South Korea Mandates Treasury Share Cancellation: 3rd Commercial Act Amendment – Key Changes and Corporate Strategy
Table of Contents
- 1. What Has Changed Under South Korea’s 3rd Commercial Act Amendment?
- 2. What Are the Rules and Exemptions for the Mandatory Cancellation Requirement?
- 3. How Should Companies Handle Treasury Shares Held Before the Law Takes Effect?
- 4. Does a Special Exemption Apply to Industries Subject to Foreign Ownership Restrictions?
- 5. What Must Companies Do at the 2026 Annual General Meeting?
- 6. FAQ
Real Situation: February 25, 2026 — the floor of South Korea’s National Assembly. A CFO of a major listed company watched the vote in real time, his expression darkening. Hundreds of billions of won in treasury shares, carefully accumulated over decades as a defense against hostile takeovers and M&A ammunition, had just become subject to a mandatory one-year cancellation deadline. He immediately called the legal team.
A Structural Turning Point in South Korean Corporate Governance — Why Does This Amendment Matter?
This amendment is not a minor procedural change. Following the 1st Amendment expanding directors’ duty of loyalty and the 2nd Amendment mandating cumulative voting and separate election of audit committee members, the 3rd Amendment — mandating treasury share cancellation — completes a trilogy of reforms signaling South Korea’s corporate governance shift toward shareholder primacy. For decades, treasury shares served as a flexible tool: defending against hostile takeovers, building M&A war chests, and supporting share prices. Under the new law, their default status is fundamentally redefined: treasury shares are now primarily a capital return mechanism, subject to cancellation as the rule. With annual general meetings approaching in March and April 2026, listed companies must begin reviewing their treasury share strategies immediately.
1. What Has Changed Under South Korea’s 3rd Commercial Act Amendment?
The core of the 3rd Amendment is twofold: it explicitly defines treasury shares as having no shareholder rights, and it establishes mandatory cancellation within one year of acquisition as the default rule. It also significantly restricts the use of treasury shares in various corporate transactions.
Legal Status of Treasury Shares Clarified (Amended Commercial Act Article 341-3)
The amendment explicitly provides that treasury shares carry no voting rights and no right to dividends (Article 341-3(1)). As a result, the following transactions are now prohibited:
- Using treasury shares as collateral (Article 341-3(2))
- Issuing bonds with treasury shares as the exchange or redemption target (Article 341-3(3)) — this means exchangeable bonds (EB) and redeemable shares structured around treasury shares as the underlying asset are no longer permitted
- Allocating new shares to treasury shares in mergers, splits, or split-mergers (Articles 529-2 and 530-13)
Cancellation by Board Resolution Alone Now Permitted (Amended Article 343(1), Proviso)
Previously, there was significant debate as to whether treasury shares acquired for specific statutory purposes — that is, shares acquired not from distributable profits but through a legally prescribed process — required cancellation by way of a capital reduction approved by a general shareholders’ meeting rather than a simple board resolution. The amendment resolves this controversy by providing that treasury shares may be cancelled by board resolution regardless of the reason for their acquisition. This meaningfully reduces the procedural burden of cancellation for companies.
2. What Are the Rules and Exemptions for the Mandatory Cancellation Requirement?
Under Article 341-4(1) of the amended Commercial Act, companies that acquire treasury shares must cancel them by board resolution within one year of acquisition. Exemptions are available only in cases specified by law and only where the company obtains shareholder approval through the prescribed process.
Exemptions from the Cancellation Obligation (Amended Article 341-4(2))
| No. | Exemption Grounds | Articles of Incorporation Amendment Required? |
|---|---|---|
| ① | Disposal to all shareholders on a pro-rata, equal-terms basis | Not required |
| ② | Employee compensation purposes, including stock options | Not required |
| ③ | Employee stock ownership plan (ESOP) | Not required |
| ④ | Use as consideration in comprehensive share exchanges, transfers, or mergers as permitted by law | Not required |
| ⑤ | Business purposes such as introducing new technology or improving financial structure | Special resolution of general shareholders’ meeting to specify the purpose in the articles of incorporation is required |
Even where an exemption ground applies, the company must prepare a Treasury Share Retention and Disposal Plan signed or sealed by all directors and obtain approval from a general shareholders’ meeting. This plan must be renewed annually at the regular general shareholders’ meeting (Article 341-4(2) and (3)).
Mandatory Contents of the Treasury Share Retention and Disposal Plan (Amended Article 341-4(3))
- Purpose of retention or disposal
- Type, number, and acquisition method of treasury shares subject to the plan
- Details as of the planned start of retention and expected disposal date: type and number of treasury shares, type and number of other issued shares excluding treasury shares, and change in the ratio of treasury shares to total issued shares
- Planned retention period
- Planned disposal timing
New Share Issuance Rules Applied Mutatis Mutandis to Treasury Share Disposals (Amended Article 341-4(4))
When treasury shares are disposed of under an approved plan, the provisions governing new share issuances (Articles 417 through 419, 421, 422, 423(2) and (3), 424, 424-2, and 427 through 432) apply mutatis mutandis to the extent not inconsistent with the nature of treasury share disposals. This ensures that treasury share disposals are subject to shareholder protection procedures comparable to those for new share issuances. Companies should also note that Article 165-9 of the Financial Investment Services and Capital Markets Act requires public disclosure one week prior to disposal.
Sanctions for Non-Compliance (Amended Article 635(3)(9) and (10))
Following the law’s effective date, directors including the CEO may be subject to an administrative fine of up to KRW 50 million if: (1) the company fails to cancel treasury shares within one year without obtaining shareholder approval; or (2) treasury shares are retained or disposed of in violation of an approved Treasury Share Retention and Disposal Plan (Supplementary Provisions Article 3).
3. How Should Companies Handle Treasury Shares Held Before the Law Takes Effect?
The 3rd Amendment takes effect immediately upon promulgation. For treasury shares already held at the time of promulgation, grace periods vary depending on how the shares were acquired. Identifying the correct cancellation deadline for each category of treasury shares is the essential starting point for compliance planning (Supplementary Provisions Article 2).
| Treasury Share Category | Start of Grace Period | Cancellation Deadline |
|---|---|---|
| Existing directly acquired treasury shares (general) | Six months after the effective date | Within one year from the grace period start date (maximum 18 months from the effective date) |
| Treasury shares subject to a pledge | Date the pledge is released after the effective date | Within one year from the date of release |
| Bonds issued before the effective date with treasury shares as exchange/redemption target | Date the bond obligation is extinguished or the exchange/redemption period expires after the effective date | Within one year from that date |
| Indirectly acquired treasury shares (trust arrangements) | Date the company receives the shares back from the trustee after the effective date | Within one year from the date of return |
The same cancellation obligations apply to treasury shares acquired through trust arrangements. The trustee may not dispose of treasury shares during the term of the trust contract, and once the company receives them back, the one-year cancellation obligation — or the requirement to obtain shareholder approval of a Retention and Disposal Plan — applies immediately (Amended Article 542-16).
Wishing to Retain Shares? — Shareholder Approval Must Be Secured Within the Grace Period
Companies that wish to retain or dispose of existing treasury shares rather than cancelling them must prepare a Treasury Share Retention and Disposal Plan and obtain shareholder approval within the applicable grace period. With annual general meetings scheduled for March and April 2026, companies face time pressure to make swift decisions on whether to cancel, retain, or dispose of their treasury holdings.
4. Does a Special Exemption Apply to Industries Subject to Foreign Ownership Restrictions?
In industries subject to statutory foreign ownership caps — such as telecommunications under the Telecommunications Business Act — cancelling treasury shares reduces total issued shares, potentially causing the foreign ownership ratio to exceed the statutory limit. The amendment addresses this concern through a special provision in the supplementary provisions.
Industries Covered by the Special Provision (Supplementary Provisions Article 2(2))
Where cancelling treasury shares would result in a violation of any of the following laws, the company may dispose of — rather than cancel — those shares within three years from the effective date:
- Aviation Safety Act, Article 10(1)(iv)
- Financial Investment Services and Capital Markets Act, Article 168(1)
- Act on the Structural Improvement of Public Enterprises, Article 19
- Broadcasting Act, Article 14
- Act on the Promotion of Newspapers, Article 13(4)(iii)
- Telecommunications Business Act, Article 8(1) (49% foreign ownership cap)
- Internet Multimedia Broadcast Services Act, Article 9(1) and (2)
Even under this special provision, the company must prepare a Treasury Share Retention and Disposal Plan and obtain shareholder approval. Companies in these regulated industries should carefully analyze the impact of treasury share cancellations on their foreign ownership ratios and assess applicability of this special provision in advance.
5. What Must Companies Do at the 2026 Annual General Meeting?
Given that the 3rd Amendment takes effect immediately upon promulgation, listed companies with annual general meetings scheduled for March and April 2026 must begin preparing their response now.
Step 1: Conduct a Precise Inventory of Treasury Share Holdings
The first step is to categorize all treasury shares by acquisition method (direct vs. trust-based indirect acquisition), acquisition date, acquisition purpose, and whether any pledge is attached. Since the applicable grace period and cancellation deadline differ by category, this inventory is the foundation of all subsequent planning.
Step 2: Determine the Strategy — Cancel, Retain, or Dispose
After completing the inventory, companies should decide for each category of treasury shares whether to cancel, retain under an approved plan, or dispose. Where the grounds for retention fall within the exemptions directly enumerated in the law — such as employee compensation or employee stock ownership plans under Article 341-4(2)(1) through (4) — no amendment to the articles of incorporation is required; preparing a Retention and Disposal Plan and obtaining shareholder approval is sufficient.
Step 3: Assess the Need to Amend the Articles of Incorporation
Companies wishing to retain treasury shares for broad business purposes — including M&A preparedness, financial restructuring, or technology acquisition under Article 341-4(2)(5) — must amend their articles of incorporation by special resolution of a general shareholders’ meeting to specify such purposes. Whether to proactively address this at the 2026 annual general meeting is a key strategic decision. Drafting the articles amendment broadly enough to cover a range of future business needs is advisable.
Step 4: Design the Treasury Share Retention and Disposal Plan and Prepare the AGM Agenda
Where the plan is placed before shareholders for approval, clearly specifying the purpose, scale, and duration of retention in terms that shareholders find persuasive is critical. If the plan is rejected, the one-year mandatory cancellation rule applies in full. Pre-AGM engagement with major shareholders and careful design of the agenda item will be decisive. Given that the signatures of all directors are required, internal alignment within the board must also be secured in advance.
Regulatory Gap Between the Amended Commercial Act and the Capital Markets Act
Although the 3rd Amendment takes effect upon promulgation, there is currently a regulatory gap between the amendment’s annual shareholder approval requirement for a Treasury Share Retention and Disposal Plan and existing disclosure obligations under the Capital Markets Act — including rules on the semi-annual treasury share report that took effect in December 2025. Prompt guidance from the Ministry of Justice, the Financial Services Commission, and the Financial Supervisory Service, or expedited amendment of Capital Markets Act subordinate regulations, is needed. Additionally, tax legislation — including corporate income tax provisions that treat treasury shares as assets and classify their disposal as profit-and-loss transactions — requires comprehensive review and revision.
6. FAQ
This amendment marks a fundamental shift in how treasury shares are treated under South Korean corporate law — from assets to be managed strategically to capital to be returned to shareholders as the default. The legal team at Atlas Legal has handled a substantial number of corporate governance disputes and Commercial Act advisory matters, and is well positioned to support companies through this transition — from treasury share inventory analysis and Retention and Disposal Plan design, to articles of incorporation drafting and AGM strategy.
※ This article is provided for general informational purposes based on the amended Commercial Act (Bill No. 2216966) passed by the National Assembly of South Korea on February 25, 2026. Legal conclusions may differ depending on the specific facts of each case, and the detailed implementation rules will be confirmed upon promulgation. This article does not constitute legal advice. Please consult a qualified attorney regarding your specific situation.