CONTENTS
- 1. Management Control Defense | Conflict between a Security Right and Voting Rights, an Actual Management Control Dispute Case
- - Legal Issues Regarding the Scope of the Pledge and the Attribution of Voting Rights
- - The Court's Determination and the Significance of Management Control Stability
- 2. Management Control Defense | The Basics of Protecting Corporate Governance through Share Buybacks
- - Management Control Defense and the Legal Purpose of Acquiring Treasury Shares
- - Practical Use as a Mechanism for Responding to Hostile M&A
- 3. Management Control Defense | The Limits and Inefficiency of Using Treasury Shares under the Korean Commercial Act
- - Procedures for the Acquisition and Retirement of Treasury Shares under the Commercial Act
- 4. Management Control Defense | Recent Trends in the Issuance of Exchangeable Bonds
- - Issues in Maintaining Control through the Issuance of Exchangeable Bonds
- - Preparing for Amendments to the Commercial Act and Securing the Reliability of Disclosure
- 5. Management Control Defense | Building Diversified Defense Mechanisms and the Need for Legal Advice
- - The Core of Risk Management through Legal Review
1. Management Control Defense | Conflict between a Security Right and Voting Rights, an Actual Management Control Dispute Case
A management control defense strategy is something every company should prepare in advance.
Recently, the firm's corporate attorneys represented a venture capital company and its principal investor, a private equity fund, and defended management control in a dispute over the exercise of voting rights arising from the creation of a pledge on shares.
In that matter, a financial institution applied for a provisional injunction, asserting that, on the basis of a pledge it had created on the shares, it would directly exercise the company's voting rights.
Although the matter formally concerned the exercise of a security right, in substance it was a management control dispute over who would exercise the company's principal decision-making authority.
Legal Issues Regarding the Scope of the Pledge and the Attribution of Voting Rights
The central issue in this case was whether the creation of a pledge itself meant a transfer of the voting rights.
The corporate attorneys systematically organized, in accordance with the contractual language, the provisions of the Commercial Act, and case law, the position that a pledge is no more than a limited right for the purpose of securing a claim and is not a right that transfers shareholder status itself.
In particular, they emphasized that, even where a pledgee may exercise voting rights, this is recognized only on a limited basis within the scope necessary to protect the interests of the pledgor, and it cannot be expansively interpreted as entirely excluding the pledgor's fundamental shareholder rights.
They also developed their argument around the court's standard of judgment, under which the interpretation of a contract must comprehensively consider not only the language of individual clauses but also the overall contractual structure and the circumstances of its conclusion.
They thus made clear that a security right and management control must be distinguished, and that the exercise of a security right cannot be permitted to be converted directly into a means of seizing management control.
The Court's Determination and the Significance of Management Control Stability
The court accepted this legal analysis and dismissed the application for a provisional injunction, and the client was able to maintain its existing voting rights structure.
This matter is a case that shows how a security arrangement can be converted into a management control dispute.
In particular, it suggests that how voting-rights-related clauses are designed at the stage of concluding an investment or financing agreement can be a key factor that determines the direction of any future dispute.
Management control defense is not an issue only in hostile M&A situations.
One should always keep in mind that various financial structures created during the process of attracting investment, such as security rights, exchangeable bonds, convertible bonds, and pledges, may operate as a means of controlling voting rights in the future.
2. Management Control Defense | The Basics of Protecting Corporate Governance through Share Buybacks
Management control defense is an activity for maintaining a company's control in hostile M&A or management control dispute situations.
As volatility in domestic and overseas capital markets has recently increased, many companies are using share buybacks as a key defensive measure.
A company's direct purchase of its own shares has the effect of reducing the number of shares circulating in the market, which makes it more difficult for a party seeking a hostile acquisition to secure a stake.
Share buybacks can still have the effect of signaling to the market and raising the cost of acquisition. However, because the amended Commercial Act imposes an obligation to retire shares within one year, it is necessary to design a capital policy that combines the buyback and the retirement.
For such conduct to go beyond a mere boost to the share price and lead to a substantive strengthening of management control, a thorough understanding of the complex procedures and regulations under the Commercial Act must come first.
Management Control Defense and the Legal Purpose of Acquiring Treasury Shares
The Commercial Act permits a company to acquire its own shares in its own name and on its own account within the limit of distributable profits.
In the past this was strictly limited, but a company may now hold treasury shares through certain procedures on the grounds of management control defense and the enhancement of shareholder value.
One should note, however, that if the acquisition process violates the principle of equal treatment of shareholders or provides favorable conditions only to particular shareholders, grounds for legal disputes may arise.
Practical Use as a Mechanism for Responding to Hostile M&A
When a hostile acquisition attempt is detected, companies often urgently file a disclosure of a share buyback and proceed with on-market purchases.
This serves as a signal expressing a firm intention to defend against the acquiring party, and it has the effect of rallying friendly shareholders.
However, because treasury shares themselves carry no voting rights, the core of the strategy lies in how they are used to connect to the securing of substantive voting rights.
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3. Management Control Defense | The Limits and Inefficiency of Using Treasury Shares under the Korean Commercial Act
The greatest problem with share buybacks as a means of management control defense is cost efficiency.
In advanced markets such as the United States, the acquisition of treasury shares is treated as an immediate reduction of capital, so the total number of issued shares decreases and a major shareholder's shareholding ratio naturally rises.
However, with the amendment of the Commercial Act in February 2026, where a company has acquired treasury shares it must in principle retire them within one year, so a strategy of defending a shareholding ratio through mere holding is structurally restricted.
Accordingly, where a company intends to use treasury shares as a means of management control defense, it must design, together with the acquisition, a plan for retirement or for holding under an exception.
Under the amended Commercial Act, the retirement of treasury shares has become possible by a resolution of the board of directors alone, subject to certain requirements.
However, because issues of whether the capital is reduced and of creditor protection procedures may arise depending on the method of retirement and the circumstances of acquisition, a concrete structural design is necessary.
Procedures for the Acquisition and Retirement of Treasury Shares under the Commercial Act
2. Method of Acquisition: A company must use on-market purchases through the exchange or a tender offer on equal terms to all shareholders
4. Management Control Defense | Recent Trends in the Issuance of Exchangeable Bonds
The amended Commercial Act has been revised in the direction of restricting the issuance of bonds that have treasury shares as the object of exchange or redemption, so the past strategy of issuing treasury-share-based exchangeable bonds structurally requires re-examination.
Going forward, there is a high likelihood that strategies will need to be designed around alternative financial measures such as the issuance of new shares and friendly third-party allotments.
When an amendment to the Commercial Act applying procedures as strict as those for the issuance of new shares to the disposal of treasury shares was recently announced, many companies moved to issue exchangeable bonds with treasury shares as the underlying asset before the amendment took effect.
This is a financial choice intended to secure friendly forces or raise funds without directly selling the treasury shares.
However, such conduct creates a point at which the interests of the controlling shareholder conflict with the interests of general shareholders.
If treasury shares acquired on the grounds of enhancing shareholder value are used solely to secure friendly stakes for the sole purpose of defending management control, it is difficult to avoid criticism that this is a misuse of capital.
In addition, if the purpose of acquisition is falsely stated or key information is concealed during the disclosure process, an issue of legal liability for betraying the market's trust may arise.
Issues in Maintaining Control through the Issuance of Exchangeable Bonds
The issuance of exchangeable bonds using treasury shares can, in substance, have the effect of converting shares that carry no voting rights into a state in which voting rights can be exercised.
If an exchangeable bond investor later exercises the exchange right and comes to hold shares, such an investor generally serves as a "white knight" who casts votes favorable to management.
Courts tend to strictly examine whether such a disposal infringes shareholders' preemptive rights for the sole purpose of management control defense.
Preparing for Amendments to the Commercial Act and Securing the Reliability of Disclosure
In preparation for the regulations that will be strengthened in the future, a company should examine in advance the strategic validity of disposing of treasury shares and issuing exchangeable bonds.
Rather than choosing an easy defensive measure, it is important to have an innovative financial strategy and a transparent disclosure system.
This is because a management control defense that has lost the market's trust may produce the counterproductive effect of instead becoming a target for private equity funds or activist shareholders.
5. Management Control Defense | Building Diversified Defense Mechanisms and the Need for Legal Advice
For an effective management control defense, various legal measures should be used alongside share buybacks.
Principal Management Control Defense Measures through Amendment of the Articles of Incorporation
2. Supermajority Voting Requirement: Requiring an approval rate higher than the standard under the Commercial Act for major agenda items such as the dismissal of directors, thereby providing a defense
3. Staggered Board: Setting different terms for directors so as to prevent the entire board from being taken over at once
The Core of Risk Management through Legal Review
If management control defense is needed in the course of a company's important decision-making, the company should, before committing funds, closely examine the legal legitimacy of the conduct and the deliberation process of the general meeting of shareholders.
In particular, the disposal of treasury shares or an amendment of the articles of incorporation at the point when a management control dispute has fully developed is very likely to become the subject of a nullity lawsuit afterward.
Companies should therefore consider systematic improvements to corporate governance and the formation of a legal line of defense from the stage before a dispute.
Stable management control is completed not only through a numerical advantage but also through procedural transparency.
Amid the complex provisions of the Commercial Act and rapidly changing capital market regulations, specialized legal assistance in corporate legal affairs is important for safely protecting a company's management control.
If you need a management control defense against hostile threats that hinder a company's sustainable growth, you are welcome to establish a defense strategy tailored to your company through a 🔗corporate attorney legal consultation reservation.
Daeryun, the ninth-largest law firm in the Republic of Korea (based on 2025 value-added tax filings with the National Tax Service), devises rapid response strategies tailored to each situation.
