Concerns mount as treasury stock cancellation could disrupt control, funding for conglomerates
The economic proposals unveiled by Lee Jae-myung, the presidential front-runner of the liberal Democratic Party of Korea, are triggering alarm bells among major South Korean conglomerates, particularly his plan to mandate that listed firms retire treasury shares following buybacks.
On Monday, Lee introduced an ambitious policy framework aimed at doubling the benchmark Kospi index to surpass 5,000 points if elected.
Central to this initiative is the cancellation of treasury shares held by publicly listed companies, coupled with a commitment to prioritize small shareholders in the allocation of new shares during subsidiary spinoffs.
Lee intends to broaden the fiduciary duties of corporate directors to encompass the interests of both the company and its shareholders. He also advocates for the adoption of cumulative voting and the separate election of audit committee members, indicating a strong commitment to enhancing corporate governance and protecting shareholder rights.
“The treasury shares of listed companies will be fundamentally retired and returned to shareholders through institutionalization,” Lee said at a meeting with heads of securities firms’ research centers.
Typically, major corporate owners have leveraged treasury shares as a defense mechanism to maintain management control. The proposed mandate for their retirement could significantly pressure companies by diluting the influence of founding families and constraining strategic investments and capital management.
This potential shift has ignited concerns within the business community regarding its broader implications for corporate governance and ownership structures.
Currently, many holding companies maintain treasury shares that constitute over 10 percent of their total equity.
For instance, Lotte Holdings reports that 32.51 percent of its shares are held as treasury stock, while Sempio Foods, Daewoong Pharmaceutical and SK each exhibit treasury share portions around 20 percent, amid ongoing requests from minority shareholders for cancellation.
It is a common practice among holding companies to retain a higher proportion of treasury shares. During corporate spinoffs, new shares with voting rights have often been issued in exchange for treasury shares, prompting groups eager to establish a holding company structure to increase their treasury holdings through buybacks.
Treasury shares without voting rights also serve as a defense means for the founding families' management control. By repurchasing their shares with company funds, chaebol families effectively reduce the number of circulating shares, thereby consolidating their control over the company despite having smaller ownership stakes. This strategy also allows them to sell treasury shares to allied parties or exchange them with allies to regain voting rights, further entrenching their dominance.
“Unlike in the United States, where share buybacks typically lead to retirements, Korean companies often repurchase treasury shares to solidify corporate control or place them up for sale, which severely undermines shareholder value,” said an official from a financial think tank on the condition of anonymity.
Initially, the purchase of treasury shares was prohibited due to concerns that such actions could artificially inflate stock prices and distort the market. However, in a bid to enhance shareholder value and promote regulatory freedom, buybacks were permitted for publicly listed companies in 1994 and for privately held firms in 2011.
Recent data indicates that Korean companies have been relatively passive in retiring treasury shares. According to the Financial Services Commission, listed companies acquired a total of 18.7 trillion won ($13.2 billion) in treasury shares last year, yet only 13.9 trillion won were retired — a gap that raises questions about the effectiveness of these measures.
“From companies' perspective, as demand for shareholder returns continues to grow, it has been preferable to buy back and hold treasury shares rather than distribute dividends, as this can be used to strengthen management control. However, if they are mandated to retire these shares, they can no longer be used for that purpose, making dividends and share retirements effectively the same in terms of cash outflow,” another official from a brokerage house said.
Critics argue that Lee's proposal could lead to a contraction in business activities by narrowing funding sources reliant on treasury stocks and inciting a surge in management disputes, especially as activist investors target firms exhibiting weakened management control.
hnpark@heraldcorp.com
