As the third Commercial Act amendment, which includes mandates such as canceling treasury shares, is now likely to pass in November, later than initially expected, listed companies are speeding up the issuance of exchangeable bonds (EB).
According to the Korea Exchange on the 12th, from Sept. 1–12, 15 listed companies, including Daedong, Daewon Pharmaceutical, and Harim Holdings, decided to issue EBs totaling 335.3 billion won. Except for ILJIN Holdings deciding to issue EBs using shares of its subsidiary ILJIN Electric (equity 50.2%), all are treasury share-based EBs.
An EB is a bond that corporations issue using treasury shares or held shares as the underlying asset. Investors who buy the bond obtain the right to exchange it for the relevant shares after a certain period.
With the likelihood growing that canceling treasury shares will become mandatory within the year, corporations are seen as raising funds through EB issuance while circumventing treasury share cancellation. There were 5 cases in 2023, 11 last year, and 53 so far this year, indicating a surge in EB issuance. Kang Jin-hyeok, an analyst at Shinhan Investment & Securities, said, "Ahead of the Commercial Act revision, corporations are responding swiftly," adding, "Corporations issued 1.0411 trillion won worth of treasury share-based EBs through August this year, using them as a liquidity option."
However, the third Commercial Act amendment has reportedly not been included in the agenda for the Legislation and Judiciary Committee's subcommittee review in the National Assembly in September as discussions have dragged on. It was expected to pass this month, but there is talk it could be delayed by about two months. Related amendments proposed by Rep. Kim Nam-geun of the Democratic Party of Korea (cancellation of newly acquired and previously held treasury shares within one year), Rep. Kim Hyeon-jeong of the Democratic Party (immediate cancellation of newly acquired treasury shares and cancellation of previously held treasury shares within six months), and Rep. Cha Gyu-geun of the Rebuilding Korea Party (mandatory cancellation of treasury shares within six months) are to be handled in a consolidated hearing.
A National Assembly official said, "The third Commercial Act amendment will be discussed at the November session, after the October National Assembly audit," adding, "As it is a revision strongly pushed by the ruling party, it is highly likely to pass without issue."
Although processing of the amendment has been delayed, corporations are pushing ahead with EB issuance at a rapid pace because passage within the year is likely. As details such as the scope of the mandatory cancellation of treasury shares and whether it applies to previously held treasury shares have not yet been set, from the corporate perspective they are using treasury shares as a funding tool while reducing policy risk. Some fear that in such circumstances, if a company issues EBs to friendly parties, it could be used as a tool to strengthen control.
Hwang Hyeon-yeong, a research fellow at the Korea Capital Market Institute, noted, "Under our Commercial Act, treasury shares have unique features, such as being recognized as collateral like a company asset, for in-kind dividends, and as consideration for exchangeable bonds," adding, "It is necessary to put in place safeguards to prevent treasury shares from being abused as a means to strengthen control."
Hwang pointed out that it is important to establish shareholder remedies when disposing of treasury shares for use in unfair EB issuance and the like. In a report, Hwang said, "Just as remedies such as maintenance claims are available to prevent shareholder disadvantages when issuing new shares, it is necessary to establish analogous provisions so that maintenance claims, suits to nullify issuance, and liability for those who subscribe to shares at an unfair price also apply when disposing of treasury shares."