'Insider Stock Magic' Banned... Financial Services Commission Announces Legislative Proposal for System Improvement

Financial Services Commission Announces Legislative Notice on Improvement of Treasury Stock System for Listed Companies
Restriction on New Share Allocation for Treasury Stock in Case of Demerger

Going forward, the allocation of new shares for treasury stock will be restricted in the event of a spin-off. Disclosure requirements for the entire process of acquiring, holding, and disposing of treasury stock will also be strengthened.

On the 3rd, the Financial Services Commission announced that it will conduct a legislative notice and regulatory change notice for the amendment of the "Enforcement Decree of the Capital Markets and Financial Investment Business Act" and the amendment of the "Regulations on the Issuance and Disclosure of Securities" containing these provisions.

According to the amendment, to enhance the rights of general shareholders, the allocation of new shares for treasury stock will be restricted during a spin-off. Currently, almost all shareholder rights such as voting rights, dividend rights, and preemptive rights are suspended for treasury stock, but regarding spin-offs, laws and precedents have been unclear, allowing the allocation of new shares for treasury stock.

This has led to criticism that so-called "treasury stock magic" occurs, where treasury stock is used not to enhance shareholder value but to increase the controlling power of major shareholders. There were also claims that treating spin-offs differently from other shareholder rights is inconsistent with international standards. To address this, the amendment to the enforcement decree restricts the allocation of new shares for treasury stock during spin-offs of listed companies.

Additionally, disclosure has been strengthened in the process of holding and disposing of treasury stock. From now on, if the proportion of treasury stock held by a listed company reaches a certain level (5% of the total issued shares), a report on the status of treasury stock holdings, the purpose of holding, and future disposal plans must be prepared and approved by the board of directors.

The amendment to the regulations requires that this report be submitted as an attachment to the business report and that the main contents of the report be included in the business report.

Furthermore, institutional shortcomings such as regulatory arbitrage in the acquisition and disposal of treasury stock have been improved.

Currently, when treasury stock is acquired through a trust, regulations are more relaxed compared to direct acquisition, raising concerns about corporate abuse. It has also been pointed out that there is a gap in investor protection because there is no disclosure obligation for the disposal of treasury stock during the trust contract period, unlike direct disposal.

To improve this, the amendment to the regulations requires that when treasury stock is acquired through a trust, if the acquisition amount is less than the initially planned and disclosed treasury stock purchase amount, a statement of reasons must be submitted, and new trust contracts are restricted from being concluded within one month after the planned treasury stock purchase period ends.

Also, when a trust company disposes of treasury stock during the trust contract period, it must disclose the purpose of disposal, the counterparty and reasons for selection, and the expected dilution effect on stock value in a major event report, just as with direct disposal.