[fn Editorial] Mandatory Cancellation of Treasury Shares, Will Take Away Means of Defense for Management Rights

The Korea Chamber of Commerce and Industry released a report on the 16th stating that the Democratic Party's commercial law amendment mandating the cancellation of treasury shares could have a very negative impact on management. Mandatory cancellation of treasury shares is a core part of the so-called 'stronger' commercial law, the third amendment, which can reduce the number of issued shares and increase earnings per share (EPS), thereby boosting stock prices.

The ruling party's intention is well understood. No one opposes increasing shareholder benefits and attracting foreign investors' trust to escape the Korea discount that has long weighed down the Korean stock market. However, the report from the Korea Chamber of Commerce and Industry states that in addition to these positive functions, there are several negative functions of treasury share cancellation that require caution.

The Korea Chamber of Commerce and Industry pointed out the problems of mandatory cancellation of treasury shares from five perspectives. The first is that if cancellation is mandatory, companies' incentives to acquire shares are weakened. If acquired, they must be canceled within a certain period, and if the true purpose is not to boost stock prices, there is no reason to acquire them. As a result, the desired stock price boosting effect of the bill does not occur.

It is said that mandatory cancellation of treasury shares can make restructuring difficult. Companies have used treasury shares for financial structure improvement or strategic alliances, but mandatory cancellation can be an obstacle to restructuring. Acquiring treasury shares has been used as a defense against management rights attacks, but this too can become difficult. For these various reasons, major countries around the world minimize mandatory cancellation and allow free holding and use of treasury shares.

After the more severe commercial law amendment was mentioned following the first and second amendments, the business community has conveyed concerns to the political world through various channels, but the ruling party is pushing forward unwaveringly. Experts are most concerned that companies will lose the means to counter foreign capital attacks. Of course, there are companies like Taekwang Group that use treasury shares to strengthen major shareholders' control, but this is not a general phenomenon.

Considering the side effects of treasury share cancellation, even if cancellation is mandated, a compromise such as targeting only newly acquired treasury shares or allowing holding within a certain limit should be considered. The minimum means to protect management rights from hostile mergers and acquisitions (M&A) should be left. While shareholder benefits and stock market boosting should be policy goals, they should not be based on excessive sacrifices of corporate management rights. Any policy needs a balance of interests. Even the Yellow Envelope Act is already impacting companies.

The problem is that the government and the ruling party are not listening to the appeals of the business community. They say that the country thrives when businesses do well, but in reality, they are pressuring and constraining them, so what entrepreneur would want to do business in Korea? The ruling party should not push ahead with mandatory cancellation of treasury shares recklessly but should incorporate diverse counterarguments into the final plan.