‘Magic of treasury stock’ to be prohibited by end of year

Financial Services Commission (FSC) headquarters in Seoul / Courtesy of FSC

The practice of allocating newly issued shares to existing treasury stocks held by corporations during corporate spinoffs will now be prohibited, aiming to curb the misuse of the treasury stock system and to better protect minority shareholders’ rights.

It is part of a legislative notice announced by the Financial Services Commission (FSC) earlier this week on amendments made to the country’s Capital Markets Act and the Korean Securities and Futures Exchange Act as well as related enforcement decrees. The regulatory amendments will take effect by the end of this year, following final reviews at ministerial meetings and cabinet decisions.

Treasury stocks, or reacquired stocks, are previously issued, outstanding stocks that a company repurchased or bought back from shareholders. The reacquired shares will then either be removed permanently from market circulation by retirement or held under the company’s possession.

While the treasury stock system intends to protect the rights of shareholders, the system has sometimes been exploited in Korea by major shareholders of listed companies to bolster their control over the firms.

Often called the “magic of treasury stocks,” there have been incidents where the controlling shareholder’s power is strengthened during the process of corporate spinoffs by allocating new shares of the spun-off company to the existing treasury stocks of the parent company. This has sparked controversy because it enhances the controlling shareholder’s power without additional investment, leading to corporate governance concerns.

The reason that such misuses had been allowed in Korea was due to its legal void. Under the Korean legal system, the unclarity in the regulations regarding corporate spinoffs has led to the allocation of new shares to treasury stocks, allowing additional shareholder rights to be given to major shareholders.

“We expect that this amendment will serve as an opportunity for treasury stocks to be operated in line with their original purpose of enhancing shareholder value,” an official from the FSC said.

The proposed amendments also strengthen disclosure obligations throughout the process of acquiring, holding and disposing of treasury stocks.

The amendments stipulate that if the proportion of treasury stocks held by a listed company exceeds a certain threshold — 5 percent of the total issued shares — the company should prepare a report detailing the status of its treasury stock 카지노 holdings, the purpose of holding them and future disposal plans. This report must also be approved by the board of directors.

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