South Korea’s 3rd Commercial Act revision introduced: “Cancel treasury shares within 1 year” as business groups seek workarounds

Third Revision of Korea’s Commercial Act Unveiled — Mandatory Treasury-Share Cancellation at the Core
Business Groups Scramble for Workarounds on Treasury-Stock Rules, but Run Into Limits
“No More Loopholes” — Regulators and Markets Respond Coldly

Legislation for the “third revision” of Korea’s Commercial Act is now moving forward in earnest, with mandatory cancellation of treasury shares at its core. Lawmakers are taking direct aim at Korea’s long-standing practice of using treasury stock as a strategic tool. Business groups warn that if cancellation becomes compulsory—without clear alternatives for control defense—markets could face greater turbulence from hostile M&A attempts. In response, companies are increasingly exploring workarounds such as forming “friendly alliances” and issuing exchangeable bonds (EBs).

Full-scale push to mandate treasury-share cancellations

According to the financial investment industry on the 10th, the Democratic Party’s “KOSPI 5000” Special Committee recently introduced an amendment that would add a new Article 341-4 to Korea’s Commercial Act. The proposal aims to overhaul the treasury-share system from the perspective of ordinary shareholders. Under the current law, boards can dispose of treasury shares at their discretion, and critics say this has often enabled treasury stock to be abused for the benefit of specific shareholders and management. In some listed companies, controversies have also emerged after firms disclosed buybacks as a move to enhance shareholder value, only to keep the shares instead of canceling them—sparking accusations of misleading disclosure.

The amendment would establish a principle that companies must cancel treasury shares within one year of acquisition (with a six-month grace period for treasury shares already held). Exceptions would be allowed only under certain conditions—such as employee compensation—if the company drafts a plan for holding or disposing of treasury shares and obtains approval at a shareholders’ meeting. Firms would need to seek approval for such plans every year at the AGM. If a company fails to cancel the shares within one year without an approved plan, or violates an approved plan by holding or disposing of treasury shares improperly, individual directors could face an administrative fine of up to $36,000.

The proposal would also explicitly state in law that treasury shares carry no rights, and would clarify their nature as “capital.” While treasury stock is treated as equity for accounting purposes, some provisions in the current law are said to implicitly treat treasury shares as assets, raising concerns about inconsistency. The amendment would further bar companies from allocating new shares to treasury stock in mergers or spinoffs, and would add a principle that when a company is exceptionally permitted to dispose of treasury shares, it must do so on equal terms to all shareholders in proportion to their holdings.

Business backlash: “This strips away takeover defenses”

Corporate Korea is pushing back hard against the ruling party’s move. Executives argue that if the third round of Commercial Act revisions goes through, incentives to buy back shares will weaken—ultimately undercutting a key driver of share-price support. They also warn that, unlike advanced markets, Korea lacks many standard takeover defenses—such as dual-class shares, poison pills, or golden shares—leaving domestic companies exposed to hostile M&A attempts by foreign funds. In Korea, dual-class shares are currently permitted only for venture firms and startups.

Companies are also exploring workarounds. One option is the “white-knight alliance” approach—transferring treasury shares to another company to deepen cooperation or stabilize control. However, market participants say meaningful alliances formed this way are rare, largely because mutual distrust gets in the way. As one industry official put it, firms typically believe their own stock is undervalued with upside ahead, while viewing the other company’s stock as uncertain and risky—making it hard to form an alliance based on goodwill alone.

Other ideas include raising funds overseas, issuing American Depositary Receipts (ADRs), or using offshore special purpose companies (SPCs). The logic is to convert treasury shares into instruments like ADRs—where outright bans are unclear and disclosure obligations can be ambiguous—and later tap them as financing ammunition for M&A if needed. Still, critics say this route carries significant long-term risk: even if it is technically feasible, once it is seen as regulatory evasion, the political and reputational costs could be steep.

EB Issuance and Other Workarounds Face Clear Limits

Issuing EB backed by treasury shares has also surged this year. According to the Korea Securities Depository’s securities information portal, total treasury-share-backed EB issuance from January to November reached about $2.09 billion, up 355.7% from the same period last year (about $459 million). This far exceeds the growth rate for overall EB issuance—including EB backed by other companies’ shares—which rose 158.9%. The number of deals also jumped 242.3%, from 26 to 89. Selling treasury shares via an EB can bring in cash and improve the balance sheet, and if the securities end up with a friendly third party, voting rights can be revived—potentially helping defend management control.

That said, treasury-share-backed EB issuance, which peaked at 34 deals in September, has been easing lately, with 15 deals in October and 13 in November. The slowdown follows the Financial Supervisory Service tightening disclosure requirements from last month, requiring issuers to spell out why they chose an EB over other funding options, what their feasibility review found, and how the deal affects existing shareholders. In effect, regulators have moved to block treasury-share-backed EB from being used as a “shortcut.”

Some companies have also abandoned EB plans amid strong shareholder pushback. Taekwang Industrial, for example, pushed in June to issue an EB worth about $223 million, exchangeable into all of its treasury shares (24.41%) as part of a fundraising effort. In response, a coalition of minority shareholders—including Truston Asset Management—filed for an injunction, arguing that at a deeply depressed valuation (PBR around 0.2), the move effectively amounted to a third-party allotment capital increase disguised as a treasury-share disposal. Although the injunction request was later dismissed, negative market sentiment persisted, and Taekwang ultimately withdrew the EB plan at the end of last month.