The ruling and opposition parties clashed over the third Commercial Act amendment that includes a mandatory cancellation of treasury shares. The Democratic Party of Korea said it will handle it during the February extraordinary session of the National Assembly to boost capital market value.
The National Assembly's Legislation and Judiciary Committee's first subcommittee on bill review held a public hearing on the morning of the 13th and discussed the third Commercial Act amendment mandating the cancellation of treasury shares. The third Commercial Act amendment, introduced on Nov. 24 last year by Special Committee on K-Capital Market Chairperson Oh Ki-hyeong as the lead sponsor, defines treasury shares as "capital," not an "asset." In particular, it mandates that corporations must cancel newly acquired treasury shares within one year and cancel existing treasury shares after a six-month grace period.
The parties showed clear differences at the hearing. Kim Yong-min, a Democratic Party lawmaker and the ruling party secretary on the Legislation and Judiciary Committee, said, "For today's KOSPI 5550 to become a solid fundamental strength of our economy rather than a temporary phenomenon, the amendment must be completed," adding, "Now is the golden time to ensure treasury shares no longer serve as the shield of owner families but become a true primer that raises shareholder value."
By contrast, Cho Bae-sook of the People Power Party said, "Treasury shares are the only tool for defending management control," and expressed concern, saying, "I wonder how our corporations will defend against hedge funds and mergers and acquisitions (M&A) attacks."
◇Opposing experts: "Like burning down the thatched house to catch bedbugs"
The divide was also evident in the debate among experts invited by both sides. The Democratic Party invited Kim Woo-chan, a professor at Korea University Business School, and Hwang Hyun-young, a research fellow at the Korea Capital Market Institute, while the People Power Party invited Kwon Jae-yeol, a professor at Kyung Hee University Law School, and Shin Jang-seop, a professor at the National University of Singapore.
Experts invited by the People Power Party warned that mandatory cancellation of treasury shares would weaken tools for defending management control, exposing corporations to hostile M&A. Professor Kwon Jae-yeol cited Microsoft's 1998 attempt to acquire Hangul Word Processor (HWP) as an example, saying, "Treasury shares are almost the only remaining tool for defending management control," and added, "I think there may be a problem with not leaving other exits (for defending management control)."
He continued, "A mechanical application of the cancellation mandate carries the risk of over-legislation that fails to consider company- and situation-specific differences," adding, "If (cancelling treasury shares) leads to a capital reduction, companies could fall short of licensing standards that require minimum capital, which I fear would cause great difficulties for many corporations, including small and medium-sized ones."
Professor Shin Jang-seop also said, "While approaches to regulating treasury shares differ by country, no country imposes a rule that forces cancellation," adding, "This is a 'Galápagos' regulation, and if it passes, the real beneficiaries will be activist funds and corporate raiders seeking short-term gains."
He went on, "If the issue is third-party disposal, we can fix that part, but making mandatory cancellation of treasury shares the principle is like 'burning down the thatched house to catch bedbugs,'" adding, "M&A requires swift responses when opportunities arise, and if shareholder approval is required each time, corporations' agility could be significantly reduced."
◇Supporting experts: "We must prevent damage to shareholder value… the law is flexible"
On the other hand, experts on the Democratic Party side who support mandatory cancellation of treasury shares pointed out that treasury shares are being diverted as a private means to strengthen controlling owners' grip, and emphasized that the current amendment is also flexible.
Professor Kim Woo-chan said, "The essence of the third Commercial Act amendment is the protection of preemptive rights," adding, "Management has strengthened control through swaps of treasury shares, lowering existing shareholders' voting and dividend rights. If preemptive rights are not properly protected, something close to a 'rigged election' occurs."
He also countered the argument that protecting management control would become precarious due to mandatory cancellation. Kim said, "The amendment is a very flexible bill," explaining, "Even if it passes, there is no need to mandatorily cancel treasury shares. If shareholder consent is obtained, they can continue to be held, so the problem does not seem significant."
Research fellow Hwang Hyun-young explained findings from an analysis of disclosures on the disposal of treasury shares over the past year, saying, "Disposals include those to the largest shareholder personally, direct descendants, a second son, and affiliates, which does not align with the legislative intent of the Commercial Act and, compared with legislation in major overseas countries, is a representative case of damage to shareholder value that is undesirable," arguing that the treasury share system needs improvement.
The Legislation and Judiciary Committee plans to begin reviewing the third Commercial Act amendment after the Lunar New Year holiday. Lawmaker Kim Yong-min said the same day, "We will review it as quickly as possible and pass it during the February extraordinary session." During committee discussions, a revised plan may emerge to exempt treasury shares held for the purpose of defending management control by small and midsize corporations and mid-tier corporations. With the government voicing public concern, the ruling party leadership is also said to believe revisions to the third Commercial Act amendment are necessary.