Will Stricter Mandatory Treasury Share Cancellations Ignite a 7,000-Point KOSPI Rally?

Newly acquired shares to be canceled within 1 year, existing shares within 18 months
Business community's demands for exceptions on "involuntary acquisitions" and "SMEs and ventures" excluded
KOSPI PBR expected to rise from 0.9 to 1.3... insurance s

Could a mandatory share cancellation scheme for treasury stocks become a key to resolving the chronic issue of the so-called Korea Discount? As the third amendment to the Commercial Act, which requires companies to cancel newly acquired treasury stocks within one year, is expected to pass the plenary session of the Legislation and Judiciary Committee of the National Assembly on the 23rd, attention is focusing on the potential impact across the capital market. The market is already clearly expecting stock price support, as the bill is expected to block the long-standing practice of controlling shareholders using treasury stocks to strengthen their control and to expand shareholder returns. In contrast, the business community is voicing concerns that exceptional provisions have not been sufficiently reflected, raising the possibility of increased exposure to hostile mergers and acquisitions (M&A).

Inside the third Commercial Act amendment... market reaction is 'positive'

The amendment to be discussed at the Legislation and Judiciary Committee plenary session on the afternoon of the same day sets as a principle that when a company acquires treasury stocks, it must cancel them within one year, and imposes a fine in case of violation. Treasury stocks already held must also be cancelled within one year and six months. For companies such as those in the telecommunications sector that are subject to foreign ownership limits, the bill requires disposal within three years.

Oh Ki-hyoung, a lawmaker from the Democratic Party of Korea and chairman of the "Korea Premium K-Capital Market Special Committee," explained, "The point of the amendment is that decisions which used to be made solely by the board of directors must now be decided by the general meeting of shareholders."

In particular, the bill notably includes as mandatory cancellation targets even "involuntary treasury stocks" that companies inevitably acquire due to reasons such as M&A or conversion into a holding company structure. All treasury stocks are to be regulated in the same way, regardless of the purpose for which they were acquired.

The market response is generally positive. Even before the bill passed the subcommittee on the 20th, insurance and securities stocks had surged. In the securities industry, some forecast that if shareholder return policies such as treasury stock cancellation take root, the average price-to-book ratio (PBR) of KOSPI-listed companies could improve from the current 0.9 times to as high as 1.3 times. Cancellation of treasury stocks reduces the number of shares in circulation and thus has the effect of increasing earnings per share (EPS).

Lee Namwoo, chairman of the Korea Corporate Governance Forum, said, "Most treasury stock acquisitions have been used for the purpose of strengthening the control rights of controlling shareholders," and evaluated that "making cancellation mandatory aims to correct this, so it could partially resolve the Korea Discount." The Democratic Party of Korea aims to complete the process up to the plenary session of the National Assembly in the February session after handling the amendment at the committee's plenary meeting on this day. The bill is expected to be tabled at the plenary session as early as the 24th.

No exceptions for small and venture companies... business community warns of 'crippled defense of management control'

The amendment does not reflect the separate exceptions for involuntary treasury stocks and for small and venture companies that the business community has long demanded. Exceptions to the cancellation obligation are limited to cases such as: proportional and equal disposal to shareholders; compensation for executives and employees through the granting of stock options; and implementation of employee stock ownership plans.

This is why concerns are being raised, particularly in business circles, that "uniform regulation that does not reflect the corporate life cycle or industry characteristics at all will lead to side effects." The business community is especially wary that mandatory cancellation of treasury stocks will "eliminate tools for defending management control," increasing exposure to hostile M&A. Kwon Jeongyeol, a professor at Kyung Hee University Law School, pointed out, "There are many cases where companies use treasury stocks in the process of mergers or business restructuring, and if cancellation is forced, it will be impossible to implement flexible strategies needed for corporate reorganization."

By contrast, Hwang Hyunyoung, a research fellow at the Korea Capital Market Institute, suggested that the current bill already includes a defense mechanism for management control, noting, "This is not unconditional cancellation; if there is shareholder approval, retention or disposal is allowed." Chairman Lee also countered, "If exceptions are broadened, the risk of infringing on the rights and interests of ordinary shareholders will increase." He dismissed calls for exceptions for small and venture companies, saying, "The same principles must apply to all listed companies, regardless of size."

Capital market experts argue that in order to resolve the Korea Discount, the process cannot stop at mandating treasury stock cancellation. They stress that structural reforms such as strengthening transparency in corporate governance, improving the predictability of dividend policies, and securing the independence of boards of directors must continue. An official from the securities industry emphasized, "Treasury stock cancellation is a symbolic measure and a starting point," adding, "To enhance investor confidence, consistency and predictability must also be secured across companies' overall capital allocation policies." Research fellow Hwang suggested, "Companies must continue voluntary efforts to enhance shareholder value through the cancellation of treasury stocks," and added, "Follow-up legislation in line with the Commercial Act revision should also be put in place."