A Paradigm Shift in Korean Corporate Governance: Mandatory Treasury Stock Cancellation & Its Implications

On February 25, 2026, the Korean National Assembly passed a landmark amendment to the Commercial Code (the “3rd Amendment”), signaling a structural transition toward Shareholder Primacy. This amendment introduces a mandatory cancellation rule for treasury stocks, fundamentally redefining their legal status in South Korea.

1. The Core Change: Mandatory Cancellation within One Year

The most significant feature of the 3rd Amendment is the principle of mandatory cancellation. Under the new law, companies must cancel their treasury stocks within one year from the date of acquisition via a board resolution.

While exceptions exist, they are strictly regulated. A company may only hold or dispose of treasury stocks if it obtains approval from the general meeting of shareholders based on a “Treasury Stock Retention and Disposal Plan” signed by all directors. For disposals aimed at “achieving business purposes,” companies must now explicitly state such reasons in their Articles of Incorporation.

2. Redefining Treasury Stocks as “Capital,” Not “Assets”

The amendment clarifies that treasury stocks carry no rights, reinforcing their nature as “Capital” rather than corporate assets. Consequently:

• Collateralization and Debt Issuance Prohibited: Using treasury stocks as collateral or as underlying assets for exchangeable/redeemable bonds is now banned.
• No New Shares in M&A: The practice of allotting new shares to treasury stocks during mergers or spin-offs (often called the “Magic of Self-Spin-offs”) is strictly prohibited.

3. Strategic Timelines and Compliance

The 3rd Amendment takes effect immediately upon promulgation. For treasury stocks held prior to the law, grace periods are provided:

• Directly Held Stocks: Must be cancelled within one year from the date six months after the enforcement date.
• Indirectly Held Stocks (Trusts): Must be cancelled within one year from the date they are returned to the company. Non-compliance may lead to fines of up to KRW 50 million for directors.

4. Practical Implications for Global Investors

This amendment, following previous reforms regarding directors’ fiduciary duties and cumulative voting, marks a “structural inflection point” for the Korean market. For international investors and corporations operating in Korea, I recommend the following strategic actions:

• Portfolio Reclassification: Strategically classify existing treasury stocks to design an optimal mix of cancellation, disposal, or retention within the grace period.
• Amendment of Articles of Incorporation: Proactively update the Articles of Incorporation during the 2026 General Shareholder Meeting to secure future flexibility for business-related disposals.
• Enhanced IR Communication: Leverage this regulatory change as an opportunity to reinforce “Value-up” strategies and communicate capital allocation policies more transparently with the market.

At Sehan LLC, we provide comprehensive “One-Stop Services” to help global clients navigate these complex regulatory shifts. As the Korean legal landscape moves toward global standards, we remain committed to ensuring your business interests are protected with the highest level of expertise.