or spin-off merger or the successor company in a spin-off merger (as applicable, the “Spin-Off Company”) may neither allot new shares resulting from the spin-off or spin-off merger nor provide treasury stock for treasury stock held by the original company to the spin-off (the “Original Company”) or the counterparty to the spin-off merger. Additionally, neither the Original Company nor the counterparty to the spin-off merger may transfer its treasury stock to the Spin-Off Company.
   

• If the treasury stock of a listed company accounts for 5% or more of such listed company’s total issued shares, the listed company will be required to prepare a report detailing the shareholding status, purpose of ownership, and future plans with respect to such treasury stock (additional acquisitions, cancellation of treasury stock, etc.), which must be approved by its board of directors. Such information must also be included in such listed company’s business report, which is subject to public disclosure obligations.
   

• A listed company that disposes of its treasury stock will be required to disclose the purpose of the disposal, the identity of the counterparty with respect to such disposal and the reason for selecting such counterparty, as well as the anticipated dilutive effect on the value of the listed company’s stock.
   

• Regulatory arbitrage has been eliminated by improving regulations applicable to direct acquisitions and acquisitions in trust in a consistent manner in the context of acquiring treasury stock.
   

• If the amount of treasury stock to be acquired in trust is less than the amount of the treasury stock as originally planned and publicly announced to be purchased, listed companies will be required to submit a statement of reasons for the deviation and will also be prohibited from entering into a new trust agreement until one month after the end of the planned treasury stock purchase period.
   

• When a trust company disposes of treasury stock during a trust contract period, the relevant listed company will be required to disclose in a report on material facts the purpose of the disposal, the identity of the counterparty with respect to such disposal and the reason for selecting such counterparty, as well as the anticipated dilutive effect on the stock value of the listed company’s stock.
   

Starting from December 31, 2024, the improvements summarized above will result in the prohibition of the allocation of new shares to either treasury stock or Merged Shares in the event of mergers, spin-offs and spin-off mergers of listed companies. Please be advised that these improvements will result in fundamental changes to many existing practices in restructuring transactions (including matters relating to the application of the restructuring tax systems concerning qualified mergers and qualified divisions).

It is also important to note that any listed company with treasury stock accounting for more than 5% of its total issued shares will be required to make public disclosures after obtaining the approval of its board of directors regarding the purpose of holding and managing such treasury stock. Accordingly, companies subject to these requirements need to prepare for the review of their boards of directors and related decision-making processes. If any listed company publicly discloses its management plan and then fails to comply with it, this may result in various sanctions and civil and/or criminal liability for violation of the FSCMA. Therefore, a thorough review is necessary.

There will be further changes to specific regulations governing direct transactions or transactions via trusts, with respect to the acquisition and disposal of treasury stock, as well as the disclosure of such events. Therefore, companies will need to refer to these regulations to ensure future compliance.

[Korean Version]