Regulatory Trends on Treasury Stock and Impact on Corporate Governance Restructuring
The amendment to the Korean Commercial Code (the “KCC”) promulgated on September 9, 2025 (the “Second Amendment to the KCC”), which introduced mandatory cumulative voting for large-scale listed companies and expanded the separate appointment of audit committee members, has contributed to the transparency of the board of directors and audit committee operations. In the case of treasury shares, however, there have been persistent claims that they still remain a regulatory blind spot, despite being widely used as a tool to defend management control and to bolster the power of controlling shareholders.
In response, the National Assembly (led primarily by the Democratic Party of Korea (the “DPK”)) is now pursuing a third round of amendments to the KCC (the “Third Amendment to the KCC”) and tax laws that would mandate the cancellation of treasury shares and tighten restrictions on their disposal. In parallel with the aim to strengthen disclosure obligations for treasury shares, the financial authorities have recently finalized amendments to relevant regulations, including those in relation to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”) and the Regulations on Issuance and Disclosure of Securities (the “Disclosure Regulations”). These measures to tighten the rules on the cancellation and disposal of treasury shares are expected to have a significant impact on how listed companies utilize treasury shares going forward, and it will be necessary to respond strategically.
Legislative Trends and Practical Considerations Regarding Mandatory Cancellation and Disposal of Treasury Stock
Third Amendment to KCC Concerning Procedures for Mandatory Cancellation and Disposal of Treasury Stock
While the current KCC allows companies to acquire treasury shares under certain conditions, there have been ongoing debates over the need to amend the KCC to ensure that treasury share acquisitions genuinely function as a means of returning value to shareholders, given that some companies have been taking advantage of treasury shares as a tool to distort corporate governance (for example, by retaining treasury shares for prolonged periods without cancellation or by disposing of them to friendly parties). Commentators have also argued that the benefits of improved corporate governance will be fully realized only when both the fairness of the disposal process and regulations governing the cancellation of treasury shares are ensured.
Against this backdrop, after the Second Amendment to the KCC, a number of amendment bills to the KCC and the FSCMA have been submitted to strengthen shareholder return, mandating the cancellation of treasury shares, subject to limited exceptions such as for compensation for officers and employees (Link). In line with this trend, on November 25, 2025, the Third Amendment to the KCC, proposed by National Assembly Member Gi-Hyung Oh, chairman of the KOSPI 5000 Special Committee, was submitted to the National Assembly. This proposed amendment clearly defines the legal nature of treasury shares as “capital,” mandates the cancellation of treasury shares and strengthens the disposal process, while also including the treasury shares held prior to the law’s effective date within the scope of mandatory cancellation. Since the amendment proposals, including the recently introduced bill, continue to aim for passage at the plenary session and promulgation at an early date, followed by immediate effectiveness, companies will need to undertake swift and comprehensive reviews of their corporate financial strategies and their strategies to defend management control.
Legal Nature of Treasury Stock
The Third Amendment to the KCC clarifies that a shareholder may not exercise his/her rights as a shareholder, such as voting rights, pre-emptive rights and rights to claim dividends, with respect to treasury shares.
Following the clarification of the nature of treasury shares as “capital,” the issuance of bonds exchangeable for, or redeemable in, treasury shares and the establishment of a pledge over treasury shares are categorically prohibited, regardless of the identity of the counterparty (shareholder or non-shareholder) or the purpose of such action (whether business-related or not).
Companies are prohibited from allocating new shares to treasury shares in the event of a merger or spin-off.
Mandatory Cancellation of Treasury Shares
Scope of Application: Applicable to all companies, including both unlisted companies and listed companies.
Time of Cancellation: Treasury shares must be cancelled within one year from the date of acquisition.
Handling of Existing Treasury Stock: Treasury shares already held by companies prior to the Third Amendment to the KCC’s effective date—including both (i) treasury stock acquired in the company’s own name and for the company’s own account (the “Existing Treasury Stock Directly Acquired”), and (ii) treasury stock acquired in the name of a trustee and for the company’s account under trust agreements (the “Existing Treasury Stock Indirectly Acquired”)—will equally be governed by the amended provisions. However, a grace period will apply as follows: (i) for the Existing Treasury Stock Directly Acquired, six months, and (ii) for the Existing Treasury Stock Indirectly Acquired, from the effective date of the Third Amendment to the KCC to the date on which the company retrieves the shares from the trustee.
Exceptional Retention and Disposal of Treasury Shares
A company may, only in exceptional cases listed below, hold or dispose of its treasury stock upon preparing a treasury stock holding and disposal plan (with the names and seals or signatures of all directors) and obtaining approval from the general meeting of shareholders each year.
(i) Disposal to shareholders: Where the shares are disposed of in a way that each shareholder can acquire such shares under equal terms pro rata to the number of held shares.
(ii) Retention or disposal to a third party other than shareholders: Where the shares are used (i) to compensate officers and employees, (ii) to implement an employee stock ownership plan, (iii) for a comprehensive share exchange, (iv) for a comprehensive share transfer or merger of shares, or (v) to achieve the management objectives set forth in the articles of incorporation.
Application of Procedures for Issuance of New Shares to Disposal of Treasury Stock
In case of disposing of treasury stock to a third party other than shareholders, the board of directors will determine, unless otherwise provided in the articles of incorporation, (i) the type and number of treasury stock to be disposed of, (ii) the disposal price and payment date of treasury stock to be disposed of, and (iii) the counterparty and method of the treasury stock disposal.
Certain provisions governing the issuance of new shares under the KCC shall apply mutatis mutandis to the disposal of treasury shares.
(i) Shareholders will have the right to subscribe to the relevant treasury shares at the time of the company’s disposal.
(ii) Shareholders may exercise their right to seek an injunction against the company for a disposition that is remarkably unfair.
Regulation on Trust Acquisition by Listed Companies
If a listed company acquires treasury shares by means of a trust agreement, the trustee will not dispose of the treasury shares during the term of the trust agreement and will return the treasury shares to the company without delay after the expiration or termination of the trust agreement. The relevant shares will be subject to holding period restrictions, with the date on which the trustee acquires the treasury shares being deemed as the date on which the listed company acquires the treasury shares.
Sanctions
In the case of a listed company violating the obligation to cancel treasury shares or the treasury shareholding plan, any individual director of that company will be subject to an administrative fine of up to KRW 50 million.
If the Third Amendment to the KCC is enacted and as a result, mandatory cancellation of treasury shares is introduced and the procedures in relation to new-share issuance are applied to treasury share disposals, it will likely become more difficult to utilize treasury shares as a means of maintaining control, facilitating strategic alliances or defending against hostile takeovers. Notably, the codification of shareholder checks and balances (for example, allowing any shareholder holding at least one share to request the company to cease such disposal if the disposal violates laws, the articles of incorporation, or is effected in a substantially unfair manner) may materially affect future decision-making regarding the disposal of treasury stock.
The Third Amendment to the KCC provides certain exceptions, such as the use of treasury shares for performance-based compensation to officers and employees, but also tightens the conditions for holding treasury shares. Among other requirements, shareholder approval must now be obtained annually at the general meeting of shareholders. The DPK continues to actively pursue the legislation, evidenced by the introduction of a similar amendment bill in early January 2026. Notwithstanding the transitional measures for treasury shares already held, the amendment is designed to take effect upon promulgation, leaving companies with limited time to adapt in practice. Companies are therefore advised to take into consideration relevant legislative developments while also preparing in advance specific plans for dealing with existing treasury shares (including cancellation). Companies should also thoroughly analyze the legal procedures applicable to the treasury shares they already hold and those they may acquire in the future and proactively develop a systematic response strategy that complies with the strengthened regulatory framework.
Meanwhile, since the disposal of treasury stock brings cash into companies, it has traditionally been difficult to establish directors’ breach of trust in such transactions. However, as the Third Amendment to the KCC specifically stipulates directors’ fiduciary duty toward shareholders, directors may be held liable for a breach of trust where an infringement of the shareholder value is recognized. In this context, a recent court decision dismissing an application for a preliminary injunction against the issuance of exchangeable bonds backed by treasury stock clarified that, under the amended KCC, directors’ fiduciary duty is owed to “all shareholders,” rather than to “particular individual shareholders.” This development suggests that, for major board decisions concerning treasury share disposals and similar matters, there will be a heightened need to provide concrete and well-substantiated explanations as to whether such decisions align with the interests of all shareholders, including management and the controlling shareholders.
Proposed Amendment to Tax Laws on Acquisition, Retirement and Disposal of Treasury Stock
In parallel with the discussions on the Third Amendment to the KCC, there has been progress in discussions to establish the accounting and legal foundations that would institutionally support the reforms from a tax-policy perspective. Although the acquisition of treasury shares is, in substance, a “capital transaction” that effectively returns capital to shareholders, gaps in current tax laws have meant that the characterization of the seller/transferor’s income as either “dividend income” (deemed dividend) or as “capital gains” has depended on case-by-case judicial interpretation. This has given rise to persistent concerns about reduced tax predictability and incentives for tax avoidance driven by transactional form. Accordingly, amendment bills to the Income Tax Act and the Corporate Tax Act to improve legal consistency have been proposed that would explicitly characterize the acquisition of treasury shares as a “capital transaction.”
Bill No. 2213653 (Proposed by National Assembly Member Gi-Hyung Oh on October 21, 2025): Introduction of taxation on deemed dividends upon sale of treasury stock by a corporation to a share certificate issuer and exclusion of gains and losses on disposal of treasury stock from taxable income or deductible expenses
Of the amount of return received by a corporation from the transfer of its treasury shares to a share certificate issuer, the portion in excess of the original acquisition price of such shares will be treated as dividends or distributions (excluding fortuitous trades through the Korea Exchange (the “KRX”)).
Gains and losses on disposal of treasury stock realized by a stock certificate issuer will not be included in taxable income or deductible expenses.
Bill No. 2213652 (Proposed by National Assembly Member Gi-Hyung Oh on October 21, 2025): Refinement of income classification standards for an individual’s sale of treasury stock of a corporation to a stock certificate issuer
As a general rule, gains earned by an individual from the sale of a company’s treasury shares to a stock certificate issuer will be classified as deemed dividends, except where the purchaser happens to become a stock-issuer in the course of trading through an exchange, in which case the gains from the trade would be exceptionally taxed as capital gains.
Strengthening of Disclosure System for Acquisition, Cancellation and Disposal of Treasury Stock
Amendment to Enforcement Decree of FSCMA, Disclosure Regulations and Regulations on Capital Markets Investigation (the “Investigation Regulations”)
As moves to strengthen substantive legal regulations on treasury shares (such as mandatory cancellation restrictions on their disposal) have gained pace, the need for procedural controls to ensure their effectiveness has also emerged. In particular, as the number of treasury stock acquisitions and cancellations has surged since 2024 and the volume of treasury stock cancellations from January to August 2025 alone exceeded the total volume in 2024, calls have intensified for more granular disclosure requirements and stricter sanctions to enhance market oversight and management transparency.
Given this context, the Financial Services Commission (the “FSC”) and the government have finalized amendments to the Enforcement Decree of the FSCMA, the Disclosure Regulations, and the Investigation Regulations, in order to enhance transparency in the management of treasury shares. Following the approvals by the FSC and the Cabinet in December 2025, these amendments have been promulgated and are now in effect.
Expansion of Subject and Frequency of Disclosure
Previous Provisions
As of the last day of the most recent fiscal year
Retention of treasury shares of 5/100 or more of the total number of issued and outstanding shares
Once a year
Amended Provisions
As of (i) the last day of June from the commencement date of the fiscal year, and (ii) the last day of the most recent fiscal year
Retention of treasury shares of at least 1/100 of the total number of issued and outstanding shares
Twice a year
Obligation to Compare the Treasury Stock Treatment Plan and Actual Implementation Status (Newly Inserted)
Previous Provisions: n/a
Amended Provisions
Obligation to disclose a comparison between the acquisition, cancellation and disposal plans set forth in the immediately preceding treasury stock report and the actual acquisition, cancellation and disposal activities during the past six months in the treasury stock report, in the business report and semi‑annual report
Strengthening the Effectiveness of Sanctions for Violation of Disclosure of Treasury Stocks (Newly Inserted)
Previous Provisions: n/a
Amended Provisions
With respect to violations of disclosure obligations relating to the acquisition, holding and disposal of treasury stock, the Investigation Regulations established new standards that specifically address the relevant violations, including a basis for imposing aggravated measures for repeated violations
In addition to the imposition of administrative fines, specified measures to restrict the issuance of securities and recommend the dismissal of officers based on the severity of the violation and any mitigating or aggravating factors
The financial authorities expect the amendments to serve as an opportunity to encourage listed companies to use treasury shares as a means of returning shareholder value that protects the rights and interests of all shareholders. Meanwhile, under the recent amendment, (i) the range of listed companies required to disclose their treasury stock holding and disposal plans (following a board resolution) in their business reports and similar filings has been substantially expanded, and (ii) the disclosure frequency has been increased to twice a year (the annual business report and the semiannual report). Accordingly, listed companies should proactively determine whether they fall within the expanded disclosure scope and, given that future disclosures will include a comparison between the planned and actual actions in regards to treasury stock, they must exercise great care from the planning stage to ensure consistency and integrity across the entire process from acquisition through disposal.
Amendment to Corporate Disclosure Forms
Meanwhile, in response to the surge in the issuance of exchangeable bonds convertible into treasury stock amid the growing momentum toward mandatory treasury stock cancellations, the Financial Supervisory Service (the “FSS”) amended the corporate disclosure forms as follows, effective as of October 20, 2025. Accordingly, companies subject to disclosure obligations are now required to provide detailed information such as the impact on existing shareholders’ profits in their material disclosure reports on the issuance of exchangeable bonds convertible into treasury stock.
* When issuing exchangeable bonds convertible into treasury stock, the following items must be specifically disclosed under the “Other Matters to be Considered in Investment Decisions” section of the material disclosure reports for “Issuance of Exchangeable Bonds” and “Disposal of Treasury Stock.”
Reason for choosing to issue exchangeable bonds using treasury shares, rather than issuing exchangeable bonds backed by other shareholdings or adopting other financing methods;
Details of the review regarding the appropriateness of the timing of the issuance;
Effects on the company’s governance structure and decision-making process in the event of an actual exchange of shares;
Impact on existing shareholders’ profits, etc.;
Plans for any subsequent resale of exchangeable bonds or exchangeable shares after issuance (including details of any pre-arranged agreements); and
Name of the arranger (if any) and related details.
This revision to the disclosure forms appears intended to (i) strengthen the market’s surveillance function by ensuring that investors are provided with sufficient information, and (ii) encourage companies to make decisions more prudently in accordance with their fiduciary duty to shareholders. As the financial authorities increasingly tighten monitoring and disclosure regulations concerning the disposal routes of treasury shares, companies are expected to face significantly greater practical burdens and risks going forward for financing activities with treasury shares.
In response to recent movements in regulation reinforcement, an increasing number of companies are proactively reviewing their potential disposal of treasury shares. Under the revised disclosure regime, companies should be mindful that strict alignment is required between the plans established to dispose of treasury shares and their actual execution. In other words, while swift decision-making remains important, proceeding without careful review can trigger unexpected sanctions or give rise to managerial liability issues under the strengthened disclosure and verification regime. Accordingly, companies should thoroughly plan from the stage of treasury share acquisition, review whether they are in compliance with enhanced disclosure obligations and manage potential risks.
Against the backdrop of strengthened shareholder protection and corporate transparency, changes in regulations concerning treasury shares are expanding to encompass not only substantive changes (such as the imposition of mandatory cancellation of treasury shares and the enhancement of fairness in disposal procedures) but also procedural aspects, including the segmentation and refinement of disclosure requirements. Therefore, the evolving regulatory environment, including developments on the Third Amendment to the KCC, will be important for minimizing potential legal risks and developing rational, strategic response measures aligned with a company’s long-term interests.
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Authors
Hyeon Deog CHO (View Profile)
Jae Ho ROH (View Profile)
Teo KIM (View Profile)
Yeong-Ik JEON (View Profile)
Eun-Young LEE (View Profile)
Gun Woo KIM (View Profile)
Hakbum AHN (View Profile)
Haewoong CHOI (View Profile)
09 March 2026
