Amendment to the Capital Markets Act to be Approved at the Cabinet Meeting on the 24th
Starting next year, the legal system will be improved to restrict the allocation of new treasury shares when listed companies undergo spin-offs or mergers. This is to prevent the so-called 'treasury share magic,' a trick that uses treasury shares to increase the controlling power of major shareholders.
On the 24th, the Financial Services Commission announced that the amendment to the 'Enforcement Decree and Regulations of the Capital Market Act' for improving the treasury share system of listed companies was approved at the Cabinet meeting and will take effect from the 31st.
Treasury shares are shares that a company reacquires and holds after issuing them. Contrary to their original purpose of shareholder returns, they have been criticized for being misused as a means for major shareholders to expand their control through loopholes. Recently, due to value-up policies and others, the scale of treasury share acquisitions by listed companies increased more than twofold from 8.2 trillion KRW in 2023 to 18.7 trillion KRW in 2024 (January 1 to December 20).
The main points of this treasury share system improvement are threefold: ▲ restricting the allocation of new treasury shares during spin-offs, ▲ strengthening disclosure of treasury share holdings and disposals, and ▲ resolving regulatory arbitrage in the process of acquiring and disposing of treasury shares.
The most anticipated aspect in the market is the plan to restrict the allocation of new shares to treasury shares during spin-offs. Currently, almost all shareholder rights such as voting rights, dividend rights, and new share subscription rights are suspended for treasury shares, but in the case of spin-offs, laws and precedents have been unclear, allowing new shares to be allocated to treasury shares. Some listed companies exploited this to increase the controlling power of major shareholders. There were also criticisms that Korea uniquely treats new share allocation during spin-offs differently from other shareholder rights.
There have also been criticisms about insufficient information regarding the scale of treasury shares held by companies after acquisition, as well as plans for cancellation or disposal. Therefore, reports must now include related plans, disposal purposes, disposal counterparties, and the dilution effect on stock value. These must be disclosed after approval by the board of directors.
Institutional shortcomings when companies acquire treasury shares through trust methods have also been addressed. The revised regulations require that when acquiring treasury shares via trust, if the acquisition amount is less than the initially planned or disclosed amount, a statement of reasons must be submitted just as with direct acquisitions. New trust contracts cannot be signed within one month after the planned treasury share purchase period ends. If the trustee disposes of treasury shares during the trust contract period, a report must be prepared and disclosed.
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