Legal Guidelines on the Implementation of the Mandatory Cancellation of Treasury Stock

This article is a contribution by Hee-Chul Ahn, an attorney at DLG Law Firm. If you would like to share high-quality content for startups in the form of a contribution, please contact the Venture Square editor team at editor@venturesquare.net .

The era of stockpiling treasury stock is over.

The third amendment to the Commercial Act, which took effect immediately upon its promulgation on March 6, 2026, can be evaluated as having effectively redesigned the treasury stock system. The core of this amendment is clear: joint-stock companies must, in principle, cancel acquired treasury stock within one year. It is no longer possible to view treasury stock as a strategic asset or financial buffer to be held in preparation for when the company needs it, as was the case in the past. The amendment to the Commercial Act stipulates that treasury stock is not an asset acquired and accumulated for later use, but is instead treated as unissued stock to be canceled in principle, with retention and disposal permitted only in exceptional cases.

This amendment to the Commercial Act fundamentally alters the nature of treasury stock. In practice, treasury stock has traditionally been utilized as a form of asset for employee compensation, stabilizing management control, adjusting corporate governance, and preparing for future investments or mergers and acquisitions. Notably, it was not uncommon for not only listed companies but also unlisted companies in their growth phase and startups to regard treasury stock as a source of future incentives or a tool for restructuring. However, following this amendment, such an approach has become difficult. From a more theoretical perspective, there has been debate regarding whether treasury stock constitutes a company asset or unissued shares; this amendment clarifies that treasury stock is no longer an asset but possesses the nature of unissued shares. In other words, treasury stock has become, in principle, a stock that must be liquidated, and continued holding requires clear legal grounds and procedures.

In the same vein, the revised Commercial Act has also clarified the restrictions on the rights of treasury shares much more clearly. As can be seen in Article 341-3 (Restrictions on Rights of Treasury Shares, etc.) of the Commercial Act below, it has been made clear that a company cannot exercise shareholder rights, such as voting rights, preemptive rights to new shares, or dividend rights, with respect to its treasury shares. Furthermore, the issuance of bonds with treasury shares as the subject of exchange or redemption is prohibited, and using treasury shares held by a company as the subject of a pledge is also not permitted. This clarifies, at the level of the provisions, that even though treasury shares are formally considered shares, they are not objects that a company can utilize or dispose of in the same manner as ordinary shares.

Of course, the revised Commercial Act does not require the unconditional cancellation of all treasury shares. There are exceptions, which are specified in detail in Article 341-4 (Obligation to Cancel Treasury Shares, etc.) of the Commercial Act. Specifically, a company may continue to hold or dispose of its treasury shares in the following cases: ① when disposing of shares to each shareholder on equal terms in proportion to their shareholding ratio; ② when using them for the purpose of compensating employees, such as stock options; ③ when operating an employee stock ownership plan; ④ when there is a purpose of organizational restructuring as stipulated by law, such as a comprehensive stock exchange; or ⑤ when there is a managerial necessity, such as the introduction of new technology or improvement of the financial structure.

If a company wishes to exceptionally continue holding or dispose of its treasury shares, it must draft a plan for the holding and disposal of treasury shares and obtain approval from the general meeting of shareholders. Furthermore, this is not a structure where approval is granted only once and then aborted. The plan must be approved again at the general meeting of shareholders every year. This design is based on the premise that the impact of holding treasury shares on the company and its shareholders as a whole can continuously change. Consequently, the issue of holding and disposing of treasury shares has become a corporate governance issue that must be responsibly managed at the level of the general meeting of shareholders, rather than a matter that can be resolved through retrospective explanations by the finance or legal teams.

A plan for the disposal of treasury shares must not end as a mere formal internal document. As stipulated in detail in Paragraph 4 of Article 341-4 (Obligation to Cancel, etc. of Treasury Shares) of the Commercial Act, it must specifically state: ① the purpose of holding or disposing of treasury shares; ② the type and number of treasury shares subject to holding or disposal, and the method of acquisition; ③ the type and number of treasury shares and the method of acquisition based on the start of holding and the planned disposal time, the type and number of shares remaining after excluding treasury shares from the total number of issued shares, and the change in the ratio of treasury shares to the total number of issued shares; ④ the planned holding period; and ⑤ the planned disposal time. Furthermore, all directors must sign or affix their seals to this document.

Furthermore, regarding treasury shares acquired and held prior to the enforcement of the amended Commercial Act, companies must prepare appropriate plans and obtain approval from the General Meeting of Shareholders if they intend to cancel them within a certain period or retain and dispose of them under exceptional circumstances, in accordance with transitional measures. Therefore, this amendment is not merely a matter of managing treasury shares acquired in the future. All treasury shares must be re-examined, including those acquired in the past, those held indirectly through trust agreements, and those held in reserve with the intention of serving as compensation funds. In particular, since existing directly acquired treasury shares must be canceled within one year from the point six months after the enforcement date, it is safer for companies to establish a liquidation schedule starting now rather than feeling complacent simply because there is a de facto grace period. Additionally, listed companies face a risk of penalties of up to 50 million won if they fail to cancel treasury shares within the statutory deadline without approval from the General Meeting of Shareholders or operate them differently from the approved plan for holding and disposing of treasury shares. Even when treasury shares are acquired through trust agreements, the same regulations apply in substance, so companies cannot evade these regulations simply by changing the form.

Companies preparing for M&A or corporate governance restructuring must take the recently amended Commercial Act more seriously. The revised act explicitly restricts the use of treasury stock to allocate new shares or design specific structures during mergers, spin-offs, and mergers by spin-off. This demonstrates the legislative intent to prevent treasury stock from being used as a workaround for corporate governance reorganization. Therefore, going forward, when investors or acquirers review a company, they will not merely look at the number of issued shares and the status of major shareholders; they will also verify the scale of treasury stock holdings, the circumstances of acquisition, the basis for holding them, the cancellation schedule, and whether approval for exceptional holdings has been granted.

So, what should companies do first? First, they must accurately identify the current status of their treasury stock holdings. They must start by documenting when, how, and for what purpose these shares were acquired. Second, they must establish a policy on whether to cancel the treasury stock in accordance with principle, or to retain and dispose of it as an exception. Third, if exceptional retention or disposal is necessary, they must review whether the reasons fall under those stipulated by the Commercial Act and prepare a plan for the retention and disposal of treasury stock, along with the procedures for shareholder approval. Fourth, they must check for any conflicts with existing documentation structures, such as the Articles of Incorporation, Board of Directors regulations, employee compensation regulations, shareholder agreements, and investment agreements. Fifth, if they are considering future investments, M&A, or corporate governance restructuring, they must prepare in advance to ensure that risks related to treasury stock do not become an issue during the transaction process.

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