As the March regular shareholder meeting season wraps up, controversy continues to swirl around retailers that have not moved to cancel treasury shares. While key agenda items passed smoothly, the decision to keep holding treasury shares is seen as likely to fuel shareholder activism, leaving embers of conflict.
According to the retail industry on the 31st, this year's shareholder meetings saw a series of corporations seek exceptions to the obligation to cancel treasury shares through "plans to hold or dispose of treasury shares." Lotte Corporation, CJ, and Hanssem are representative cases.
Lotte Corporation passed, by special resolution at the shareholder meeting held on the 24th, an agenda item to establish standards for the disposal and holding of treasury shares. It allows the company to hold or dispose of treasury shares without cancellation when there is a managerial purpose such as improving the financial structure or adopting new technology. CJ and Hanssem also took a similar approach by establishing basis clauses related to the disposal of treasury shares.
This move is a response to the recent third amendment to the Commercial Act. Under the amendment, in principle, treasury shares held by corporations must be canceled within 18 months after the law takes effect. The third amendment to the Commercial Act took effect on the 6th. However, as an exception, holding or disposal is possible if certain conditions—such as employee compensation, grants to employee stock ownership associations, or other managerial purposes—are met and shareholder approval is obtained.
Corporations say these exceptions are unavoidable. They argue that flexible use of treasury shares is necessary to execute management strategies and operate compensation systems. They also explain that because such plans must be approved at annual shareholder meetings, the potential to harm shareholder interests is limited.
But the capital market is concerned that this structure can, in effect, be swayed by the will of controlling shareholders. Given affiliates' and controlling shareholders' equity stakes, approval at shareholder meetings may amount to a formal nod, making effective checks difficult to function in practice.
In the same vein, the National Pension Service also expressed opposition to the plans by Lotte Corporation and CJ to hold or dispose of treasury shares. The National Pension Service noted, "In a structure where an agenda item can pass with only the largest shareholder's support, it is difficult to sufficiently reflect the views of general shareholders." It also warned, "If exceptions to treasury share cancellation are recognized too broadly, it could lead to damage to shareholder value." Nonetheless, despite such opposition, all related agenda items were approved.
Experts note that this situation could lead to an expansion of shareholder activism going forward. If dissatisfaction with how treasury shares are used builds up, small shareholders could band together to exercise voting rights or move to actively check management.
Behind the focus on treasury shares is the longstanding practice by some corporations of using them as a tool to strengthen control. There have been repeated cases of contributing to the interests of specific shareholders by using treasury shares during a spin-off or handing them over to friendly forces during management control disputes.
Many also expect growing legal risks surrounding treasury shares. With the second amendment to the Commercial Act taking effect in July 2025 expanding directors' duty of loyalty from the "company" to the "company and shareholders," boards could face liability if the disposal of treasury shares is deemed to have infringed the interests of small shareholders. Outside directors, in particular, are not free from liability for damages.
Experts say corporations must design treasury share utilization plans more transparently and strengthen communication with shareholders. In the case of Lotte Corporation, Ko Jeong-wook, Lotte Corporation's CEO, took shareholder questions and provided detailed explanations about the agenda item to establish standards for the disposal and holding of treasury shares.
At the shareholder meeting, Ko said, "This amendment to the articles is a preemptive step to prepare for changes in the business environment due to the amendment to the Commercial Act," adding, "In the case of Lotte Corporation, if we cancel everything, we lose all resources that could be used to improve the financial structure or to raise the company's corporate value by other means. That said, Lotte Corporation will also cancel 5% first out of the 27.5%."
An Hyo-seop, head of the Sejong Corporate Governance Research Institute, said, "Conflicts over the cancellation of treasury shares are inevitable for the time being," and added, "If corporations do not go through sufficient explanation and persuasion, it could lead to legal disputes."