The Financial Services Commission announced that the government approved the revision bill for the Enforcement Decree of the Financial Investment Services and Capital Markets Act at the cabinet meeting held on December 24. The upgraded rules on treasury stocks of listed companies will go into effect from December 31, 2024.

Background

Treasury stocks are considered as an important mechanism for shareholder return alongside dividends. However, in Korea, companies often acquired treasury stocks to bolster the control of their major shareholders. To address this problem, the government had prepared measures to upgrade rules on treasury stocks as a way to strengthen protection for ordinary shareholders and which constitute a part of broader efforts at reforming capital market regulations. In particular, this year, with the expansion of Corporate Value-up Program and growing number of market participants and companies showing interest in enhancing shareholder value, the volume of treasury stock acquisitions and cancellations by listed companies has risen to the highest level in seven years, increasing about 2.3 times and 2.9 times, respectively, compared with the previous year. Thus, the rule changes on treasury stocks of listed companies are focused on facilitating the voluntary efforts of listed companies in enhancing protection for ordinary shareholders and boosting value for shareholders.

Key Revision Details

The proposed rule changes are intended to (a) restrict the allocation of new shares to treasury stocks when companies spin-off business units, (b) strengthen disclosure requirements, and (c) close loopholes and remove regulatory arbitrage throughout the process of acquiring and disposing treasury stocks.

First, allocating new shares to treasury stocks will be prohibited when companies spin-off their business units. When it comes to treasury stocks, currently, almost all shareholders’ rights, such as voting rights, dividend rights, and preemptive rights, are non-exercisable. However, due to the lack of clarity in statutory provision and court precedents, there have been cases where new shares were allocated in corporate spin-offs. This strategy was often used by companies to bolster the control of major shareholders, instead of making use of treasury stocks to boost shareholder value, which has been pointed out as a problem. Moreover, this has remained inconsistent from the perspective of global regulatory standards. Thus, the revised Enforcement Decree will strictly restrict the allocation of new shares to treasury stocks in corporate spin-offs of listed companies. This restriction will also apply to the treasury stocks of acquired companies in corporate mergers and acquisitions.

Second, the disclosure duties on treasury stocks will be strengthened. Although the information on what companies plan to do with their treasury stocks after acquiring them can have significant effects on their stock price movements, there has been inadequate disclosure of information in this regard. Thus, the revised Enforcement Decree will require listed companies (when the proportion of their treasury stock holding is 5 percent or more of the total volume of stocks issued) to prepare reports on their treasury stock holding status, purpose of holding, and future plan (additional acquisition or write-off) and get approval from the board of directors. In addition, the revised rule will require listed companies to disclose detailed information when disposing treasury stocks, such as the purpose of disposal, information about the counterparty, and expected effects on stock price.

Third, relevant upgrades will be made in regulations to close loopholes and remove regulatory arbitrage. Under the current system, less strict rules are applied when companies acquire treasury stocks via trust, instead of acquiring them directly. Thus, there exists the potential for companies to take advantage of this loophole. Moreover, when treasury stocks are acquired via trust, disposal of treasury stocks is not subject to the disclosure duty during the trust agreement period, which presents a loophole for investor protection. Therefore, the revised Enforcement Decree will apply the same standards when companies acquire treasury stocks via trust as in the case with direct acquisition. When the volume of treasury stocks being acquired is less than the initially planned or disclosed amount, companies will need to submit an explanatory statement, while entering into a new trust agreement will be prohibited until one month after the end of the scheduled treasury stock acquisition period. In addition, during the trust agreement period, even when the disposal of treasury stocks is being carried out indirectly, companies will be required to submit reports detailing the purpose of disposal, information about the counterparty, and expected effects on stock price in their material information disclosures.

Expectation and Further Plan

The revised rules will help encourage listed companies to make use of treasury stocks to increase value for ordinary shareholders, instead of using them to bolster the control of major shareholders. The FSC will closely work with related authorities to ensure a seamless implementation of the revised measures in the market and continue to seek additional reform measures to enhance the protection of ordinary shareholders.

* Please refer to the attached PDF for details.