In addition, the Democratic Party of Korea will soon announce a third amendment to the Commercial Act that makes it difficult to use its treasury stocks such as holding and disposal. When the third amendment to the Commercial Act is implemented, companies such as listed companies must incinerate their treasury stocks as well as newly acquired treasury stocks within a year.
Companies are concerned about the revision, which forces the burning of treasury stocks and at the same time prevents the use of treasury stocks for other purposes except compensation for executives and employees. This is because the incentive for the share buyback itself, which had a shareholder return effect, will inevitably decrease with only strategic use but also actions.
On the other hand, it is also considered as a way to supplement some of the business community's concerns, such as weaknesses from hostile mergers and acquisitions, in that it opens the door for other purposes without mandatory retirement of treasury stocks if the consent of many shareholders is obtained at the general shareholders' meeting.
According to the political circle on the 23rd, the Democratic Party of Korea is coordinating the final draft of the third commercial law amendment related to the retirement of treasury stock obligations, centered on the KOSPI 5000 Special Committee. The Democratic Party of Korea is considering a plan to impose an obligation to incinerate existing treasury stocks as well as newly acquired treasury stocks, but to set a grace period for their holdings according to requirements.
Along with the retirement of treasury stock obligations, the key to the 3rd amendment to the Commercial Act is that it is highly likely to go through a special resolution at the general shareholders' meeting as a procedure for stipulating exceptions to the retirement of obligations. A special resolution requires at least two-thirds of the shareholders present at the general shareholders' meeting and at least one-third of the total number of issued stocks.
According to the current law, the disposal of treasury stocks is required by the board of directors if there is no provision in the articles of association. The board of directors can decide on the type and number of stocks to be disposed of, the disposal price, the counterparty to the disposal and the disposal method. Accordingly, most companies were able to freely dispose of their treasury stocks only by resolution of the board of directors, and it has been steadily pointed out that some companies abuse the majority shareholders to expand their control.
The third amendment to the commercial law, which is being considered by the Democratic Party of Korea, also aims to prevent major shareholders from pursuing their private interests through the retirement of treasury stocks and to secure institutional consistency to open the KOSPI 5000 era by enhancing corporate value. However, the Democratic Party of Korea is also said to have conducted discussions that partially reflect the concerns of the business community raised in the process of pushing for the revision of the commercial law.
The inclusion of a measure to allow the company to use its treasury stocks for other purposes with the permission of shareholders through a special resolution at the general shareholders' meeting is interpreted as a measure reflecting the voices of the business community. If the majority of shareholders decide on their own, the Democratic Party of Korea will not block it and admit it as an exception.
This seems to include the use of strategic treasury stocks such as defending management rights theoretically. "If the majority of shareholders say they want it, there will be no need for the law to intervene to prevent it (defending management rights)," a key Democratic Party official said. "However, would shareholders agree on that?"
The revision of the Commercial Law proposed by Reps. Kim Nam-geun and Kim Hyun-jung, who lead the special committee on the main opposition KOSPI 5000, calls for approval of shareholders' shareholders' voting rights to be limited to 3 percent of the total number of issued stocks. However, it is unclear whether the final draft will include restrictions on voting rights of major shareholders.
The most worrisome part of the business community is that if treasury stock retirement is mandatory at a time when management rights defense systems such as poison pill (new stock acquisition option) are insufficient, hostile M&A could be exposed defenselessly. In addition, since the act of purchasing treasury stocks has the effect of returning shareholders, it is argued that the purchase of treasury stocks itself could be sharply reduced if mandatory retirement and utilization control are promoted at the same time.
Some companies say that forcing the retirement of treasury stocks on a certain deadline is also a big burden. Until now, domestic companies have not been active in burning treasury stocks, but they have used them as a means of boosting stock prices depending on market conditions. According to the Korea Exchange, the amount of treasury stocks burned by domestic listed companies increased from 1.2 trillion won in 2020 to 13.9 trillion won last year.
In response to such concerns, the Democratic Party of Korea believes that the expansion of compensation for executives and employees, including Woori, will act as one of the means to secure friendly shares, which will benefit the defense of hostile M&A. It also plans to consider introducing a mandatory tender offer system, which requires the company to purchase remaining stocks when it seeks to take hostile takeover of listed management rights. The Democratic Party is pushing to revise the commercial law with the aim of processing it by the end of this year, but there is a possibility that it will be delayed somewhat in line with various legislative discussions within the party, including rationalization of corporate punishment.
Reporter Jeon Kyung-woon ([email protected] )
“The amendment to the Commercial Act is moving toward the cancellation of treasury shares.
Shares purchased with company funds should be used for the benefit of all shareholders, but in practice they have often been used for the benefit of controlling shareholders, the so‑called ‘owners.’
Now, a legal revision is being pursued to ensure that profits rightfully belonging to shareholders are returned to them.
Personally, I believe such cancellations should only be permitted through a shareholders’ meeting, and only for reasons specified by Presidential Decree.
This is a step toward a properly valued KOSPI.”
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