As noted in a previous update, the Financial Services Commission of Korea (“FSC”) held a seminar on June 5, 2023 in which it discussed plans to improve the treasury stock system of listed companies (Link). The FSC’s 2024 Report on Financial Policy (a report submitted to the President of Korea) also included a plan to prevent the pursuit of private interests by major shareholders, accomplished by improving the treasury stock and convertible bond system (Link).
 
On January 30, 2024, the FSC held another meeting, presided over by Vice Chairman So-Young Kim, to further discuss and announce specific measures to improve the rules regarding treasury stock of listed companies (Link). At the meeting, Vice Chairman Kim emphasized the importance of the treasury stock system fulfilling its primary aim of increasing shareholder value, as opposed to acting as a means to expand the control of major shareholders.
 
Key proposals put forth in the meeting include: (i) preventing the allocation of new shares in a horizontal spin-off to treasury stock and ensuring investor protection measures are in place when a newly established company intends to be listed on an exchange following such a spin-off, and (ii) strengthening market monitoring by enhancing disclosure obligations around the acquisition, maintenance and disposal of treasury stock.
 
Key details of the proposed improvements announced in the meeting are as follows:
 

• Prohibition on the allocation of new shares in a horizontal spin-off to treasury stock: Nearly all shareholders’ rights, including voting rights, dividend rights and preemptive rights, are not exercisable with respect to treasury stock. However, there have been cases of horizontal spin-offs where new shares were allocated to treasury stock because the law and court precedent regarding whether such allocation was permitted were unclear. Such practice has drawn criticism, and opponents are calling this “magical treasury stock” issue a means for major shareholders to increase their control rather than to maximize shareholder value. Critics also note that the special treatment given to the allocation of new shares in spin-offs (i.e., suspension of shareholders’ rights), is inconsistent with the practices in other jurisdictions. Accordingly, the authorities aim to improve the system by prohibiting listed companies from allocating new shares to treasury stock in horizontal spin-offs.
   

• Review of measures to enhance ordinary shareholders’ rights and interests in a listing after a horizontal spin-off: The authorities aim to review measures to enhance ordinary shareholders’ rights and interests where a newly-established company intends to be listed on an exchange following a horizontal spin-off, such as whether to collect the opinions of investors.
   

• Imposition of disclosure obligation when the ratio of treasury stock to non-treasury stock exceeds a certain threshold: If a listed company holds shares of treasury stock in an amount exceeding a certain threshold (e.g., 10% of all issued and outstanding shares), the board of directors should review whether there is a reasonable rationale for the company holding such treasury stock and the company’s future plans regarding it (e.g., additional purchases or disposals), the conclusions of which should be disclosed in the company’s annual business report.
   

• Expansion of disclosure of material matters in respect of disposals of treasury stock: The authorities aim to expand the duty to specifically disclose the purpose of any disposal of treasury stock, the reason for selecting the counterparty and the impacts of such disposal on the rights and interests of ordinary shareholders, in order to ensure that the intended aims of the market’s monitoring and checking functions are achieved.
   

• Provision of information on true market capitalization: Some point out that the higher the ratio of a company’s treasury stock is, the more artificially inflated its market capitalization becomes, as treasury stock is currently included in the calculation of a company’s market capitalization. Therefore, the authorities aim to strip out treasury stock from the market capitalization figures provided to investors.
   

• Relaxed regulations apply to acquisitions of treasury stock in trust, as compared to direct acquisitions, which may induce companies to abuse the method of acquisition in trust. 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, the authorities aim to require submission of a statement of reasons for the deviation and prohibit the execution of a new trust agreement prior to one month after the end of the planned treasury stock purchase period, consistent with the same requirements in direct acquisitions.
   

The FSC announced its plan to amend the Enforcement Decree of the Financial Investment Services and Capital Markets Act in the first half of this year to expedite these improvement plans. It is therefore prudent to stay updated on the legislative process, as there may be significant changes in restructuring practices of listed companies, such as horizontal spin-offs, as well as practices around the acquisition, disposal and cancellation of treasury stock. In addition, as the FSC has clearly set forth its policy stance in this regard, the Korea Exchange and financial supervisory authorities may strengthen their own review criteria for spin-offs and treasury stock-related transactions by listed companies even before the enactment of any new legislation.

[Korean Version]