Korea’s New Treasury Share Rules and What They Mean for Companies

This analysis follows our previous coverage of Korea's corporate governance reforms: "Korea Implements Commercial Code Reform, Initiating Governance Updates" (August 1, 2025) on the first Commercial Act amendment, and "Unpacking the Next Chapter: South Korea's Second Wave of Corporate Governance Reforms" (September 1, 2025) on the second amendment. 

Building on earlier reforms to the Commercial Act aimed at addressing the “Korea discount”, a third round of amendments (“the amendments”) has now been adopted with a focus on treasury shares. Passed by the National Assembly on February 25, 2026 and effective as of March 6, 2026, the latest amendments introduce mandatory cancellation of treasury shares and strengthen the regulatory framework governing their retention and disposal. 

At its core, the amendments reflect a broader effort to address the Korea discount by rebuilding investor confidence in Korean companies’ commitment to shareholder value. Past instances in which treasury shares were used to benefit controlling shareholders rather than all investors have contributed to persistent market skepticism, and it has been argued that regulatory gaps have allowed management to acquire and deploy treasury shares using corporate assets in ways that disadvantaged minority investors. The new rules limit such governance manipulation and clarify the legal status of treasury shares to restore investor trust. 

Against this backdrop, the amendments seek to realign the legal structure by enhancing conceptual consistency in the treatment of treasury shares, thereby reinforcing capital integrity and strengthening shareholder protections.

KEY UPDATES:

• Redefining Treasury Shares and Restricting Their Use

The amendments expressly define treasury shares as shares without shareholder rights (Article 341-3(1) of the Commercial Act), stripping them of core entitlements such as voting, dividend entitlements, and pre-emptive subscription rights.

They further restrict the use of treasury shares as instruments for indirect control enhancement. Specifically, the issuance of bonds exchangeable or redeemable into treasury shares and the pledging of treasury shares are now prohibited (Article 341-3(2) and (3)). In addition, the allocation of new shares to treasury shares in the context of mergers, spin-offs, or spin-off mergers has been expressly disallowed (newly introduced Articles 529-2 and 530-13).

Collectively, these measures reposition treasury shares as non-operational assets, confining their role and clearly curbing their potential use for governance manipulation. 

• Mandatory Cancellation

As a general principle, the amendments require cancellation of treasury shares within one year of acquisition. This requirement also applies to treasury shares already held prior to the effective date, subject to a six-month grace period (Addendum Article 2, etc.).

The amendments also clarify that treasury shares may be cancelled by a resolution of the board of directors (Article 343(1), proviso), a pragmatic change that enables compliance even when a shareholders’ special resolution cannot be secured, thereby reducing the risk of inadvertent legal breaches. Previously, cancellations were treated as capital reductions requiring a special resolution of shareholders and creditor protection procedures. In practice, this made the process complex and time-consuming. The revised framework removes those formalities, whether the shares were acquired using distributable profits or through unavoidable circumstances, such as appraisal rights, allowing cancellation without capital reduction procedures. This streamlines execution and places operational control squarely with the board.

• Exception: Shareholder-Approved Retention and Disposal

Exceptions apply where treasury shares are retained or disposed of pursuant to a Treasury Share Holding and Disposal Plan (the “Plan”) approved annually by the shareholders’ meeting. Such exceptions are limited to specified purposes, including employee compensation and implementation of employee stock-ownership plans, and the pursuit of business objectives set out in the company’s articles of incorporation, such as adoption of new technologies, strategic third-party transfers, or financial structure improvements (new Article 341-4). Any disposal must be offered to shareholders on equal terms, pro rata to their respective holdings.

The Plan must set out key details to ensure transparency and accountability in the retention or disposal of treasury shares. These include the purpose of holding or disposal, as well as the class, number, and method of acquisition of the shares. It should offer structural transparency by outlining the company’s share structure both at the commencement of the holding period and at the anticipated time of disposal, including any changes in the proportion of treasury shares. In addition, it must specify the intended holding period and timing of disposal, providing operational visibility into the duration and exit of such holdings.

• Enforcement Mechanism

An administrative fine of up to KRW 50 million may be imposed for failure to cancel treasury shares within one year acquisition (or such longer period as may be applicable) absent shareholder approval of a Treasury Share Holding and Disposal Plan, or for retaining or disposing of treasury shares in violation of such a plan (new Article 635(3), items 9 and 10).

Implications for Corporate Practice

The implications of the amendments extend well beyond mere compliance. Rather, they are poised to drive simultaneous shifts in both capital allocation strategies and control dynamics. With retention and disposal of treasury shares now more tightly regulated, rules materially constrain managerial discretion and remove much of the tactical flexibility companies once had — whether to reinforce control, create aligned shareholder blocs, support strategic partnerships, or defend against hostile bids.

Concurrently, evolving interpretation of directors’ fiduciary duties and greater shareholder willingness to challenge perceived unfairness raise the bar for treasury‑share transactions. Both process and outcomes must meet heightened standards of procedural compliance and fairness, and demonstrate stronger management accountability to avoid criticism and satisfy investor expectations, changes likely to fundamentally reshape governance practices.

The combination of tighter rules and heightened oversight is also recalibrating how markets value firms. Rather than signalling financial cushion, a large treasury stock balance now compels investors to demand demonstrable deployment outcomes, namely share cancellations that lift ROE/EPS, transparent buybacks at defensible prices, or targeted redistributions that deliver measurable shareholder value.

This shift reflects a sharper investor calculus—greater sensitivity to opportunity cost, governance risk and fairness—so companies are increasingly judged on the efficiency and alignment of their treasury-share decisions rather than on the quantity held.

The implication is clear. Boards must reassess capital management strategies and governance frameworks, embedding stricter approval processes, transparent valuation/disclosure practices, and proactive shareholder engagement to ensure treasury share decisions withstand intensified scrutiny.

Market Movement

Tabled in November 2025, the measures had already fueled market concern during its lead up to passing. When the amendments took effect in early March, just weeks before Korea’s packed AGM season, the timing forced companies into immediate, high‑pressure responses. Share cancellations and restructuring announcements were widely expected to surge, and the timing impact was typically more acute for firms that planned disposals for employee compensation or employee stock-ownership plans, adding last‑minute complexity and heightening AGM scrutiny.  

Recent market activity confirms that the anticipated impact of the amendments on corporate behavior is beginning to take effect. As of April 6, more than 65% of listed companies in Korea hold treasury shares, with many (including many holding companies) holding stakes above 10%. According to the Korea Exchange, 102 listed companies resolved to cancel treasury shares during this last AGM season in March alone, representing a total of KRW 15.8 trillion. This marks a 159% year‑on‑year increase, underscoring the scale and urgency of the response. Notably, this figure already amounts to approximately 70% of the total annual cancellations recorded in 2025 (KRW 21.4 trillion), achieved within just one month.

Taken together, these developments indicate that the regulatory shift is already driving accelerated treasury‑share cancellations and effectively reshaping capital‑allocation practices as companies adapt.

Going forward, companies should treat treasury shares as a governed capital‑allocation instrument rather than a tactical wedge by implementing stricter, documented approval processes, setting clear shareholder‑aligned rationales, and delivering outcomes that demonstrably enhance shareholder value and withstand heightened regulatory and investor scrutiny.