Korea Mandates Treasury Stock Cancellation, Firms Must Adapt

A recent amendment to the Commercial Act has made the cancellation of treasury shares mandatory for Korean companies. There has been ongoing debate over the legal nature of treasury shares—whether they should be treated as unissued shares or function as assets on the balance sheet. This amendment clearly adopts the former view while institutionally blocking any possibility of utilizing treasury shares as corporate assets.

Accordingly, the disposal of treasury shares must now follow procedures equivalent to new share issuance, with exceptions to reflect the substance of treasury share disposals. This is understood as an effort to curb practices where companies utilized treasury shares in various ways, while enhancing transparency in capital transactions and equity among shareholders.

Unlike before, the board of directors can no longer arbitrarily determine how to dispose of treasury shares. Disposal must follow a retention and disposal plan approved by the shareholders' meeting. The authority of shareholders' meetings has expanded significantly.

The transitional provisions for existing treasury shares deserve attention. Directly acquired treasury shares must be cancelled within one year after six months from the amendment's effective date of January 6. Treasury shares with pledges must be cancelled within one year of the pledge release date. Treasury shares derived from exchangeable or redeemable bonds must be cancelled within one year from bond maturity or the expiration of exchange or redemption periods. Indirectly acquired treasury shares must also be cancelled within one year of their return date.

This amendment signals structural changes in overall corporate capital allocation strategies, beyond mere procedural modifications. Companies must meticulously redesign shareholder return policies, including dividends and treasury share acquisitions and cancellations.

The need to clearly explain treasury share matters to stakeholders—including institutional investors, proxy advisors, and ESG rating agencies—has grown. Corporate communication strategies will become increasingly important, as global investors consider capital policies and shareholder return plans as key investment criteria.

Companies should consider proactively announcing treasury share cancellation plans to secure capital market participants' trust. It is encouraging that several companies announced cancellation plans meeting market expectations before this law passed. These cases demonstrate that communication with the market can reduce uncertainty and enhance corporate value.

The mandatory treasury share cancellation legislation resulted from extensive discussion and deliberation, but this is not the end. Subsequent legislation regarding tax law, capital market law, and disclosure regulations requires close monitoring. Companies need to systematically analyze shareholder value and market conditions to develop careful strategies for treasury share retention and disposal. How related regulations are refined will affect corporate capital policies and market valuations going forward.