[Two Faces of Treasury Stock Trading]② US Treasury Stock Disposal Process as Complex as IPO Procedures

Easier Acquisition and Disposal of Treasury Shares Domestically
Convenient for Purposes Other Than Shareholder Returns
Need for Strict Regulation Like in the US to Protect Shareholder Interests

It has been revealed that domestic companies have completely different purposes when acquiring and disposing of treasury shares. The main purpose of acquiring treasury shares was 'stock price stabilization and shareholder returns,' but when disposing of them, the majority aimed to secure investment funds or performance bonuses. If companies widely use treasury shares for purposes different from those disclosed, it could undermine market trust. This is why there are calls to require companies to go through complex procedures similar to those during an initial public offering (IPO) in the U.S. when selling treasury shares on the market.

Domestic Companies’ Treasury Share Acquisition and Disposal: Different Inside and Out

In the domestic stock market, acquiring and disposing of treasury shares is easy. Especially, the ease of disposing treasury shares means they can be easily used for purposes other than shareholder returns. U.S. and European companies tend to buy back treasury shares primarily for shareholder returns. As of 2018, 59% of major U.S. listed companies and 24% of major European listed companies acquired treasury shares for shareholder returns.

According to the Korea Capital Market Institute, from 2015 to the first half of 2022, the top purpose (85.6%) for direct acquisition of treasury shares by domestic companies was 'stock price stabilization.' This was followed by profit cancellation (5.7%), employee performance compensation (3.5%), delisting (1.4%), and exercising stock options (0.5%). Purposes such as improving financial structure (0.1%), strengthening management control (0.2%), and converting to holding companies (0.1%) accounted for less than 1%. The top purpose (99.3%) for indirect acquisition of treasury shares (through trust agreements) was also stock price stabilization.

However, when disposing of treasury shares, there was a significant difference from the acquisition purposes. Based on the number of disclosures, the top purpose for disposing treasury shares was employee performance compensation (34.5%). This was followed by exercising stock options (26.9%), securing investment and operating funds (11.6%), improving financial structure (4.6%), strategic alliances (3.9%), and stock price stabilization (3.6%). Even when viewed by the number of shares, improving financial structure (21.2%), securing investment and operating funds (20.0%), and issuing exchangeable bonds (14.3%) accounted for more than half. Kang Sohyun, a researcher at the Korea Capital Market Institute, pointed out, "Although disposing treasury shares is economically similar to issuing new shares, companies use them at their discretion without special procedural sanctions, which raises concerns about fairness among shareholders and the possibility of controlling shareholders pursuing private interests."

U.S. Excludes Treasury Shares from Market Capitalization... Disposal Is Also Strict

Earlier this year, financial authorities considered mandating the cancellation of treasury shares but eventually dropped the plan due to strong opposition from companies. The reason was that legally forcing companies on whether and how to dispose of treasury shares acquired with corporate funds does not align with market logic.

However, experts emphasize the need to prepare shareholder return measures that indirectly encourage treasury share cancellation. This is because domestic companies rarely dispose of treasury shares for cancellation purposes and often use them for controlling shareholders.

The U.S. case is worth referencing. In the U.S., when selling treasury shares on the market, companies must go through procedures similar to those during an IPO. After a company buys back treasury shares, it must re-register with the Securities and Exchange Commission (SEC) to sell them again on the market. Since treasury shares are not treated as issued shares, companies must undergo a kind of 'treasury share listing' process to sell them.

In contrast, there are no separate regulations on how to dispose of treasury shares in Korea. For on-market disposal, there are restrictions on quantity and price, but there are no regulations regarding off-market disposal. If the disposal price and timing are unreasonable, companies can be penalized under unfair trade practice regulations. However, under the current system, it is difficult to determine whether treasury share disposal was conducted at an appropriate price.

Also, in the U.S., treasury shares are excluded from market capitalization calculations because they have no voting rights or dividend rights. Kim Suhyun, a researcher at DS Investment & Securities, pointed out, "Including treasury shares in market capitalization causes discrepancies between book value (excluding treasury shares) and market value (including treasury shares), which can distort corporate indicators."

Due to activist fund attacks and changes in minority shareholders' awareness, demands for treasury share cancellation have increased, and cases of treasury share cancellation have risen mainly among large companies. However, there are still more cases where treasury shares are used for purposes such as spin-offs and share swaps. This is also cited as a factor in the 'Korea discount.' Professor Sung Taeyoon of Yonsei University’s Department of Economics said, "The purpose of treasury share buybacks is to compensate shareholders through share cancellation," adding, "Using them for other purposes violates the principle of capital integrity, so regulations to control this are necessary."