The National Assembly passed a bill amending the Commercial Act to limit the voting rights of major shareholders and related parties to 3% when appointing audit committee members, following which the Democratic Party of Korea is pushing for a plan to mandate the cancellation of treasury stock. The business community expresses concern that if the amendment is implemented and the cancellation of treasury stock is mandated, it could threaten management rights from external speculative forces, unlike in foreign countries where there is no system for defending management rights.
On the 8th, the Democratic Party of Korea and the Financial Services Commission held a closed meeting to discuss plans to mandate the cancellation of treasury stock. The Financial Services Commission is considering measures to encourage corporations to cancel their treasury stock, while the Democratic Party of Korea is pursuing legislation for it.
Treasury stock refers to shares that a corporation has issued in its own name, which can be used as compensation for employees or to support the stock price. Although treasury stock has no voting rights, if it is transferred to friendly shareholders, the voting rights become effective. For this reason, corporations threatened with management rights may use treasury stock as a means of defending those rights.
The Democratic Party of Korea believes that corporations primarily use treasury stock for the purpose of defending management rights. However, the business community argues that this is because there are no other means of defending management rights besides utilizing treasury stock.
The Democratic Party of Korea is reported to have prepared the amendment to the Commercial Act with reference to the shareholder protection provisions of Delaware corporate law, which includes management defense mechanisms such as dual-class voting shares and poison pills, unlike in Korea.
Dual-class voting shares are a system that grants more voting rights to shares held by founders or major shareholders compared to common shares held by regular shareholders. A golden share, which gives the holder the right to exercise a veto on major decisions with just one share, is also a type of dual-class voting share. The dual-class voting share system is currently implemented in countries such as the U.S., Japan, the U.K., and France.
Coupang, a domestic retail corporation, is noted to have gone public in the U.S. in 2021 primarily due to dual-class voting shares. At that time, the Korea Exchange attempted to list Coupang domestically, but Coupang chose to go to the U.S. where defending management rights is easier. Coupang's stock consists of Class A common shares and Class B common shares, with Class B common shares owned solely by founder Bom Kim having 29 voting rights per share. Thanks to dual-class voting shares, Kim can exercise more than 70% of voting rights with less than 10% equity.
Poison pills are also utilized in the U.S., Japan, France, and other countries. A poison pill is a provision that allows existing shareholders to purchase stock at prices lower than market value when a threat to management rights occurs. This can dilute the stake of the party aiming for management control, thereby preventing them from securing a dominant stake.
In July of last year, the board of directors of the U.S. airline Southwest Airlines triggered a poison pill after activist hedge fund Elliott purchased 11% equity and demanded the dismissal of the CEO, a board replacement, and a change in business strategy, allowing existing shareholders to buy stock at 50% lower than market value. Elliott is the hedge fund that opposed the merger of Samsung C&T and Cheil Industries, and has filed damage claims against the Korean government for approving it.
A representative from an economic organization noted, "For corporations to invest large sums in facilities or research and development, they need to secure funding, but if they conduct a paid-in capital increase, their equity ratio may drop, putting management rights at risk. If they pursue mandatory cancellation of treasury stock to boost stock prices, they need to have defense mechanisms for management rights in place," adding, "If defending management rights becomes difficult, promising corporations will have a strong incentive to go public overseas instead of domestically."