[Startup Must-Know Laws] Mandatory Treasury Share Cancellation: How Will Corporate Practices Change?

Ahn Heecheol's Must-Read Laws for Startups

Heecheol Ahn, Attorney at Law at DLG Law Firm

The core of the third amendment to the Commercial Act, which was promulgated and came into effect on March 6, 2026, is that, in principle, treasury shares acquired by a company must be canceled within one year. This revision puts a brake on the widespread practice of using treasury shares for management rights defense, indirect restructuring of control, or as a tool for capital policy at specific points in time. It clearly establishes that, in principle, treasury shares will be addressed from the perspectives of shareholder returns and transparency in corporate governance. Companies are prohibited from exercising shareholder rights such as voting rights, rights to subscribe to new shares, or rights to receive dividends with respect to treasury shares. Treasury shares also cannot be used as the subject of exchangeable bonds, redeemable bonds, or as collateral for pledges.

However, not all treasury shares are required to be canceled immediately, as certain exceptions are allowed. A company may retain or dispose of treasury shares if it draws up a plan for retaining or disposing of treasury shares and obtains approval from the general meeting of shareholders, but only if one of the following five conditions is met. First, if the disposal is made to each shareholder under equal conditions in proportion to their shareholdings; second, if the shares are used for employee compensation purposes; third, for the implementation of the employee stock ownership program; fourth, for statutory organizational restructuring purposes such as comprehensive stock exchanges; and fifth, for management purposes such as the introduction of new technology or improvement of financial structure. Therefore, companies that intend to use treasury shares as a source for compensation, such as stock options or RSUs, must follow the procedures outlined above.

The more significant practical change is the prohibition of indirect use of treasury shares. Even if a listed company acquires treasury shares through a trust agreement, the same cancellation obligation and holding restrictions apply. In cases of mergers or spin-offs, the allocation of new shares or transfer using treasury shares as a workaround is also restricted. Another noteworthy point is that existing holdings are not exempt. Treasury shares acquired and held directly before the implementation of the amended Commercial Act must be canceled within 18 months from the effective date, or prior to that, the company must obtain approval from the general meeting of shareholders for a legitimate plan for retaining or disposing of treasury shares.

The message of this third amendment to the Commercial Act is clear. Treasury shares are no longer inventory assets that companies can use at their convenience; they have become financial instruments that can only be used under strict control and within limited circumstances. Ultimately, the essence of this amendment is not simply the introduction of a cancellation obligation. Rather, it is a declaration that shareholder protection and transparency in corporate governance will be at the center of corporate decision-making. This is the very point that companies should check first during the regular general meeting of shareholders season.

This content was produced with the assistance of AI translation services.