As the government and the ruling party push a third amendment to the Commercial Act centered on a mandatory cancellation of treasury shares, treasury shares indirectly acquired through trust contracts also appear likely to be subject to cancellation.
Many listed companies choose to indirectly acquire treasury shares through trust contracts with securities firms instead of acquiring them directly. That is because this method faces relatively fewer regulations.
Because of this, some worry that trust-acquired treasury shares could become a loophole to evade the mandatory cancellation of treasury shares, but the government and the National Assembly are aware of this issue and are expected to take it into account in the legislative process.
On the 3rd, according to officials at the National Assembly and others, treasury shares acquired through trusts are highly likely to be included in the mandatory cancellation scope. The Commercial Act amendment pending in the National Assembly includes treasury shares indirectly acquired through trust contracts among those subject to cancellation. The amendment, for which Democratic Party lawmaker Lee Kang-il is the lead sponsor, specifies that treasury shares subject to mandatory cancellation "include the conclusion of a trust contract with a trustee to acquire treasury shares."
The legal basis for excluding trust-acquired treasury shares from the mandatory cancellation scope is also weak. Both treasury shares acquired directly and those acquired through trust contracts are, in principle, accounted for in financial statements as treasury shares under capital adjustments and are recognized as the company's own held asset.
An attorney who requested anonymity said, "Unless an exception is recognized, I understand that treasury shares acquired through trust contracts are naturally included among those subject to cancellation," and added, "There is no reasonable basis or justification to separately exclude trust-acquired treasury shares from the mandatory cancellation scope."
O Gi-hyeong, who serves as chairperson of the Democratic Party's KOSPI 5000 Special Committee, also said, "Is there any reason to treat indirectly acquired treasury shares differently from directly acquired treasury shares?" and questioned, "Is managing treasury shares through a trust company an acceptable management practice from the perspective of all shareholders?"
A Democratic Party official said, "We have been discussing the inclusion of indirectly acquired treasury shares in the mandatory cancellation category with the Financial Services Commission (FSC)," adding, "Otherwise, wouldn't every company try to acquire treasury shares indirectly? There should be no regulatory arbitrage."
If so, would it be possible to dodge cancellation by extending a treasury share repurchase trust contract for a long time as a "trick"? That also does not appear easy. A business community official said, "If trust-acquired treasury shares also become subject to mandatory cancellation, the National Assembly and financial authorities will set specific grace periods and the like through a presidential decree or legislation," predicting that it would not be easy to avoid this.
According to the Korea Exchange (KRX) disclosure system, a total of 342 cases of treasury share acquisitions have taken place so far this year. Of these, listed companies directly acquired treasury shares in 45% of cases, while 55% were indirect acquisitions through trust contracts. A considerable number of listed companies chose to acquire treasury shares indirectly.
When a listed company signs a treasury share repurchase trust contract with a securities firm, the securities firm buys the treasury shares on behalf of the company. Companies prefer indirect acquisition because trust acquisition is less regulated than direct acquisition.
If a company directly acquires treasury shares, it must disclose how many shares it actually bought and whether it sold or canceled them three months after the purchase. Trust acquisitions also require a results report to be disclosed three months later, but there is no additional disclosure obligation until the trust contract expires. For this reason, it has been pointed out that it is difficult to determine acquisition or disposal details.
Meanwhile, although the Democratic Party is accelerating legislative discussions, saying it will handle the third amendment to the Commercial Act within the year, no specific details have been decided yet.