South Korea moves to mandate treasury share cancellation

South Korea’s ruling Democratic Party is accelerating its push to boost shareholder value by requiring listed companies to cancel treasury shares within one year of acquisition, prompting strong opposition from business leaders.

The initiative is one of President Lee Jae-myung’s campaign pledges and follows an amendment to the Commercial Act early this month aimed at strengthening minority investor protections under a government-led value-up program.

Kim Nam-geun, a Democratic Party lawmaker, on Wednesday submitted a bill requiring the mandatory cancellation of treasury shares.

The lawyer-turned-politician serves in the ruling party’s floor leadership group as a member of the Kospi 5000 Special Committee.

The committee was newly launched under the current government to support the government’s pledge to propel the Kospi index to 5,000 points, a milestone yet to be reached in Korea's stock market history.

The benchmark stock index has been on an upward streak since President Lee Jae-myung took office in early June. It surpassed the 3,200 mark at one point on Friday for the first time since late 2021.

The government had been weighing a more moderate approach to treasury share retirement, considering revisions to the enforcement decree of the Capital Markets Act that would encourage, but not mandate, cancellations.

However, the ruling party is pushing ahead with a stronger regulatory measure by proposing a new amendment to the Commercial Act for treasury stock cancellation.

Exceptions would be granted for legitimate purposes such as employee compensation. But that would require approval at the annual general meeting, where top shareholders’ voting rights are capped at 3% of outstanding shares.

A TOOL USED TO STRENGTHEN OWNERSHIP

South Korean business groups have been criticized for using treasury shares to consolidate control in their family-run businesses. In some cases, firms have allocated treasury stock to friendly parties during proxy fights.

Supporters of the proposed reform argue that mandatory share cancellation is needed to enhance corporate governance and boost return on equity.

Stock cancellations reduce the number of outstanding shares and lead to a rise in earnings per share.

However, business leaders argue that they must retain minimum defensive measures to guard against unfriendly takeover attempts.

The country’s business lobby groups, including the Korea Chamber of Commerce and Industry and the Federation of Korean Industries, are calling for the treasury shares they already own to be exempt from the proposed mandatory retirement rule.

As of the end of 2024, 73.6% of South Korea’s listed companies held treasury shares, according to research firm Leaders Index.

Write to Yeonhee Kim at yhkim@hankyung.com