Companies Make Bold Treasury Stock Cancellations; Management Defense Measures Urgently Needed

Samsung Electronics has decided to cancel 16 trillion won worth of treasury stock, while SK Inc. has decided to cancel 5 trillion won worth. Samsung Electronics will cancel 82.5% of its treasury stock holdings, and SK Inc. will cancel all treasury shares except those reserved for employee compensation. This appears to be a positive corporate response to the ruling party's third Commercial Act amendment aimed at enhancing shareholder value. Since the third Commercial Act amendment passed the National Assembly on the 25th of last month through the 10th of this month, 48 companies have announced treasury stock cancellations totaling 6.997 trillion won. The third Commercial Act amendment, which took effect on the 6th, mandates that newly acquired treasury shares must be canceled within one year and existing treasury shares within 18 months.

Until now, treasury stock has served as virtually the only safety net for Korean companies that lack adequate management defense mechanisms. In hostile merger and acquisition situations, treasury shares have been used as a means to defend management control by selling them to friendly parties. In this regard, SK Inc.'s decision to cancel all its treasury stock is particularly commendable, given the company's trauma from its 2003 management dispute with Sovereign Asset Management. However, despite the business community's active cooperation, it is regrettable that exceptions for unintended treasury stock acquisitions resulting from M&A or for small and medium-sized venture companies were ultimately not accepted. The recent efforts by some companies to hold onto their treasury shares despite criticism of using "loopholes and tricks" likely stem from concerns over threats to management control.

Ahead of the first shareholders' meetings since the Commercial Act revision, companies are extremely busy preparing response strategies. Starting in July, the voting rights of the largest shareholders and related parties will be limited to 3% when electing audit committee members. Beginning in September, cumulative voting will become mandatory and expanded regulations for separate election of audit committee members will be introduced. While these measures are intended to enhance shareholder value, they represent significant institutional changes that could threaten management control from the corporate perspective.

Activist funds are already intensifying pressure through shareholder proposals. If shareholders have been given the "spear" of Commercial Act amendments, companies should be provided with a "shield" for management defense. The institutionalization of reasonable defense mechanisms such as poison pills and dual-class shares must no longer be delayed. As treasury stock disposal obligations have been strengthened, conditions for new share issuance should also be improved. Institutional improvements that expand productive investment and growth capital inflows through capital markets are urgently needed.