Dream Security, a software development company listed on the Korea Securities Dealers Automated Quotations market, announced its plans for stock buybacks four times last year. Instead of directly buying back its own shares, the company chose to enter into trust agreements with securities firms like Korea Securities (Mirae Asset Securities), Kiwoom Securities, and Shin Young Securities to indirectly repurchase its shares.
Regardless of the method, investors cheered. Just before Dream Security announced its stock buyback plan last August, the stock price was around 2,280 won, the lowest since the onset of the COVID-19 pandemic. However, following the announcement of the stock buyback policy, the stock price exceeded 3,800 won by the end of the year. Buying back shares with company funds reduces the number of shares in circulation, thereby increasing the value of the remaining shares, which is why stock buybacks are regarded as a representative shareholder return policy.
In particular, Dream Security signed a trust agreement with Mirae Asset Securities to acquire 3 billion won worth of its own shares over six months from October last year to April this year. According to the agreement, Mirae Asset Securities purchased about 900,000 shares in 11 transactions during the 24 days from October 10.
However, on December 26, Dream Security unexpectedly transferred 500,000 of the shares bought by Mirae Asset to its subsidiary DigiCAP via an over-the-counter transaction, claiming it was a decision based on its mid- to long-term management strategy. Dream Security controls DigiCAP, a listed company on the Korea Securities Dealers Automated Quotations, through Korea Rental, in which it holds a 43.4% equity stake. Consequently, Dream Security and DigiCAP formed a small circular investment chain with Korea Rental in the middle.
Last year, as the government pushed for a value-up (corporate value improvement) policy, many listed corporations announced their stock buyback plans in response. In particular, in the second half of last year, the stock price plummeted, leading to a series of stock buyback decisions by corporations.
According to the Korea Exchange, the scale of stock buybacks announced by listed firms last year reached 18.8 trillion won, the largest amount since the exchange began collecting related data in 2009. Previously, the scale of stock buybacks announced by listed companies was in the range of 4 trillion to 8 trillion won annually; however, following the government's announcement of the value-up policy, stock buyback decisions significantly increased.
The problem is that listed companies feel burdened when directly acquiring their own shares and prefer to go through securities firms to make indirect purchases. According to the exchange, last year, the scale of direct buybacks was 11.8 trillion won, while trust acquisitions amounted to 7 trillion won. Although direct purchases were larger in scale, many companies opted for trust acquisitions, excluding large corporations that announced substantial repurchase plans, such as Samsung Electronics (about 3 trillion won) and Hyundai Motor Company (1 trillion won).
It is generally known that when corporations entrust securities firms with their stock buybacks, it incurs more expenses. Even when companies directly purchase their own shares, there are acquisition commissions; however, if they entrust the purchase to a securities firm, they must pay higher trust fees.
The reason corporations choose to procure their own shares through securities firms despite the high costs is that the constraints are weaker compared to when buying back directly. This means listed companies can reduce the burden associated with their own stock repurchases. If a listed company decides to directly buy back its own shares through the board of directors, it must purchase all the promised shares within three months. Moreover, once shares are bought back, they cannot be sold for six months, making disposal conditions quite stringent.
In contrast, when a listed company entrusts the stock buyback to a securities firm, the company has much more flexibility. The listed company only needs to deposit money with the securities firm. During this period, the securities firm can relatively freely acquire shares. Even after a contract is signed, if the company does not wish to proceed, it is not obligated to purchase all the promised shares.
For example, CS Holdings signed a trust agreement with NH Investment & Securities to repurchase its own shares worth 5 billion won last year; however, it only acquired 3.2 billion won worth of shares, which is 64% of the initially announced amount, and then terminated the trust agreement. Listed corporations can freely set the duration of the trust agreement, and they can also terminate or extend it earlier than the promised period.
While the convenience for listed companies increases, the effectiveness of enhancing shareholder value inevitably decreases. A representative from a major securities firm noted, “When stock buyback announcements are made, it is essential to confirm whether the repurchase will be done directly or through a trust agreement; if a trust agreement is utilized, we need to ensure that all the agreed-upon amount is acquired,” adding, “Ultimately, we must also track how the acquired stock will be used and processed.”