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Mandatory treasury share retirement: A remedy to the 'Korea discount' or a poison pill for corporate defense?

Published: 25 Feb. 2026, 16:28 Updated: 25 Feb. 2026, 19:07

People Power Party Rep. Yoon Han-hong, at the podium, delivers a filibuster at the National Assembly after a revision to the Commercial Act to mandate the retirement of treasury shares was tabled at the plenary session of the National Assembly on Feb. 24. [YONHAP]

As a hotly contested bill requiring companies to cancel holdings of their own shares marches toward passage in the National Assembly, business owners are on edge over the potential loss of a key defense against hostile takeovers.

The ruling Democratic Party (DP) shone the spotlight on the issue, arguing that a legal obligation to retire treasury shares would strengthen protections for minority shareholders as a means of curbing controlling stakeholders' use of the shares to expand control. The Commercial Act revision was passed in the National Assembly's Legislation and Judiciary Committee on Monday and was quickly brought to the floor on Tuesday, where resistance from the opposition People Power Party in the form of a filibuster is expected to be futile in the face of the liberal bloc's overwhelming majority.

Under the revision, listed companies must retire newly purchased treasury shares within one year, with violators subject to a fine of up to 50 million won ($34,800).

Treasury shares already held must be retired within one year and six months from the law’s enforcement date. Companies subject to foreign ownership restrictions would be required to dispose of such shares within three years.

The exceptions recognized in the revision include compensation for executives and employees and holdings for company stock ownership systems.

Closing share prices of Samsung Electronics and SK hynix are displayed on an electric board at Hana Bank's trading room in Jung District, central Seoul, on Feb. 24. [NEWS1]

‘Korea discount’ to be resolved

Minority shareholder groups and market participants welcomed the measure in hopes that the bill would address the so-called Korea discount — a chronic undervaluation of Korean stocks — as the retirement of shares results in an increase in earnings per share, which can buoy prices.

“With the institutionalization of mandatory treasury stock cancellations, we expect a trend of expanding shareholder returns leading to improving return on equity, which could in turn result in revaluing the price-to-book ratio [PBR],” said Han Ji-young, a researcher at Kiwoom Securities.

Democratic Party Rep. Kim Yong-min, who introduced a revision to the Commercial Act to mandate the retirement of treasury shares, speaks during a meeting of the Legislation and Judiciary Committee at the National Assembly in Yeouido, western Seoul, on Feb. 20. [NEWS1]

The PBR indicates how a company’s stock price compares to its net asset value. A ratio below one generally suggests undervaluation.

Lawmakers also expect the move to eliminate the "magic of treasury shares," in which controlling shareholders have used company funds to buy back shares and later leveraged them during spinoffs or other restructuring processes to strengthen control.

“The amendment would serve as a driving force to transform Korea’s stock market into one characterized by a Korea premium by ensuring that corporate profits are fairly distributed among all shareholders rather than monopolized by a small group of controlling owners,” said DP Rep. Kim Yong-min, who introduced the bill at the plenary session.

The Korea Chamber of Commerce and Industry building in Jung District, central Seoul [JOONGANG ILBO]

Concerns regarding management control

However, business groups have expressed concern that the measure effectively disarms companies of one of their few remaining defenses. Eight major business associations, including the Korea Chamber of Commerce and Industry and the Federation of Korean Industries, urged lawmakers last month to revise the bill to reduce management uncertainty.

A key concern is heightened vulnerability to hostile takeovers. While treasury shares held by a company carry no voting rights, the shares can be sold to a friendly third party — a "white knight" — in the face of a hostile takeover bid or activist investor campaign, granting the aligned buyer voting rights that ensure control is maintained.

Defensive options are limited under Korean law, in stark contrast to the United States and other advanced markets, which permit mechanisms such as the poison pill defense, in which shares are offered at discounted rates in a bid to dilute the value of a stock as a means of deterring a takeover. The issuance of dual-class shares, granting more voting rights to a particular class, is also generally not permitted.

As a result, treasury shares have functioned as one of the few practical defenses available to Korean companies.

Business leaders of major Korean companies attend a forum at Lotte Hotel in Jung District, central Seoul on Feb. 23. From left: Samsung Electronics Executive Chairman Lee Jae-yong, Hyundai Motor Group Executive Chair Euisun Chung, LG Group Chairman Koo Kwang-mo and HD Hyundai Chairman Chung Ki-sun. [NEWS1]

'Even treasury stocks could be burned'

Business groups also argue that the change in the law fails to distinguish involuntary treasury shares — those acquired inevitably during mergers and acquisitions or holding company conversions — from voluntary buybacks. The only exceptions recognized under the revision are shares used for employee compensation or employee stock ownership plans.

“The amendment effectively blocks strategic investment or crisis response measures using treasury shares, amounting to a near-total ban on their use,” a business source said.

The Korea Listed Companies Association estimated that about 36.5 trillion won ($25.5 billion) in involuntary treasury shares would be subject to retirement if the bill takes effect, including 33.39 trillion won on the Kospi and 3.19 trillion won on the Kosdaq.

Minister of Justice Jung Sung-ho is seen listening to a filibuster at the National Assembly after a revision to the Commercial Act to mandate the retirement of treasury shares was tabled at the plenary session, at the National Assembly in Yeouido, western Seoul, on Feb. 25. [YONHAP]

“Forcing companies to retire treasury shares without allowing certain uses such as market stabilization or mergers and acquisitions is globally unprecedented,” said Shin Jang-sup, a professor of economics at the National University of Singapore. “If certain governance abuses exist, they should be addressed through targeted regulations rather than a blanket rule that effectively burns assets worth 150 trillion won and weakens companies’ defense capabilities.”

Some industry sources said there are concerns that further governance regulations could follow.

“There is growing concern that lawmakers may increasingly pursue overregulation in the style of collective joint punishment, using the misconduct of a few companies as justification to tighten governance rules for all listed firms without sufficient dialogue with the corporate sector,” a business insider said.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY YI WOO-LIM [[email protected]]