Third Amendment to the Korean Commercial Code, on Mandatory Treasury Share Cancellation, Passed by the National Assembly

As previously explained, following (i) the first amendment to the Korean Commercial Code (the “KCC”) in 2025 introducing, among other things, a fiduciary duty of directors to protect the interests of shareholders, and (ii) the second amendment mandating cumulative voting for director elections and increasing the number of audit committee members subject to separate election, there have been active discussions on a third amendment to the KCC focused on, among other matters, the mandatory cancellation of treasury shares. On November 25, 2025, National Assembly member Oh Gi-hyoung, the chairman of the Democratic Party’s KOSPI 5000 Special Committee, proposed to the National Assembly a bill to partially amend the KCC which consolidated various previously proposed bills concerning mandatory cancellation of treasury shares (Link).

As formal legislative discussions progressed following the introduction of this third amendment bill, there has been considerable market activity, such as transactions aimed at raising funds by disposing of treasury shares before cancellation becomes mandatory, including the issuance of convertible bonds backed by treasury shares, off-hours block trades, over-the-counter transactions, and on-exchange disposals. In this context, disclosure regulations concerning listed companies’ holdings of treasury shares and their disposal plans have also been continuously strengthened (Link).

The third amendment bill (the “Amendment”) passed the first sub-committee of the Legislation and Judiciary Committee of the National Assembly on February 20, 2026, was submitted to the general meeting of the Legislation and Judiciary Committee on February 23, 2026, and was passed by the National Assembly plenary session on February 25, 2026. During the committee review process, the bill was further revised beyond the original framework (which defined treasury shares unissued shares and mandated their cancellation) to additionally: (i) expressly state that treasury shares have no rights with respect to stock dividends as well as cash dividends; (ii) clarify (thereby resolving prior controversy) that treasury shares acquired for specific purposes under Article 341-2 of the KCC (e.g., where a shareholder exercises appraisal rights) may be cancelled by a board resolution without undergoing capital reduction procedures (i.e., no special resolution at a general meeting of shareholder and no credit protection procedures); and (iii) include in the addenda a separate three-year grace period and disposal provisions for companies subject to statutory foreign ownership caps under, for example, the Telecommunications Business Act, where mandatory cancellation of treasury shares could result in an indirect increase of foreign shareholding and thereby trigger a regulatory breach.

Under the addenda, the Amendment is scheduled to take effect on the date of promulgation.

If enacted, the Amendment may have a significant impact on companies’ capital structures, shareholder return policies, value-up disclosures and investor relations policies, and may also materially affect strategic investment and financing decisions that have historically assumed the availability of treasury shares as a funding or transaction source.

In particular, if the Amendment is promulgated and becomes effective before the annual general meeting of shareholders in 2026, companies that plan to dispose of treasury shares (such as through executive compensation arrangements or sales to third parties) may need to promptly submit to their shareholders agenda items relating to treasury share holdings, disposal plans, and related amendments to their articles of incorporation. In light of these considerations, some companies have already adopted board resolutions and issued convocation notices for the annual general meeting of shareholders and public announcements that include agenda items premised on the enactment of the Amendment (including treasury shareholding and disposal plans). Accordingly, careful and thorough attention should be paid to the progress of the Amendment in connection with preparations for the annual general meeting of shareholders in 2026.

Below is a consolidated summary of the key provisions of the Amendment as passed by the National Assembly plenary session (integrating both the originally submitted bill and the additional revisions made by the Legislative and Judiciary Committee).

Treasury shares are treated as unissued shares and corresponding restrictions apply.

The Amendment defines treasury shares as unissued shares without any rights, thereby legislatively resolving the longstanding debate between the “asset theory” and the “unissued shares theory” regarding the nature of treasury shares. Accordingly, the bill: (i) excludes voting rights, preemptive rights, and rights to cash dividends and share dividends; and (ii) specifically prohibits: (A) issuing bonds exchangeable into or redeemable with treasury shares; (B) creating a pledge over treasury shares held by the company; or (C) allocating split shares to treasury shares in the context of a merger or corporate division (Article 341-3, Article 529-2, and Article 530-13 of the Amendment).
When a company is exceptionally permitted to hold or dispose of treasury shares as notwithstanding the cancellation obligation (as described below), the Amendment generally applies by analogy the procedures for issuance of new shares to the extent consistent with the “unissued shares” characterization (Article 342-4 of the Amendment), and requires, as a general rule, disposal on equal terms to each shareholder in proportion to the number of shares held (Article 342(1) of the Amendment). However, where an exception under Subparagraph 2 through 5 applies (explained below), the company may dispose of treasury shares to other persons who are not shareholders (Article 342(2), (3)).

Second, with cancellation of treasury shares becoming mandatory, companies wishing to hold and dispose of treasury shares must obtain approval of holding and disposal plans at a general meeting of shareholders (and, for disposals to certain third parties, support for such disposals in the articles of incorporation is also necessary).

In principle, where a company acquires treasury shares after the Amendment takes effect, it must cancel them within one year from the date of acquisition (Article 341-4(1) of the Amendment). Treasury shares held by a company as of the effective date of the Amendment are also subject to the same cancellation obligation, but with an additional six-month grace period (Addenda, including Article 2). However, where any of the grounds enumerated below apply and the company prepares a treasury share holding/disposal plan and obtains shareholder approval, the company may hold or dispose of treasury shares in accordance with such approved plan. In particular, the exception allowing disposal to a specified third party under Subparagraph 5 may be significant in practice; to rely on it, an additional amendment to the articles of incorporation is necessary – a clause similar to those that allow for allocation of newly issued stock to third parties is required. There has been controversy that treasury shares acquired not out of distributable profits but for specific purposes under Article 341-2 (e.g., in connection with appraisal rights) would still require capital reduction procedures (a special resolution of the general meeting of shareholder and creditor protection procedures), creating an excessive burden. The Amendment resolves this by expressly permitting cancellation of treasury shares by board resolution alone, without capital reduction procedures (proviso to Article 343(1) of the Amendment).

[Permitted grounds for holding/disposal of treasury shares (subject to shareholder approval of the holding/disposal plan)]

(1)	Where the company disposes of treasury shares to each shareholder on equal terms in proportion to the number of shares held;

(2)	Where the company utilizes treasury shares for the purpose of employee/executive compensation purposes, such as granting stock options as prescribed by Article 340-2 or Article 542-3 of the KCC;

(3)	Where the company utilizes treasury shares for the purpose of implementing an employee stock option plan, such as granting employee stock options under the Framework Act on Labor Welfare;

(4)	Where the company utilizes treasury shares as prescribed by applicable laws and regulations, including Article 360-2(2), Article 360-1(2), and Article 523(3) of the KCC; or

(5)	Where necessary to achieve legitimate business objectives, such as introduction of new technology or improvement of financial structure, and the articles of incorporation specify such grounds pursuant to a resolution of the general meeting of shareholders under Article 434.

[Required contents of the holding/disposal plan]

The plan requiring shareholder approval must include the following items, and must be signed (or sealed) by all directors:

(1)	Purpose of holding or disposing of treasury shares;

(2)	Types and numbers of treasury shares to be held or disposed of, and the method of acquisition;

(3)

The following items as of (i) the start of the holding period and (ii) the planned disposal date;

1) Types and numbers of treasury shares, and the method of acquisition;

2) Types and numbers of the remaining shares excluding treasury shares from the total issued shares; and

3) Change in the ratio of treasury shares to total issued shares;

(4)	Planned holding period; and

(5)	Planned timing of disposal.

Listed companies may be subject to an administrative fine of up to KRW 50 million if treasury shares are (i) not cancelled within one year of acquisition in violation of Article 341-4(1) of the Amendment (and shareholder approval under Article 341-4(2) of the Amendment has not been obtained) or (ii) held or disposed of in violation of the approved holding/disposal plan under Article 341-4(2).

[Korean Version]

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