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[KOR-US NOW] No More Magic Of Treasury Shares?

2020. 9. 24. THU


(Korean Commercial Act) Proposed Amendment that prohibits the allotment of Shares by a newly incorporated company to the Treasury Shares of the divided company.


Following the division of a company (“A”), according to the Korean Commercial Act (“KCA”), a newly incorporated company (“B”) is established through the division of A’s target business. Shareholders of A receive B’s shares allotted by the shareholders’ share ownership percentage of A.

What happens if A has treasury shares? According to the current KCA, shares by a newly incorporated company may be allotted to the treasury shares, allowing A to receive B’s shares by the treasury shares percentage of A. In this regard, B’s list of shareholders includes A, which has the effect of strengthening the control over the newly incorporated company B by the majority shareholders (including specially related parties) of A. While the treasury shares of A do not have any voting rights in terms of the control over A, the treasury shares add control power to the majority shareholders of A by receiving the shares.


For example, if majority shareholders have 60% share ownership of A, minority shareholders have 20% and treasury shares make up the rest of 20%, upon a division of A, the majority shareholders would have a total of 80% share ownership of B (the majority shareholders’ 60% + A’s 20%) while the minority shareholders would still have 20%.

Regarding this, there has been criticism that it is unreasonable that the treasury shares are used as a means of strengthening the control of the majority shareholders while the treasury shares are the property of all shareholders purchased as the company’s assets.


The proposed amendment of KCA announced by 10 members of the ruling party of Korea prohibits the allotment of shares by a newly incorporated company (B) to a divided company (A)’s treasury shares upon a division, reflecting the above criticism.


If this proposed amendment of KCA enacts, the regulation on treasury shares would be strengthened, and it would make M&A and reorganization harder to make use of treasury shares.


To be continued.

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