[Reporter’s Notebook] Be a "Black Knight" for Shareholder Value Before Seeking a "White Knight"

As the mandatory retirement of treasury shares emerges as a key topic in the third amendment to the Commercial Act, the first move companies have made is to issue exchangeable bonds (EB) backed by treasury shares. Companies have decided that, rather than risk their management rights being threatened by the retirement of treasury shares, it is better to transfer EBs issued on that basis to friendly parties.

The market's response was cold. This is because such actions are far removed from the goal of expanding shareholder returns through the retirement of treasury shares. When EBs purchased by third parties are converted into shares, voting rights are revived and the ownership percentage of existing shareholders is diluted. In effect, this has the same impact as a third-party allotment of new shares. This is why such actions are criticized for infringing upon shareholder interests. The media published a stream of articles pointing out that these tactics are a trick to avoid retiring treasury shares, and as stock prices plummeted, many companies hurriedly withdrew their EB issuances.

Just as it seemed that public criticism had quieted these tricks for disposing of treasury shares, companies have recently revived such strategies in the form of "treasury share swaps." A notable example is the 4 billion won treasury share swap earlier this month between Muhak, a beverage company, and Samsung Climate Control, an automotive parts manufacturer, which drew attention as a case of cross-industry cooperation. Through this swap, Samsung Climate Control disposed of all its treasury shares, while Muhak reduced its holdings by half. Although both companies claimed the swap was to "strengthen cooperative partnership," the justification was unconvincing, as the only real connection between the two is that both are based in Changwon, Gyeongnam, with no significant business overlap. The same applies to last month's treasury share swap between Aurora, a toy company, and Dongin Giyun, an outdoor equipment original design manufacturer (ODM).

It is extremely important to protect a company's control from the threat of hostile mergers and acquisitions (M&A) and to maintain a stable management environment. Both the issuance of EBs based on treasury shares and treasury share swaps are tempting options for companies, as they allow the acquisition of friendly stakes without significant cost. It is also worth noting that disposing of treasury shares to friendly parties is virtually the only management defense mechanism available to Korean companies today. However, it is disappointing to see companies seeking ways to avoid retiring treasury shares solely for the purpose of strengthening the controlling shareholder's dominance.

The government-led policy to expand shareholder returns is ultimately an effort to remove the "Korea discount" label. Unless companies themselves take the initiative, success will be difficult to achieve. While a series of measures to avoid retiring treasury shares may, in the short term, improve financial indicators and help defend management rights, in the long term, they could undermine shareholder value and erode trust in Korea's capital markets-a self-defeating strategy. Treasury shares should not be used only as a shield, but should serve as a solid tool for enhancing shareholder value. Now is the time for companies to act as "black knights" who take the lead in returning value to shareholders, rather than "white knights" obsessed with defending themselves.