On January 10, 2023, the Financial Services Commission (“FSC”) announced its plan to review plans to improve the treasury stock system, indicating that it “will review various measures to prepare improvement plans for the treasury stock system, and no specific improvement plans have yet been decided.” Accordingly, the FSC held a Seminar on Improvement of Treasury Stock System of Listed Companies on June 5, 2023, to discuss improvement plans of the system for listed companies.
During the seminar, Kim So-young, the FSC’s Vice Chairman, stated that there seemed to be a mixed view on the acquisition of treasury stock: while some view it as an effective means to enhance shareholder value, others criticize that major shareholders abuse the system to expand control or defend management control. The Vice Chairman also pointed out that under the current system, (i) allotting new shares to treasury stock is customarily allowed in the event of a horizontal spin-off, raising the “magical treasury stock” issue where major shareholders can expand their control without making any additional contribution, and (ii) since voting rights are restored during “treasury stock swap” between companies to secure friendly shareholders, it dilutes ordinary shareholders’ shareholding and may undermine sound competition for management control. He further added that there are opinions that Korean companies are passive in cancelling treasury stock for shareholder return. Taking these factors into consideration, the government has announced its intention to review a variety of policy measures, in order to ensure that the treasury stock system of listed companies serves its original purpose of enhancing shareholder value, and not misused to expand control by major shareholders. However, considering the opinions that treasury stock has been used in practice to defend corporate management control in Korea, he noted that the government would aim to develop policies that strike a balance between “shareholder protection” and “practical demand by the companies.”
Based on such awareness, Professor Joon Hyug Chung of Seoul National University, who made a presentation at the seminar, provided an introduction to the treasury stock system in Korea and abroad and explained specific measures to improve the treasury stock system as follows:
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(1) |
Compelling the cancellation of entire treasury stock or obliging to hold certain treasury stock (e.g., 10% holding) |
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(2) |
Applying the same procedures to the issuance of new shares as the disposal of treasury stock |
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(3) |
Prohibiting treasury stock swap |
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(4) |
Prohibiting the allocation of new shares to treasury stock in case of merger/demerger |
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(5) |
Excluding treasury stock in calculating financial position indexes of listed companies (e.g., market capitalization) |
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(6) |
Strengthening disclosure on acquisition and disposal of treasury stock |
Following the discussions held at the seminar, the FSC plans to gather input from a wide range of stakeholders before devising improvement measures for the treasury stock system of listed companies. We believe that the FSC may again announce specific measures that reflect the discussions at the seminar, as it did for the measures regarding mandatory tender offer and advanced disclosure of massive stock trading by major shareholders and officers. If so, there may be significant changes in the practices of listed companies’ acquisition, disposal and cancellation of treasury stock, as well as in the practices of mergers and demergers, such as allocation of new shares.
