The Democratic Party of Korea is reviewing an amendment to the third Commercial Act revision bill that would make an exception for treasury shares held by small and midsize corporations for the purpose of defending management control from the obligation to cancel them. It effectively accepted concerns from the government and the business community.
According to political and government circles on the 13th, the Democratic Party is reviewing a plan in the third Commercial Act revision bill to make exceptions for treasury shares held by small and midsize corporations to defend management control and for special-purpose treasury shares. In particular, there is a high possibility that treasury shares for small corporations held to defend management control will be exempted.
A Democratic Party official said, "For corporations that are just getting big and growing now, the party believes there is a need to slightly supplement the treasury share issue," adding, "The broad direction of canceling treasury shares does not change, but we need to proceed while making appropriate adjustments depending on circumstances and corporate size."
The National Assembly's Legislation and Judiciary Committee plans to hold a public hearing on the morning of the 13th to hear expert opinions on the third Commercial Act revision bill. The third Commercial Act revision bill, which Chairperson Oh Ki-hyeong of the K-capital market special committee introduced as the lead sponsor on Nov. 24 last year, defines treasury shares as "capital" rather than an "asset." In particular, it would require corporations to cancel newly acquired treasury shares within one year and also cancel existing treasury shares after a six-month grace period.
The business community says it has used treasury shares as a defense against hostile M&A (mergers and acquisitions) and is concerned that mandatory cancellation could lead to the loss of a tool to defend management control. Concerns were especially high among small and midsize corporations vulnerable to threats to management control.
Rep. Oh Ki-hyeong and the Democratic Party's K-capital market special committee take the position that mandatory cancellation of treasury shares is necessary regardless of corporate size. At a press conference on the 11th, Oh said, "I do not agree with the argument that there would be a gap in defending management control due to mandatory cancellation of treasury shares."
However, the government and the presidential office maintain that exceptions to mandatory cancellation of treasury shares are needed to prevent harm to small and midsize corporations. In a recent opinion submitted to the National Assembly, the Ministry of Justice said, "Given the current corporate law framework, consideration is needed for the reality that treasury shares have been used as the only means of defending management control," adding, "We should discuss alternative measures to protect blue-chip corporations in national key industries from hostile mergers and acquisitions (M&A) by foreign speculative capital."
The presidential office is also said to share the Ministry of Justice's position. The Democratic Party, reflecting the positions of the presidential office and the government, is reviewing a plan to allow exceptions to mandatory cancellation of treasury shares when the case fits specific purposes such as corporate size and defense of management control. The Legislation and Judiciary Committee is also reportedly considering revising the third Commercial Act revision bill in line with the positions of the party, the government, and the presidential office.
At the National Assembly public hearing to be held that day, views calling for broad exceptions to the third Commercial Act revision bill are also expected to be presented. The public hearing will feature testimony from Professor Kwon Jae-yeol of the Kyunghee University law school and Professor Shin Jang-seob of the National University of Singapore, among others.
Professor Kwon said, "If the cancellation obligation is applied mechanically regardless of a company's financial condition, industry characteristics, and market circumstances, it entails the risk of over-legislation," adding, "Treasury stock has been used as a core tool for defending management control, but if forced cancellation is imposed, that tool disappears, leaving corporations defenseless against attacks on management control such as hostile M&A."
Professor Shin Jang-seob also said, "Mandating cancellation of treasury shares is not the introduction of a global standard but a Galapagos regulation found nowhere else in the world," adding, "If the third Commercial Act revision bill passes, it will go down in history as the 'corporate raider promotion law.'"
By contrast, Professor Kim Woo-chan of Korea University Business School and Senior Research Fellow Hwang Hyun-young of the Korea Capital Market Institute, both recommended by the Democratic Party, are expected to submit opinions that mandatory cancellation of treasury shares is necessary.