Kyusung Lee Attorney at Law

What the New Mandatory Treasury Share Retirement Rule Means for Foreign Investors and Boards

If you invest in, sit on the board of, or advise a Korean company, a quiet but significant change took effect on March 6, 2026: Korea’s National Assembly amended the Commercial Act so that treasury shares — stock a company buys back and holds in its own name — must now, as a general rule, be cancelled (retired) within one year of acquisition.

Until this reform, Korean companies could buy back their own shares and simply sit on them indefinitely, using them for anything from employee compensation to, more controversially, shoring up a friendly voting bloc during a control contest.

That flexibility is now the exception rather than the rule, and it applies to every Korean company — listed or private, large or small. Here is what you need to know, drawn from the Ministry of Justice’s official guidance and recent academic commentary on the reform.

1. What Actually Changed

The core rule is simple to state: once a Korean company buys back its own shares, it must generally retire them within one year. The table below lays out the shift.

Area	Before	After (effective March 6, 2026)
Scope	No general rule	Every Korean company — listed, private, and venture-backed alike
Shares covered	No general rule	All treasury shares, whether bought back voluntarily or acquired involuntarily (e.g., in a merger)
Retirement deadline	No general rule	Within 1 year of acquisition (18 months for shares already held as of the effective date)
Retirement procedure	Board approval or a formal capital-reduction process, depending on how shares were acquired	Unified: board resolution alone is sufficient
Exception (retain or resell)	No time limit or special approval required	Requires a formal retention/disposal plan re-approved by shareholders every year

2. Why This Matters if You Hold Korean Shares

•  Buybacks now mean real capital return. Because treasury shares must be cancelled rather than parked indefinitely, a buyback announcement is far more likely to translate into an actual reduction in shares outstanding — reducing dilution and overhang risk for minority shareholders.

•  A well-known entrenchment tool is now largely closed off. Korean companies have at times sold treasury shares to a friendly third party during a control dispute, effectively reviving dormant voting rights for an ally of incumbent management. Mandatory retirement, combined with new restrictions on using treasury shares as merger consideration or as collateral for exchangeable/redeemable bonds, narrows that playbook considerably.

•  Restructuring just got more constrained. In a merger or spin-off, a company can no longer allot new shares to its own treasury stock or use treasury shares as deal consideration — closing what Korean practitioners have called the ‘treasury share magic’ used in some holding-company conversions to entrench control without additional investment.

•  A grace period exists for foreign-ownership-restricted sectors. If your target operates in broadcasting, telecommunications, aviation, or another industry with a statutory cap on foreign ownership, and retiring treasury shares would push foreign ownership above that cap, the company has up to three years from the effective date to work out compliant disposal instead.

When can a Korean company still hold or sell treasury shares? – Only for one of five statutory purposes: pro-rata distribution to shareholders, employee/executive compensation, an employee stock ownership plan, a use required by other statutes, or a ‘business purpose’ pre-written into the articles of incorporation. – Even then, the board must adopt a formal Treasury Share Retention & Disposal Plan, and shareholders must re-approve it at every single annual general meeting — not just once.

3. What to Watch For in AGM Materials

If a Korean portfolio company is holding or plans to hold treasury shares beyond the one-year default, its AGM agenda should now include a standing item: shareholder approval of the treasury share retention/disposal plan. As a shareholder, this is worth reading closely rather than rubber-stamping. Recent data on the first proxy season after the reform showed 268 listed companies putting such a plan to a vote — with the vast majority approved, and only a fraction disclosing an actual retirement schedule for existing holdings. Pay particular attention to the stated purpose, the intended counterparty if shares are to be sold rather than cancelled, the pricing methodology, and how the plan compares to what was disclosed the prior year.

4. A Note of Caution from Recent Scholarship

A 2026 academic review of the reform (Cho Yijae, “A Study on the Amended Korean Commercial Act Introducing Mandatory Retirement of Treasury Shares,” Sogang Law Review, Vol. 15, No. 2) offers a useful comparative perspective worth keeping in mind.

•  The United States, United Kingdom, Germany, and Japan generally do not force blanket short-term retirement of treasury shares. Instead, they manage risk stage by stage — regulating the funding source at acquisition, suspending voting and dividend rights while shares are held, and imposing fairness controls when shares are resold. Measured against that backdrop, Korea’s new rule is comparatively strict.

•  Because treasury shares also serve legitimate corporate finance functions — equity compensation, financing for restructurings, capital structure management — the reform may narrow those tools along with the ones it was designed to curb.

•  Korea still lacks a fully codified poison pill or comparable takeover-defense regime. With treasury shares now harder to deploy defensively, boards facing a genuine control contest may find they have fewer lawful options than companies in jurisdictions with more developed defensive frameworks — a gap worth factoring into governance planning and, for activist investors, into strategy.

Further implementing decrees or follow-on legislation may refine these rules, so it is worth reviewing your Korean holdings’ treasury share position now rather than waiting for the next AGM cycle.

5. A Practical Checklist

1	Identify the acquisition date and method (open-market purchase, merger, appraisal rights, etc.) for every block of treasury shares held.
2	Calculate the applicable retirement deadline (1 year generally; 18 months for shares held before the effective date).
3	If continued holding or resale is intended, confirm the articles of incorporation include the required ‘business purpose’ clause.
4	Prepare a board-approved Treasury Share Retention & Disposal Plan with full required disclosures.
5	Calendar annual AGM re-approval — this is not a one-time filing.
6	If the company operates in a foreign-ownership-restricted sector, evaluate the 3-year transitional relief.
7	If disposal (not retirement) is planned, review the new-share-issuance-style procedural requirements: counterparty selection, pricing, and disclosure.

Because this reform is still new, several interpretive questions remain open in practice. If you are reviewing a Korean investment, structuring a deal involving a Korean counterparty, or advising a board on its treasury share position, I would be glad to help you work through the specifics.

Attorney Profile — Kyusung Lee
Education	B.A. in Economics, Brown University / J.D., Yonsei University School of Law
Experience	International Contracts, Samsung C&T Corporation Legal Team / Equity Research, BofA Merrill Lynch
Credentials	Member, Korean Bar Association / CAMS (Certified Anti-Money Laundering Specialist) / KBA-registered Startup Law Specialist
Practice Areas	International contracts, foreign investment, startup law, corporate law, commercial disputes, corporate governance & shareholder activism

Need Korean Legal Counsel? Tel  +82-2-6264-7604    Email  kyusungii@gmail.com http://www.kyusunglee.com   |   Naver Blog  blog.naver.com/hotchkiss777

#KoreanCommercialAct  #TreasuryShares  #CorporateGovernanceKorea  #ShareholderActivism  #DoingBusinessInKorea  #ForeignInvestorKorea  #KoreanLawyerForForeigners  #KoreanCorporateLaw  #MergersAndAcquisitions  #KoreanSecuritiesLaw  #KoreaMarketEntry