South Korea Mandates Treasury Share Cancellation in Major Corporate Law Reform

South Korea's third Commercial Act revision fundamentally redefines how companies must treat treasury shares, shifting the legal framework from an asset-based to a capital transaction approach.

"Aren't treasury shares just company stock that the company holds?" This question frequently arises in consultations with executives and owner families. While intuitively correct, the answer conceals complex terrain where commercial law, accounting standards, and tax law each describe treasury shares in different languages.

Treasury shares are issued shares that a company reacquires in its own name and for its own account. Since companies cannot exercise voting rights against themselves or claim dividends, such shares enter a transitional legal state fundamentally oriented toward cancellation upon acquisition.

Key Provisions of the Revised Law

The amended Commercial Act, passed by the National Assembly on February 25, 2026, establishes the following framework:

Treasury shares are prohibited from exercising shareholder rights including voting rights, preemptive rights, and dividend claims. Companies must cancel acquired treasury shares within one year of acquisition in principle.

To retain or dispose of treasury shares, boards must establish a "Treasury Share Retention and Disposal Plan" requiring annual shareholder approval. Disposal must follow pro-rata distribution among existing shareholders. Third-party disposals are limited to employee compensation, employee stock ownership programs, and cases of operational necessity such as technology introduction or financial restructuring.

New share allocations to treasury shares during mergers or spin-offs are completely prohibited. Using treasury shares as collateral or as underlying assets for exchangeable or redeemable bonds is also banned.

Directors who fail to cancel treasury shares within one year without approved retention plans face fines up to 50 million won. Existing treasury shares receive a grace period of up to 18 months from the effective date.

Why Professionals View Treasury Shares Differently

Accountants treat treasury shares as capital reduction. When companies acquire treasury shares, the balance sheet reflects decreased assets while recording treasury shares as a deduction from equity—accurately reflecting the economic substance of capital return.

Legal scholars traditionally adopted the "asset theory," with Supreme Court precedents treating treasury shares as company property items. Tax law similarly approaches treasury shares as assets, taxing disposal gains as corporate income.

Three Reasons the Asset Theory Fails

The compromise position that treasury shares are "accounting capital deductions but legal assets" appears convenient but loses persuasiveness on multiple levels.

First, voting rights are not granted and dividends ultimately return to the company. Second, the revised law prohibits using treasury shares as collateral or as underlying assets for financial instruments. Third, new share allocation to treasury shares during mergers and spin-offs is completely prohibited.

These restrictions demonstrate that treasury shares represent a special legal state anticipating cancellation rather than temporarily suspended normal shares. Treating them as ordinary assets would allow companies to stockpile shares and dispose of them to management-friendly parties, effectively restructuring governance through what legally appears as asset disposal but economically functions as control transfer through new share issuance.

The Market Cap Distortion Argument Overstates the Case

Critics argue that including treasury shares in market capitalization calculations structurally undervalues per-share value. However, accounting standards already deduct treasury shares from capital, and key metrics like earnings per share and book value per share adjust for outstanding share counts.

The legislative justification for mandatory cancellation lies not in market cap calculation inaccuracies but in the structural asymmetry where treasury share disposals create control-shifting effects similar to third-party rights offerings while requiring only board discretion under simplified procedures.

Reading Treasury Shares as Capital Transactions

Fundamentally, acquiring treasury shares resembles capital reduction—returning contributed capital to shareholders and extinguishing shares. Conversely, disposing of treasury shares produces effects comparable to capital contributions and new share issuance regardless of acquisition cost, as outstanding shares increase and shareholder composition shifts.

Understanding treasury share acquisition as a variant of capital return and share extinction, and disposal as a variant of capital contribution and new share issuance, reveals the true significance of the revised Commercial Act.