A survey found that 6 out of 10 listed companies oppose making share cancellations mandatory. Analysts say that if a mandatory treasury share cancellation bill takes effect, most corporations would stop buying treasury shares or reduce the size of purchases, which could negatively affect efforts to revitalize the capital market.
The Korea Chamber of Commerce and Industry said on Nov. 12 that it surveyed 104 listed companies holding 10% or more in treasury shares on "corporate opinions regarding mandatory cancellation of treasury shares," and 62.5% of responding corporations opposed mandatory cancellation. "Neutral" was 22.8%, and "in favor" was 14.7%.
Among corporations, 29.8% said that if cancellation of treasury shares becomes mandatory, they would no longer be able to use treasury shares for various management strategies such as business reorganization. Concerns followed that it would become harder to defend management control (27.4%) and that factors for acquiring treasury shares would decrease, potentially hurting stock support (15.9%).
If cancellation of treasury shares actually becomes mandatory, 60.6% of corporations said they "have no acquisition plan." Even among corporations that have a plan (14.4%) or are reviewing one (25.0%), 56.2% said they would reduce the size of future acquisitions. Corporations that said they would proceed with treasury share purchases as planned came to 36.5%, and those that said they would expand treasury share acquisitions were 7.3%.
Shin Hyeon-han, a professor at Yonsei University School of Business, noted, "If one becomes fixated on the expectation of a one-off stock price rise from cancellation, it is more likely to forfeit, over the long term, the stock support effect from corporations' repeated treasury share purchases."
Some corporations (20.3%) argued that for treasury shares already held, only a disposal obligation should be imposed, not cancellation. The proposed revisions currently introduced would impose a cancellation obligation within a certain period not only for treasury shares acquired in the future but also for those already held. There were also opinions that treasury shares acquired for specific purposes such as mergers should be exempt from the cancellation obligation.
Choi Seung-jae, a professor in the Department of Law at Sejong University, said, "With amendments to the Commercial Act expanding directors' duty of loyalty, discretionary disposals of treasury shares to third parties by corporations have become virtually difficult," adding, "Rather than mandating cancellation, it would be preferable to place emphasis on fair disposals while allowing free use for business reorganization and restructuring."
KORCHAM analyzed that among major countries overseas, few have regulations on holding treasury shares. In Germany, if the ratio of treasury shares exceeds 10% of capital, the excess must be disposed of within three years, and if it is not disposed of within the period, it must be cancelled.
Kang Seok-gu, head of the research division at KORCHAM, said, "Mandatory cancellation of treasury shares, which can dampen corporate business activities and negatively affect the capital market, should be approached cautiously," and added, "Considering the original intent of institutional improvement, legislative objectives can be sufficiently achieved through fair disposals rather than cancellation."