The third amendment to the Commercial Act, centered on mandating the cancellation of treasury shares (own shares), has been finalized. Newly acquired treasury shares must be canceled within one year, and plans for disposing of treasury shares must be approved at the shareholders' meeting every year. If this is violated, a fine of up to 50 million won may be imposed on individual directors, strengthening the responsibility of the board.
According to political circles on the 24th, Rep. Oh Ki-hyeong of the Democratic Party of Korea will submit as the lead sponsor an amendment to the Commercial Act containing these provisions within the day. An aide in Oh's office said, "If possible, we will introduce it this afternoon."
Oh, who serves as chairperson of the Democratic Party of Korea's KOSPI 5000 special committee, said in the bill's statement of purpose, "To resolve the Korea discount, it is necessary to give shareholders the trust that 'a specific shareholder or management will not abuse their authority to privatize the company's profits,'" and added, "Because current law inadequately regulates treasury shares, cases frequently occur in which the interests of ordinary shareholders are infringed. Accordingly, we intend to overhaul the treasury share system to establish safeguards for ordinary shareholders and to ensure consistency with accounting for treasury shares."
The Commercial Act amendment led by Oh first clarified the nature of treasury shares. The amendment explicitly provides that treasury shares have no rights and have the character of capital. It prohibits issuing bonds with treasury shares as the object of exchange or redemption, and it stipulates that treasury shares cannot be the object of a pledge. It also prohibits allocating new shares from a split to treasury shares in the event of a merger or partitioning.
Newly acquired treasury shares must be canceled within one year. However, under certain conditions such as employee compensation, the company may defer disposal if it prepares a plan for holding or disposing of treasury shares and obtains approval at the shareholders' meeting. Exceptions include cases where the purpose is employee compensation such as granting stock options, implementing an employee stock ownership plan, or where managerial needs of the company are recognized, such as the introduction of new technology or improvement of the financial structure.
Although several exceptions were provided, the use of treasury shares for the purpose of defending management control was blocked, according to the lawmaker's office.
The plan for holding or disposing of treasury shares must be approved at the shareholders' meeting every year. The amendment also specified the personal responsibility of directors if corporations do not fulfill the obligation to cancel treasury shares. If treasury shares are not canceled within one year or are held or disposed of in violation of the plan for holding or disposing of treasury shares, a fine of up to 50 million won may be imposed on individual directors.
For treasury shares already held, an additional grace period of six months was granted. The measure to cap the total amount of existing treasury shares at within 10% of capital stock appears to have been dropped in the final review stage.
When a company disposes of treasury shares, it must do so on equal terms for each shareholder according to the number of shares held. The current Commercial Act only stipulates procedures for acquiring treasury shares and has no clear restrictions on disposal procedures. The amendment clarifies the disposal procedures for treasury shares as well, preventing corporations from disposing of treasury shares at their discretion.
As of June this year, there are 236 corporations with a treasury share holding ratio of 10% or more, and 533 corporations with 5% or more. The business community says that mandating cancellation of treasury shares burdens corporate management, but the government and the ruling party say it is a necessary overhaul to rationalize the capital market. The Democratic Party of Korea aims to pass the bill within the year, but with a filibuster likely in the December regular session over handling of judicial reform bills, it appears likely to be pushed to early next year.