The Democratic Party of Korea said it will handle the "third Commercial Act amendment bill" within the year. The amendment makes it a principle to retire not only newly acquired treasury shares but also existing treasury shares within one year. However, it provides exceptions such as for employee compensation. Even in such cases, the company must draw up a "treasury share holding and disposal plan" and obtain approval from the general shareholders meeting to hold or dispose of the shares.
Han Jeong-ae, the Democratic Party policy committee chair, said at a floor countermeasures meeting held at the National Assembly on the morning of the 25th, "We will complete within the year the third Commercial Act amendment, which includes the obligation to retire treasury shares, following the codification of the duty of loyalty to shareholders and the mandatory cumulative voting system."
The policy committee chair said, "There have been many bad cases where treasury shares were used for the benefit of certain shareholders. Through this Commercial Act amendment, we will clearly define the nature of treasury shares and expel the treasury-share magic from Korea's capital market."
The Democratic Party KOSPI 5000 Special Committee the day before (on the 24th) introduced at the committee level the third Commercial Act amendment (treasury share system reform act) containing these provisions. Committee chair O Gi-hyeong, a lawmaker, led the introduction, and 22 people, including policy committee chair Han Jeong-ae and special committee members, joined as co-sponsors.
Rep. O said, "We included treasury share reform as one of the capital market system reform tasks for the Korea premium," adding, "We will do our best so that it can swiftly pass and take effect after deliberation by the relevant standing committee."
The core of the third Commercial Act amendment is "mandatory retirement of treasury shares" and "approval by the general shareholders meeting when exceptionally permitted." Newly acquired treasury shares must be retired within one year from the acquisition date, and, in principle, existing treasury shares must be retired within one year from the date of occurrence of certain reasons after the law takes effect. However, an additional six-month grace period is granted for existing treasury shares.
Even in the case of "indirect acquisition," where the company enters into a trust contract with a trustee and acquires treasury shares, the acquisition itself is allowed, but the same procedures as for direct acquisition apply so that the trust company retires the treasury shares within one year from the date it acquired them.
However, if the purpose is business management, such as employee compensation, the introduction of new technology, or improvement of the financial structure, holding treasury shares is permitted for a certain period. Instead, when holding or disposing of treasury shares, a "treasury share holding and disposal plan" must be prepared and approved each year at the general shareholders meeting. The "treasury share holding and disposal plan" must include ▲ the purpose of holding or disposing of treasury shares ▲ the types and number of treasury shares concerned ▲ the planned holding period of treasury shares or the scheduled time of disposal. A sanction is also included to impose fines of up to 50 million won on individual directors if they hold or dispose of treasury shares in a way that deviates from the plan.
The amendment specifies in law that treasury shares have no rights and clarifies that the nature of treasury shares is capital, not an asset. In other words, it treats treasury shares like unissued shares and prohibits acts that have regarded treasury shares as an "asset," such as creating pledges and issuing exchangeable bonds (EB). It also blocks the so-called "treasury-share magic" by prohibiting the allocation of split new shares to treasury shares in cases of corporate mergers or partitioning.
When disposing of treasury shares, the procedures for issuing new shares must be applied mutatis mutandis. This means that the same stringent procedures as issuing new shares apply when selling treasury shares. If the procedures for issuing new shares are applied mutatis mutandis, disposal must be made to shareholders on equal terms under the "principle of shareholder equality," and disposal to third parties who are not shareholders is allowed only when there are legal reasons or reasons in the articles of incorporation. In effect, it becomes difficult to dispose of shares in a devious way favorable to specific shareholders. In addition, the "right to seek maintenance of new share issuance" can also be applied. This is the right of a shareholder to request the company to stop an issuance when the company issues shares by unfair means and there is concern that shareholders may suffer disadvantages.
The Democratic Party plans to push follow-up measures in consideration of concerns that mandatory retirement of treasury shares could make it harder to defend management control.
Kim Nam-geun, a KOSPI 5000 special committee commissioner, said, "On the issue of defending management control, we plan to more actively accept what the business community is requesting, such as mandatory disclosure systems, when we hold roundtables with the business community going forward, and to push such legislation as follow-up."