Mandatory Retirement of Treasury Shares Within One Year of Acquisition... Third Commercial Act Amendment Passes Legislation and Judiciary Committee (Updated)

Hopes for Resolving the “Korea Discount”

The third amendment to the Commercial Act, which would require companies to mandatorily cancel their treasury shares, has passed the National Assembly’s Legislation and Judiciary Committee.

On the 23rd, the Legislation and Judiciary Committee held a plenary session and put the third amendment to the Commercial Act to a vote. The People Power Party voted against the bill, but it was passed under the leadership of the Democratic Party of Korea.

The amendment establishes, as a general principle, that when a company acquires its own shares, it must cancel them within one year. However, exceptions are allowed when certain reasons are recognized, such as employee compensation or the implementation of employee stock ownership plans, and the board of directors unanimously signs and seals a retention and disposal plan that is then approved each year at the general meeting of shareholders.

For companies where foreign investment and other matters are restricted under the Telecommunications Business Act and similar laws, the amendment stipulates that, for the purpose of complying with such laws and regulations, treasury shares must, in principle, be disposed of within three years from the enforcement date of the amendment, to the extent necessary.

The Democratic Party of Korea intends to use this amendment to the Commercial Act to resolve the so-called “Korea discount.” The logic is that if a company cancels its treasury shares while its business performance remains unchanged and the total number of outstanding shares decreases, earnings per share (EPS) will rise, thereby increasing the value per share and benefiting shareholders.

In contrast, the People Power Party and the business community have opposed the amendment, arguing that treasury shares can serve as a defense mechanism when domestic companies are exposed to hostile mergers and acquisitions (M&A) by hedge funds and others. Their reasoning is that non-voting treasury shares can be transferred to so-called “white knights” to restore voting rights and convert them into friendly stakes. However, critics have consistently pointed out that in such cases, minority shareholders other than the controlling shareholders may suffer losses as the value of their holdings is diluted.

The Democratic Party of Korea plans to continue holding plenary sessions from the 24th through March 3 and to pass the third amendment to the Commercial Act along with the three judicial reform bills (the Crime of Distorting the Law, Constitutional Complaint Against Court Decisions, and Expansion of the Number of Supreme Court Justices).

Previously, the Democratic Party of Korea led and passed the first amendment to the Commercial Act, which expanded the scope of directors’ fiduciary duty to shareholders, and the second amendment to the Commercial Act, which included mandatory cumulative voting and the expansion of separate elections for audit committee members.

Meanwhile, at the same Legislation and Judiciary Committee session, a bill to amend the Labor Standards Act to change the title of “labor inspector” (geullo-gamdokgwan) to “labor inspector” (nodong-gamdokgwan) and to specify the duties and authority of labor inspectors, as well as a bill to enact the Act on the Execution of Duties by Labor Inspectors, were also passed under the leadership of the ruling party. In addition, an amendment to the Industrial Safety and Health Act to establish a Safe Workplace Committee within the Ministry of Employment and Labor, and an amendment to the National Intelligence Service Staff Act to extend the “rank-based mandatory retirement age” for certain staff in grades 3 to 5 at the National Intelligence Service, also passed the committee under the leadership of the Democratic Party of Korea.

Choo Miae, chair of the National Assembly's Legislation and Judiciary Committee, and lawmakers from the Democratic Party of Korea are casting their votes in favor during a show-of-hands vote on the agenda at the committee's plenary session held at the National Assembly on the 23rd. Yonhap News