The Financial Services Commission (the “FSC”) recently announced for public comment amendments to: (i) the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”) (the “Enforcement Decreet”); (ii) the Regulations on Issuance and Disclosure of Securities (the “Securities Issuance and Disclosure Regulations”), and (iii) the Regulations on Investigation of Capital Markets (the “Investigation Regulations”). These amendments are intended to strengthen regulations on listed companies’ disclosures of treasury stock holdings and related disposal plans.

According to the government press release, despite the (i) introduction of public disclosure of Corporate Value-Up Plans in 2024 and (ii) the amendment to the Enforcement Decree of the FSCMA (effective from 2025) requiring any listed company with treasury stock accounting for 5% or more of its total issued shares to prepare an annual report on the status, purpose and disposal plan of such treasury stock (the “Treasury Stock Report text”), to be approved by the board of directors and attached to its business report (and which must include key details in the main text and must be publicly disclosed), the volume of treasury stock acquisitions and cancellations has surged, with the amount of treasury stock cancellations this year as of August (KRW 18.8 trillion) already surpassing the total amount of cancellations for all of 2024 (KRW 13.9 trillion).

In this regard, some listed companies have either omitted disclosure of their treasury stock holdings or provided only minimal information with respect thereto – such as merely stating that they had no plans to acquire, cancel or dispose of such treasury stock – thus failing to adequately inform investors. As a result, the need to further improve the disclosure system to better protect the rights and interests of general shareholders has been raised. Additionally, concerns have been raised over actions that undermined the predictability of the market and investors, such as failing to acquire treasury stock contrary to the publicly disclosed treasury stock acquisition, disposal or cancellation plan or conducting large-scale disposals that were not previously planned.
 
In response to these issues, the key contents of the recently announced amendments to the Enforcement Decree of the FSCMA and related regulations are as follows:
 

The government plans to conduct a public comment period for the proposed amendments to the Enforcement Decree, the Securities Issuance and Disclosure Regulations and the Investigation Regulations from September 26 (Friday) to November 5 (Wednesday). The amendments are expected to take effect in the fourth quarter, after undergoing review by the Regulatory Reform Committee and the Ministry of Government Legislation, as well as approval at the Vice Ministerial Council and the State Council.

In addition, the FSC has stated that it will actively participate in National Assembly discussions, including those on proposed amendments to the Korean Commercial Code (the “KCC”) and other measures to improve the treasury stock system, and will work to ensure that the treasury stock system is improved to respect shareholder value and guarantee companies’ management autonomy.

As previously communicated (Link), following the implementation of the amended KCC on September 10, a court injunction – acknowledging the legitimacy of the business judgment of management on the issuance of exchangeable bonds backed by treasury shares – was issued for the first time. Since then, a significant number of listed companies have disclosed either the disposal of their treasury shares or the issuance of exchangeable bonds backed by treasury shares, and according to media reports, many more companies are currently reviewing similar actions. Additionally, the government and the National Assembly continue to discuss the proposed third amendment to the KCC, which would mandate, among other things, the cancellation of treasury shares (Link), and, as mentioned in the above press release, the FSC has also expressed its clear intent to actively participate in these discussions.
 
Under these circumstances, with the strengthening of regulations on the disclosure of treasury stock holdings and disposal plans, the number of listed companies required to resolve and publicly disclose their treasury stock holdings and related disposal plans via the board of directors and business reports will increase significantly, and disclosure frequency will increase to twice a year. Therefore, it is important to note that the board’s resolutions and the disclosure process must be carried out with even greater care.

According to these proposed amendments, actual implementation records must be compared and disclosed every six months, and penalties for violations will be heightened. Therefore, if in the future directors do not faithfully fulfill their duty of care and loyalty, or fail to ensure transparent and thorough compliance with disclosure obligations regarding decisions on the acquisition and disposal of treasury stock, the company, as well as its management and directors, may face increased risks of civil, criminal and administrative liability under the KCC and the FSCMA.

We will continue to update you on further legislative developments and market trends regarding the amended KCC and regulations on corporate governance, including treasury stock regulations.

[Korean Version]