"Companies Citing 'Enhancing Shareholder Value' for Treasury Share Acquisitions Actually Focused on Financial Objectives"

It has been pointed out that, over the past five years, the majority of Korean companies have acquired treasury shares under the pretext of enhancing shareholder value, but in reality, have used them primarily for management control and financial objectives.

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According to Leaders Index, which surveyed 2,658 listed companies in Korea regarding their treasury share acquisitions over the past five years, it was found that around 20% of companies acquired treasury shares each year. Specifically, the percentage ranged from 19% to 24% annually.

In particular, last year, 641 out of 2,591 listed companies acquired treasury shares, marking the highest proportion at 24.7%. This year as well, from the beginning of the year until November 12, 508 companies, or 19.1%, purchased treasury shares.

The stated purpose for acquiring treasury shares among these companies was predominantly to enhance shareholder value. Out of 2,067 public disclosures of treasury share acquisition plans over the past five years, 1,936 cases (93.7%) cited "enhancing shareholder value." "Employee performance compensation" accounted for 61 cases (3.0%), and cases citing both "enhancing shareholder value" and "employee compensation" made up 51 cases (2.5%). Only one case cited "stock swap" as the purpose.

However, when examining disclosures regarding the actual disposal of treasury shares, out of 1,666 cases, "employee performance compensation" accounted for 1,066 cases, or 64.0%. This was followed by "securing funds" with 188 cases (11.3%), "issuance of exchangeable bonds" with 172 cases (10.3%), and "stock swap" with 81 cases (4.9%).

Leaders Index commented, "Rather than enhancing shareholder value, these practices are more strongly characterized by the company’s financial needs or by securing friendly shares to protect management control," and argued, "In some companies, treasury shares have been used for management control and financial purposes, such as funding mergers and acquisitions (M&A), internal compensation, and securing friendly shares, contrary to their initial stated purpose."

For example, the KOSDAQ-listed company DreamCIS decided to acquire 200,000 treasury shares in November 2021, citing shareholder value as the reason. However, the shares were ultimately disposed of for purposes such as funding the acquisition of shares in other companies, employee performance compensation, and securing investment resources.

Only about 30% of companies went as far as to retire their treasury shares. Among the 880 companies (excluding duplicates) that acquired treasury shares over the past five years, only 315 companies, or 35.8%, retired treasury shares at least once. The top 15 companies among them accounted for half of the total retired shares.

Leaders Index analyzed, "The third amendment to the Commercial Act, which is expected to pass the National Assembly plenary session this year, directly targets these treasury share practices," and added, "Once the amendment is implemented, a significant number of companies will likely need to dispose of treasury shares that have been used as a means of maintaining management control."

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