'Mandatory Cancellation of Treasury Shares Within One Year of Acquisition'—Ruling Party Proposes Third Amendment to Commercial Act

(Seoul=Yonhap Infomax) Da Ye On—The Democratic Party of Korea has unveiled its third proposed amendment to the Commercial Act, centered on mandating the cancellation of treasury shares (company-owned stock) within one year of acquisition.

According to the National Assembly on the 24th, Oh Ki-hyung, head of the Democratic Party’s KOSPI 5,000 Special Committee, formally submitted the partial amendment bill to the Commercial Act on the afternoon of the same day.

The amendment aims to rationalize the treasury share system from the perspective of ordinary shareholders. Under current law, a company’s board of directors can freely dispose of treasury shares, which has led to frequent cases where boards allocate these shares to benefit specific shareholders or management.

Some listed companies have publicly stated that they acquire treasury shares to "enhance shareholder value," yet have not canceled them, instead retaining the shares and sparking controversy over misleading disclosures.

The proposed amendment stipulates that companies must, in principle, cancel treasury shares within one year of acquisition. However, exceptions are allowed for specific purposes such as employee compensation, provided the company drafts a holding/disposal plan for treasury shares and obtains approval at the general shareholders’ meeting.

Such holding/disposal plans must be approved by shareholders annually. If a company fails to cancel treasury shares within one year of acquisition without an approved plan, or violates the plan in holding or disposing of treasury shares, individual directors may face fines of up to 50 million won ($37,800).

The amendment also explicitly states in law that treasury shares confer no rights and clarifies their legal status as "capital." While treasury shares are treated as capital in accounting, some current legal provisions inconsistently regard them as assets, prompting calls for greater consistency.

Additionally, the bill prohibits the allocation of new shares to treasury shares in cases of mergers or spin-offs.

Furthermore, even when companies are exceptionally permitted to hold or dispose of treasury shares despite the cancellation obligation, the amendment requires that such disposals be made under equal conditions to all shareholders, proportional to their holdings.

For treasury shares already held, the amendment grants a six-month grace period for compliance with the cancellation requirement.

This marks the third Commercial Act amendment promoted by the Democratic Party’s KOSPI 5,000 Special Committee. The first amendment, which expanded directors’ fiduciary duties, and the second, which mandated cumulative voting for listed firms with assets over 2 trillion won ($1.5 billion), both passed the National Assembly’s plenary session under the Democratic Party’s majority.

Oh Ki-hyung stated, "To address the ‘Korea Discount’—the undervaluation of South Korea’s stock market—there must be trust among shareholders that specific shareholders or management will not abuse their authority to privatize corporate interests. As there has already been extensive public debate on improving the treasury share system, I will do my utmost to ensure swift passage and implementation through the relevant standing committee."

d​yon@yna.co.kr

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