Amendment to the Commercial Act Mandating Share Cancellation: A Time to Review Strategies for Holding and Disposing of Treasury Shares

The amended Commercial Act expressly provides that treasury shares hold no rights whatsoever, including voting rights and dividend rights. This is regarded as a measure that effectively redefines treasury shares as a means of capital adjustment.

Accordingly, providing treasury shares as collateral, issuing bonds that use treasury shares as the object of exchange or redemption, and allocating new shares to treasury shares in the course of a merger or division are, in principle, restricted.

This is a regulatory change that requires a fundamental reexamination of the practice of using treasury shares as an asset-like instrument.

The core of the amended Commercial Act is the obligation to cancel shares within one year of acquisition. Accordingly, a company must cancel its treasury shares by a resolution of the board of directors within one year from the date of acquisition.

Only where a ground prescribed by law applies, however, may the shares be held or disposed of on an exceptional basis with the approval of the general meeting of shareholders.

Representative types of exceptional grounds are as follows.

• Disposal to all shareholders proportionally and on the same terms
• Use for personnel and compensation purposes, such as employee compensation and the employee stock ownership plan
• Use for restructuring purposes, such as a comprehensive share exchange, transfer, or merger
• Use for a management purpose specified in the articles of incorporation

In particular, where a company seeks to hold or dispose of shares beyond the cancellation deadline, it must obtain the approval of the general meeting of shareholders for a "treasury share holding and disposal plan" signed by all of the directors.

This plan must specifically include the purpose of the holding or disposal, the type and quantity of the shares concerned, the method of acquisition, the change in the ratio relative to the total issued shares, and the holding period and the expected time of disposal.

If a company violates this requirement, directors of a listed company and others may be subject to an administrative fine.

The same cancellation obligation applies even where a listed company acquires treasury shares through a trust agreement.

The trustee may not dispose of the shares at its discretion during the term of the trust, and shares that are returned must likewise undergo cancellation or an approval procedure within one year.

This can be seen as incorporating every form of acquisition, including indirect acquisition, into the regulatory framework.

This amendment also raises the question of consistency with the framework of the Financial Investment Services and Capital Markets Act.

After the general meeting of shareholders approves an annual holding and disposal plan, individual disposals are permitted within that scope by a resolution of the board of directors, but a prior disclosure obligation applies in parallel.

There are also areas requiring practical adjustment, such as the relationship with the existing treasury share report system (disclosure twice a year) and the differences from the contents attached to the business report.

Beyond this, follow-up legislation and authoritative interpretations remain tasks that must be promptly settled, including the method of treating gains and losses on the disposal of treasury shares under the Corporate Tax Act, the tax treatment of treasury shares acquired through a merger, and the revision of the Enforcement Decree of the Financial Investment Services and Capital Markets Act.

Combined with recent trends in amending the Commercial Act, such as the expansion of directors' duty of loyalty and the strengthening of the separate election of audit committee members, corporate governance is gradually being reorganized into a "shareholder-centered structure."

Share cancellation is therefore no longer a one-off decision and should be approached as a matter of redesigning the company's long-term strategy, IR policy, tax structure, and the framework of its articles of incorporation as a whole.

At Daeryun Law Firm LLP, attorneys experienced in corporate matters and financial matters, together with related legal professionals, collaborate closely to provide the following legal services on an integrated basis.

• Advisory on establishing a treasury share holding and disposal plan
• Designing a strategy for amending the articles of incorporation
• Structuring the agenda for the general meeting of shareholders
• Review of consistency with the Financial Investment Services and Capital Markets Act and the disclosure framework
• Diagnosis of tax risks
• Review of corporate articles of incorporation and presentation of guidelines

Mandatory share cancellation can be the starting point of a strategy to enhance corporate value, so it is a time when a proactive review is needed.

Our firm provides tailored services, such as video consultations and on-site consultations, taking into account the circumstances of each corporate client.

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