Financial Services Commission (FSC) headquarters in Seoul / Courtesy of FSC
Minority shareholders’ rights to be enhanced
By Anna J. Park
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 holdings, the purpose of holding them and future disposal plans. This report must also be approved by the board of directors.
Way towards removing ‘Korea discount’
As of the end of last year, about 81 percent of all listed companies in Korea held treasury stocks, mostly in a range between 1 percent and 5 percent, while some 10 percent of listed companies held treasury stocks ranging from 5 percent to 10 percent.
While market analysts view the introduction of the strengthened regulations on treasury stocks would improve the Korean stock market system, some business owners maintain an opposing stance, believing that it could lead to the removal of a key means of defending management rights.
Despite such opposition, a study by the Korea Capital Market Institute, which analyzed corporate spinoffs from 2000 to 2021 in which new shares were issued during the process, showed that the proportion of shares held by controlling shareholders in both the parent company and the newly established company significantly increased by 15 percent and 11 percent, respectively, compared to before the spinoff. On the other hand, the ownership proportion of minority shareholders in terms of market capitalization decreases by 6 percent before the spinoff, leading to distortions not only in control but also in wealth distribution.
In addition, while most of the repurchased treasury stocks held by companies are followed by retirement in the U.S., only 2.3 percent of companies in Korea retired their treasury stocks.
Korea Investment & Securities has also pointed out that if listed companies were to retire all treasury stocks held over a three-year period, the KOSPI could rise to 3,620 points, suggesting that retiring treasury stocks could be the easiest way to increase dividend payouts and thereby alleviate the “Korea discount.”