The government aims to prevent the manipulation of treasury stocks for the enhancement of controlling stakes without additional investments. To achieve this, it has prohibited the issuance of new shares for treasury stocks during corporate spinoffs and strengthened disclosure regulations, including plans for stock retirements. As companies have been utilizing treasury stocks not for shareholder value enhancement but rather to reinforce the management rights of major shareholders, measures have been taken in response to the diagnosis that domestic stock prices are undervalued due to that.
On Jan. 30, the Financial Services Commission (FSC) held a meeting titled “Improvement of Treasury Stock System for Listed Companies” at the Government Complex Seoul, chaired by Vice Chairman Kim So-young. During the meeting, it announced the “Improvement Plan for the Treasury Stock System of Listed Companies.” Treasury stocks are shares that a company has issued and later repurchased for storage, a practice that was prohibited in the past. However, they have been gradually permitted for shareholder value enhancement since 1992 and extended to unlisted companies within the dividendable profit limit after the 2011 amendment to the Commercial Act.
The acquisition and retirement of treasury stocks are considered prominent shareholder return policies along with dividend distribution. The repurchasing and subsequent retirement of treasury stocks result in a reduction in the total number of issued shares, potentially leading to an increase in net earnings per share and contributing to a rise in stock prices. However, criticism has been consistently raised about South Korea’s passive approach to the acquisition and retirement of treasury stocks for the purpose of shareholder returns.
In particular, the government has pointed out that companies are using treasury stocks as a means to enhance the dominance of major shareholders in the process of corporate spinoffs. A corporate spinoff involves dividing a company into two entities while maintaining the ownership structure. A shareholder who holds 40 percent of the shares in the existing company will retain 40 percent ownership in both the surviving company and the newly established company after the spinoff. If, at this point, the treasury stock in the existing company without voting rights is 30 percent, a “magic” effect occurs, and the voting rights for the newly allocated 30 percent shares in the new company become active. Through this mechanism, major shareholders in the existing company can increase their control over the newly established company without additional capital injection.
An official from the FSC said, “For treasury stocks, almost all shareholder rights, including voting rights, dividend rights, and subscription rights for new shares, are suspended. However, for corporate spinoffs, there is no clear legal basis or precedent prohibiting the allocation of new shares to treasury stocks. There has been criticism that the ‘magic’ effect of treasury stocks is being used to increase the dominance of major shareholders by utilizing company funds.” As a result, the government has decided to prohibit the issuance of new shares for treasury stocks during corporate spinoffs. Additionally, if a company seeks relisting after a corporate spinoff, the government will request comprehensive investor protection measures, such as demanding dividend expansion, in the listing review process. The government also plans to impose an obligation on companies to disclose specific utilization plans for treasury stocks, such as reasons for holding, additional purchase plans, and plans for treasury stock retirement or sale, in their business reports if they hold treasury stocks above a certain threshold.
However, the mandatory retirement of treasury stocks was excluded from this plan. It is reported that the Financial Services Development Council, a financial advisory body of the FSC, proposed the mandatory retirement of treasury stocks last year. However, it seems that the exclusion of this provision is a result of concerns that it could excessively constrain corporate management activities and potentially infringe on private property. If the forced retirement of treasury stocks is to be implemented uniformly, it is argued that companies would lack a means to protect management rights from foreign speculative capital. In the business community, there is a pressing call for a reform of corporate governance defense mechanisms, such as poison pills and differential voting rights. A poison pill refers to a provision that grants existing shareholders the right to acquire new shares at a lower price in the event of hostile takeovers and management infringements. On the same day, Vice Chairman Kim explained, “While some advocate more proactive measures, such as the mandatory retirement of treasury stocks, others emphasize the need to consider practical demands for corporate management activities. Therefore, we considered both perspectives comprehensively.”