🚨 Mandatory Treasury Stock Buyback Coming Soon: Companies Worry About Losing Management Defense

Today Korean Economic News | 2025.07.16

📌 Treasury Stock Cancellation Bill Proposed…Companies "Losing Management Defense Tools"

💬 The government and ruling party are pushing for mandatory treasury stock cancellation, creating more burden for companies. A bill requiring companies to cancel treasury stocks within a certain period after purchase has been proposed to the National Assembly, raising concerns about fewer ways to defend management control. Currently, companies use treasury stocks for management defense and shareholder return purposes, but mandatory cancellation would greatly limit their strategic flexibility. Critics point out that introducing such regulations when Korea lacks proper management defense systems could negatively impact stable corporate management.

1️⃣ Easy Understanding

A new rule called mandatory treasury stock cancellation is being pushed forward, and companies are very worried. This is because one of the important management tools that companies could use during crisis situations might disappear.

First, let me explain what 'treasury stock' means in simple terms. Treasury stock is when a company buys back its own shares from the stock market. For example, if Samsung Electronics buys Samsung Electronics shares from the stock market, that's treasury stock purchase.

Companies buy treasury stocks for several reasons. First, when stock prices fall, they want to send a signal that 'our company stocks are still valuable.' Second, they use it as a way to return extra cash to shareholders. Third, they sometimes use it as a tool to protect their management control when needed.

The third reason is the key issue in this controversy. Treasury stocks don't have voting rights, but when necessary, companies can give them to friendly parties or use them in other ways to defend management control. For example, when a hostile takeover appears, companies could use their treasury stocks to fight back.

But the new mandatory treasury stock cancellation rule wants to require companies to cancel their treasury stocks within 6 months or 1 year after purchase. 'Cancellation' means permanently destroying the shares. If this happens, companies won't be able to use treasury stocks as a management defense tool.

The government says they want to introduce this rule to 'maximize shareholder return effects.' Their logic is that canceling treasury stocks reduces the total number of shares, which increases the value of remaining shareholders' stakes. But companies are fighting back, saying it's "excessive regulation that greatly limits management flexibility."

Especially in Korea, systems like multiple voting rights and differential voting rights for management defense are not well developed. In this situation, if treasury stocks can no longer be used as management defense tools, companies might focus only on short-term results rather than long-term investments.

In the end, this treasury stock cancellation mandate is a complex issue that needs to find balance between stable corporate management and protecting shareholder interests.

2️⃣ Economic Terms

📕 Treasury Stock

Treasury stock means shares that a company has bought back from its own company.

• Used for shareholder returns, stock price support, and management defense.
• Treasury stocks have no voting rights and don't receive dividends.
• Can be sold back to the market or canceled when needed.

📕 Treasury Stock Cancellation (Share Buyback)

Treasury stock cancellation means permanently destroying the bought treasury stocks.

• When canceled, the total number of shares decreases, increasing existing shareholders' stake value.
• Considered a method of shareholder return, but may limit companies' strategic flexibility.
• Common in the US and Europe, but wasn't mandatory in Korea.

📕 Management Defense

Management defense means protecting management control from outside hostile takeovers.

• Various methods include treasury stock purchase, securing friendly stakes, poison pills, etc.
• Korea lacks institutional defense tools like multiple voting rights and differential voting rights.
• Management defense is an important issue directly related to long-term corporate stability.

📕 Shareholder Return

Shareholder return means giving back profits earned by the company to shareholders.

• Main methods include dividend payments and treasury stock purchase/cancellation.
• Proper shareholder return helps improve corporate value and build shareholder trust.
• Excessive shareholder return may limit companies' growth investment capacity.

3️⃣ Principles and Economic Outlook

✅ Background and Purpose of Mandatory Treasury Stock Cancellation

• Let's analyze why the government is pushing for mandatory treasury stock cancellation and what effects they expect.

  • First, maximizing shareholder return effects is the main purpose. Currently, Korean companies often hold treasury stocks for long periods after purchase. This has been criticized for having limited shareholder return effects. Mandatory cancellation would reduce the total number of shares, increasing existing shareholders' stake value. For example, if 1 million shares are canceled out of 10 million total shares, the remaining 9 million shares would have higher value. The government believes this can reduce companies' cash holdings and give real benefits back to shareholders.

  • Second, they expect corporate value improvement through better corporate governance. There have been criticisms that treasury stocks used for management defense sometimes prioritize management interests over shareholder interests. Through mandatory cancellation, they want to solve this problem and guide companies to operate more transparently and efficiently. They also expect pressure effects for companies to actively use unnecessary cash through investment or dividends rather than accumulating it.

  • Third, it reflects the will to improve systems according to global standards. In advanced countries like the US and Europe, canceling treasury stocks after purchase has become common practice. Especially US companies mostly cancel treasury stocks after purchase. The government believes Korea should also improve its systems to match these global standards. This also intends to increase overseas investors' trust and strengthen Korean companies' international competitiveness.

• Mandatory treasury stock cancellation has justification for protecting shareholder interests and improving corporate governance, but concerns also exist about limiting management flexibility.

✅ Companies' Concerns and Opposition Logic

• Let's look at business community concerns and opposition reasons regarding mandatory treasury stock cancellation.

  • First, the biggest concern is corporate stability risk due to limited management defense tools. Korean companies have used treasury stocks as important management defense tools. They could strategically use treasury stocks when responding to hostile takeover threats or attacks from shareholder activist funds. But if mandatory cancellation is implemented, these defense tools would disappear, potentially threatening corporate management stability. Especially since Korea lacks other management defense systems like multiple voting rights and differential voting rights, treasury stocks played an even more important role.

  • Second, limited management decision flexibility could negatively impact corporate competitiveness. Companies could use various strategies like buying treasury stocks and selling them again according to market conditions, or using them for paid-in capital increases when needed. But if mandatory cancellation is implemented, these strategic options would disappear. Especially when responding to economic fluctuations or industry environment changes, companies would have fewer options, potentially leading to decreased competitiveness. There's also risk that companies might avoid treasury stock purchases altogether, reducing shareholder return methods themselves.

  • Third, uniform regulations ignoring individual company characteristics are being criticized. Companies differ in industry, size, and growth stage, so treasury stock utilization strategies should also differ. For example, early-stage growth companies need to maintain flexible capital structures using treasury stocks, while mature companies might need stable shareholder returns. But uniform mandatory cancellation is criticized as uniform regulation not considering such company-specific characteristics. Also, small businesses and venture companies often use treasury stocks for stock options, which could also be limited.

• Companies' concerns are raised from broader perspectives including securing strategic flexibility and recognizing company-specific characteristics, beyond just management defense.

✅ Overseas Cases and Differences from Korean Situation

• Let's compare and analyze treasury stock systems in major overseas countries and Korea's differences.

  • First, treasury stock systems in the US and Europe operate in different legal and institutional environments from Korea. US companies commonly cancel treasury stocks after purchase, but this is market practice, not legal obligation. Also, the US has developed various management defense tools like multiple voting rights and differential voting rights, making dependence on treasury stocks relatively lower. Europe also operates different systems by country, but most legally recognize various means for management defense.

  • Second, Korea's capital market environment and corporate governance characteristics differ from overseas. Korea has a chaebol-centered economic structure and complex governance structures, making management defense more important. Also, with high foreign investor ratios and active shareholder activist funds, the need for management defense tools is high. In this situation, treasury stocks have served as almost the only management defense tool. But unlike overseas, institutional devices to replace this are lacking.

  • Third, differences in market maturity and investor composition may affect system introduction effects. In the US and Europe, with high ratios of institutional investors and pension funds as long-term investors, shareholder return effects from treasury stock cancellation can be significant. But Korea has relatively high individual investor ratios and strong short-term investment tendencies, so cancellation effects might be limited. Also, differences in corporate value evaluation methods and market efficiency could bring different results even with the same system.

• While referencing overseas cases, customized system design considering Korea's special situation is needed.

4️⃣ In Conclusion

Mandatory treasury stock cancellation has justification for protecting shareholder interests and improving corporate governance, but it doesn't fully consider the realistic constraints Korean companies face. Especially limiting treasury stocks when management defense tools are already lacking could threaten corporate management stability.

The government's intention is understandable. There have been criticisms that companies hold excessive cash while not providing sufficient returns to shareholders, and system improvements to solve this are indeed needed. The purpose of improving systems according to global standards to increase overseas investors' trust is also valid.

However, careful approach is needed regarding the timing and method of system introduction. First, alternative systems for management defense like multiple voting rights and differential voting rights should be introduced, then mandatory treasury stock cancellation should be implemented. Also, differentiated approaches considering industry-specific and company size characteristics are needed.

Most importantly, sufficient communication and agreement between companies and government are crucial. Rather than unilateral regulation introduction, it's better to listen to companies' concerns and seek effective alternatives together. For example, instead of mandatory cancellation, tax benefits for cancellation or gradual introduction giving companies time to adapt could be considered.

Ultimately, mandatory treasury stock cancellation is about finding balance between shareholder interests and corporate stability, short-term effects and long-term competitiveness. Rather than hasty system introduction, careful and gradual approach considering Korean capital market characteristics is needed.

While maintaining goals of improving corporate governance and expanding shareholder returns, more diverse and flexible approaches are needed for achieving these goals.