Increase in Exchangeable Bonds Issued as a "Loophole to Avoid Treasury Share Cancellation"

Recently, as Taekwang Industrial resolved to issue exchangeable bonds (EB) with all of its treasury shares?amounting to 24.4% of its total outstanding shares?as the underlying asset, its second-largest shareholder, Truston Asset Management, has announced plans for legal action. As seen in the case of Taekwang Industrial, the issuance of exchangeable bonds to avoid the cancellation of treasury shares has been increasing every year.

On July 1, Daishin Securities reported in its "Profitable ESG" report that the number of companies issuing treasury share exchangeable EBs rose from 19 cases in 2022 to 26 in 2023, and to 31 in 2024. In the first half of this year alone, there were 17 such issuances. Lee Kyungyeon, a senior research fellow at Daishin Securities, analyzed, "In particular, the fact that 72.1% of the EBs issued in the first half of this year used treasury shares as the underlying asset suggests that companies are utilizing their treasury shares more strategically."

Activist funds and minority shareholder coalitions have long called for companies to cancel their treasury shares to enhance shareholder value. Canceling treasury shares reduces the number of outstanding shares, thereby increasing the value per share. As a result, companies that choose to dispose of treasury shares through EB issuance have faced strong criticism, being accused of using this as a "loophole to avoid canceling treasury shares."

A representative example is Taekwang Industrial, whose stock price plunged by 11.24% in a single day on June 30, following news of its treasury share exchangeable EB issuance. On June 27, Taekwang Industrial's board of directors resolved to issue EBs worth 318.6 billion won, with all 271,769 treasury shares as the underlying asset. Taekwang Industrial announced that the EB issuance was intended to raise funds for new business initiatives.

Truston Asset Management, the second-largest shareholder of Taekwang Industrial, stated on June 29, "Issuing EBs with treasury shares as the underlying asset has the same effect as a third-party allocation paid-in capital increase when the exchange rights are exercised, which seriously infringes upon the interests of existing shareholders." The company also asserted, "We will file for an injunction and hold the directors who made this decision both civilly and criminally liable."