[Invest&Law] Taekwang Industrial EB Injunction Dismissed... Treasury Stock Classification Debate Reignites

Truston's Request for Injunction Against Issuance Fully Dismissed
Court: "No Company Loss Proven, Business Purpose Recognized"
Korea Corporate Governance Forum: "EB Issuance Strengthens Controlling Shareholder Interests"

Concerns have been raised that the current legal precedent, which regards a company's treasury shares as "assets," could infringe upon shareholder rights. If treasury shares are considered as simple assets that management can dispose of at their discretion, this could lead to dilution of minority shareholders' stakes or distortions in corporate governance.

(From left) Song Okryul, Professor at Seoul National University School of Law, Lawyer Kim Gyusik, Lawyer Chun Junbeom, and Lee Yongwoo, CEO of the Economic Plus Research Institute, attended the Korea Corporate Governance Forum seminar held on the 22nd at the IFC in Yeouido, Seoul, where they discussed the recent case of Taekwang Industrial's issuance of exchangeable bonds (EB) for treasury shares and governance issues. Photo by Kim Daehyun

On the 22nd, the Korea Corporate Governance Forum held a seminar at the IFC in Yeouido, Seoul, to discuss these issues, focusing on the recent case of Taekwang Industrial's issuance of exchangeable bonds (EB) using treasury shares.

Previously, at the end of June, Taekwang Industrial convened a board meeting and decided to issue EB using all of its treasury shares (24.4%) as collateral. Exchangeable bonds are bonds that can be converted into specific shares after a certain period. At the time, Taekwang Industrial explained that the purpose was to pursue new businesses such as the acquisition of Aekyung Industrial. However, the second-largest shareholder, Truston Asset Management, filed for a court injunction to prohibit the issuance, arguing that it infringed upon the rights of minority shareholders. The court, however, dismissed the injunction, stating, "This is a managerial decision by the company, and since the bonds were issued at a 10% premium to the market price, it is difficult to see this as causing a loss to the company."

At the seminar, Lee Namwoo, Chairman of the Korea Corporate Governance Forum, said in his opening remarks, "After the revision of the Commercial Act, global investors have high expectations for Korea, but even in the case of Taekwang Industrial, we can see the gap between global standards and the reality in Korea. Chairmen and CEOs in Korea tend to treat treasury shares as liquid assets. Overseas, it is common sense to retire or cancel treasury shares, but in Korea, they are not deducted from market capitalization because of the possibility that they may be reintroduced into the market."

Song Okryul, Professor at Seoul National University School of Law, who delivered the keynote presentation, pointed out, "Domestic legal precedent has treated treasury shares as assets, but minimizing the impact on shareholder interests simply because 'there is no change in capital' is a misguided approach." He continued, "Although injunctions are considered temporary measures, in reality, they have a decisive effect. This is why it is difficult for courts to wield a major influence over corporate management," adding, "unless the legal principles are clear, cases are often dismissed due to insufficient evidence from the applicant."

He also noted, "The court requires a high standard of proof within a month, and unless it is demonstrated that the company has suffered irreparable harm, it is difficult for the application to be granted." He added, "(Major shareholders, etc.) can always claim that every decision was made for business purposes, but there are currently no standards to judge this."

During the panel discussion, many participants argued that the approach to treasury shares should be based on the "unissued shares theory" rather than the "asset theory." Only by treating treasury shares as equivalent to unissued shares can the dilution of existing shareholders' equity and voting rights be prevented, and treating them as simple assets is inconsistent with overseas practices, where treasury shares are typically retired or canceled.

Chun Junbeom, Managing Partner at Wise Forest, said, "The court's precedent that 'treasury shares are legally no different from other assets' must be changed. Even if shareholders cannot, in principle, intervene directly in the transfer of company assets, applying this to the disposal of treasury shares is problematic. Treasury shares, unlike other assets, have a significant impact on existing shareholders, so the asset theory is legally inconsistent."

Kim Gyusik, Director at Vista Global Asset Management (Lawyer), also argued, "Looking at the court's decision to dismiss the injunction in the Taekwang Industrial case, it essentially ignores the significance of the recent revision to the Commercial Act, which introduced the duty of loyalty of directors to shareholders. By relying on the asset theory, the issue of equity dilution was trivialized, so both legislation and legal precedent need to be revised."