Treasury Stock Holdings Alone Won't Guarantee Buybacks: Three Key Points for AGM Season

Following the National Assembly's passage of the third Commercial Act amendment mandating treasury stock cancellation on February 25, market attention is focusing on listed companies' annual general meetings this year.

Treasury stock cancellations can positively impact share prices by reducing the number of shares in circulation, prompting investors to identify companies with strong commitment to cancellation. However, analysts caution that high treasury stock ratios alone do not necessarily translate into shareholder returns, emphasizing the need to separately assess actual cancellation or return intentions.

According to the financial investment industry on March 1, Hanwha Investment & Securities stated in a recent report: "Simply holding large amounts of treasury stock does not qualify a company as a cancellation beneficiary. One must examine controlling shareholders' incentives for cancellation, how Commercial Act exceptions are utilized, and how related agenda items are processed at AGMs."

The amended Commercial Act requires treasury stock to be canceled within one year of acquisition in principle. However, exceptions include employee compensation, employee stock ownership plans, legal obligations, and business purposes specified in articles of incorporation. Among these, "business purposes such as introducing new technology or improving financial structure" has broad interpretive scope, potentially justifying continued holdings or disposals for M&A, strategic alliances, or financial restructuring.

Park Se-yeon, researcher at Hanwha Investment & Securities, identified three key points for assessing companies' treasury stock policies and governance direction at this year's AGMs.

First is amendments to articles of incorporation. The implications differ depending on whether companies specify only the cancellation principle or broadly include "business purpose" exceptions. "The wider and more ambiguous the exception scope, the greater the possibility of strategic treasury stock utilization, requiring careful scrutiny," Park emphasized.

Second is director appointment agenda items. Treasury stock cancellation, retention, and disposal decisions ultimately rest with the board. Investors should verify whether new outside directors possess experience and oversight capabilities regarding capital allocation and shareholder return policies. With the amended Commercial Act now explicitly extending directors' duty of loyalty to all shareholders, board composition quality can determine treasury stock policy direction.

Third is treasury stock retention and disposal plan approval agenda items. Retaining treasury stock beyond one year requires annual AGM approval. "If plans specifically detail purpose, scale, duration, and utilization methods, they can be viewed as part of capital policy. However, abstract content may leave room for use as management control defense mechanisms," Park noted.

"Companies where the largest shareholder and related parties hold over 50% can effectively pass special resolutions for articles of incorporation amendments and treasury stock plan approvals single-handedly," Park explained. "In such cases, scenarios are possible where some shares are canceled while the remainder is held long-term or strategically disposed of using 'business purpose' exceptions."

Future treasury stock utilization scenarios for listed companies include cancellation and dividend expansion, conversion to stock options, restricted stock units (RSUs), or employee stock ownership plans, transfers to affiliates or strategic investors, and financial restructuring or M&A funding.

"When companies use treasury stock sales to repay debt or raise acquisition funds, there is justification in improved financial soundness. However, caution is needed as releasing shares to the market can lead to share price dilution," Park said.