SOUTH KOREA Trends and Developments Contributed by: Bo Hee Park, Minhyun Cho, Ian Kim and Jun Hee Kwon, Jipyong LLC
such shares must be cancelled within 18 months from that date, unless the company establishes a treasury share retention and disposal plan and obtains approv - al from a general meeting of shareholders (Addenda to the KCC, Article 2 (1)1). The one-year cancellation may be deferred where treasury shares are retained for purposes permitted under the amended KCC or for management purpos - es expressly set out in the AoI, including: • the payment of bonuses, retirement benefits, ser - vice awards or incentives to officers and employ - ees; • contributions to an employee stock ownership association or an employee welfare fund; • transfers upon the exercise of stock options; • corporate reorganisations such as mergers or splits; or • the pursuit of management purposes set out in the AoI. In such cases, the board must prepare a treasury share retention and disposal plan and obtain approval for that plan at each annual general meeting of share - holders (Article 341-4 (2), (3)). Limits on the disposal and use of treasury shares In Korea, treasury shares have historically been used as a means for major shareholders to defend their management control and to restructure corporate governance. Typical examples include: • the disposal of treasury shares to friendly parties during management control disputes; • the strengthening of control through cross-share - holdings between friendly companies; • the allocation of new shares to treasury shares during a spin-off to reinforce the controlling share - holder’s influence; • the use of treasury share acquisitions to boost the share price and thwart hostile M&A; and • financial transactions using treasury shares as col - lateral. Under the amended Commercial Act, it has become more difficult to utilise treasury shares in the ways described above.
The amended KCC clarifies that treasury shares carry no shareholder rights, including voting rights, pre- emptive rights and dividend rights (Article 341-3 (1)), and further restricts their use as a financing or restruc - turing tool. In particular, the amended KCC; • prohibits the issuance of bonds that are exchange - able for or redeemable with treasury shares (Article 341-3 (2)); • bars the creation of pledges over treasury shares (Article 341-3 (3)); and • provides that treasury shares may not receive new share allocations in mergers, divisions or spin-offs (Articles 529-2 and 530-13). When a company disposes of treasury shares, it must offer them to all shareholders on equal terms and on a pro rata basis, except in limited circumstances where disposition to a third party is permitted on statutory grounds (Articles 342 (2)(1), 341-4 (2) to (5)). This has three principal implications: • first, where the disposition of treasury shares is markedly unfair and prejudicial to shareholder interests, shareholders may seek injunctive relief against the company pursuant to Article 424, which applies mutatis mutandis; • second, improper dispositions of treasury shares are therefore likely to face increased judicial scru - tiny; and • third, it will become substantially more difficult for a company to place treasury shares selectively with friendly parties. Time-limited carve-out for companies subject to foreign ownership caps The amended KCC also recognises that the mandatory cancellation of treasury shares may create unintended consequences for companies subject to foreign own - ership limits under applicable statutes. For instance, cancellation reduces the total number of outstanding shares and may thereby increase the foreign owner - ship ratio, causing the company to exceed an applica - ble foreign ownership cap. To address this issue, the company may dispose of the treasury shares within three years from the effective date (Addenda to the KCC, Article 2 (2)).
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