On February 25, 2026, the National Assembly passed a partial amendment to the Commercial Act (the “Third Amendment to the Commercial Act”), the key feature of which is the mandatory cancellation of treasury shares. The amendment is scheduled to take effect immediately upon promulgation (expected on March 6, 2026), and is expected to bring about fundamental changes in how companies utilize treasury shares.
Below, we outline the key highlights of the Third Amendment to the Commercial Act, as well as practical considerations for companies.
Mandatory Cancellation of Treasury Shares and Enhanced Restrictions on Their Use
Principle of Cancellation Within One Year: Where a company acquires treasury shares, it is required to cancel such shares within one year from the date of acquisition. However, for treasury shares acquired prior to the enforcement of the amended law, the following grace periods apply:
Shares acquired directly: Within one year from the date falling six months after the enforcement date (i.e., up to a maximum grace period of 18 months)
Shares acquired indirectly (via trust arrangements): Within one year from the date such shares are returned by the trustee after the enforcement of the amendment
Special provision for industries subject to foreign ownership restrictions: For industries subject to foreign ownership caps—such as aviation, broadcasting, and telecommunications—a grace period of up to three years is granted for disposal, in order to mitigate potential changes in foreign ownership ratios resulting from share cancellation.
Enhanced Restrictions on the Use of Treasury Shares: The amendment clarifies that treasury shares are to be treated as “unissued shares” without rights. Accordingly, treasury shares are explicitly excluded from voting rights, pre-emptive rights, and dividend rights. In addition, the use of treasury shares for issuing bonds (including exchangeable bonds), the creation of security interests (e.g., pledges) over treasury shares, and the allocation of new shares in connection with mergers or spin-offs involving treasury shares are all prohibited.
Exceptions to the Cancellation Obligation and Related Procedures
In order for a company to retain or dispose of treasury shares without cancelling them, the following requirements must be satisfied:
Statutory Grounds for Exception:
Disposal on equal terms in proportion to shareholders’ ownership ratios
Use for employee compensation purposes (e.g., stock options) or for employee stock ownership plans (ESOPs)
Use as permitted under applicable laws (e.g., comprehensive share exchange/transfer, mergers)
Use for business purposes (e.g., introduction of new technologies, improvement of financial structure), provided that such purposes are expressly stipulated in the articles of incorporation in advance
- Approval of Treasury Share Retention and Disposal Plan: A plan signed by all directors must be prepared and approved at the annual general meeting of shareholders each year. During March 2026—the first regular shareholders’ meeting season following the enforcement of the amended Commercial Act (March 6, 2026)—many listed companies submitted agenda items concerning treasury share cancellation, while, in exceptional cases, agenda items seeking approval to retain treasury shares were also presented. Based on currently observed practices, such retention plans generally fall into the following categories:
(i) compensation purposes, such as employee incentives and equity-based compensation;
(ii) business purposes, including strategic alliances, M&A, adoption of new technologies, and capital expenditures; and
(iii) hybrid structures combining both (i) and (ii). While retention for compensation purposes—an explicitly recognized statutory exception—remains the most common, there is also a noticeable trend toward articulating broader business purposes to secure greater flexibility in the use of treasury shares. However, caution is warranted, as there have been cases where institutional investors have expressed opposition on the grounds that the original purpose of acquiring treasury shares is inconsistent with their subsequent use. - Application of New Share Issuance Rules to Disposal: Where treasury shares are disposed of to third parties, procedures equivalent to those applicable to the issuance of new shares—including stringent procedural requirements and shareholder protection measures—will apply.
Key Practical Changes
- Simplification of Cancellation Procedures: Regardless of whether treasury shares were acquired out of distributable profits, all treasury shares may now be cancelled solely by a resolution of the board of directors, without undergoing capital reduction procedures (i.e., a special resolution of the shareholders’ meeting and creditor protection procedures).
- Sanctions for Non-Compliance: Where a listed company fails to cancel treasury shares within the prescribed period without shareholder approval, or violates its approved retention/disposal plan, directors and other responsible officers may be subject to an administrative fine of up to KRW 50 million. In addition, it is important to note that directors may also incur civil liability for damages suffered by the company arising from such violations.
Implications
- Amendment of Articles of Incorporation: Companies intending to utilize treasury shares for purposes such as management control defense or business objectives (including M&A) should establish the relevant enabling provisions in their articles of incorporation at the 2026 annual general meeting of shareholders or at an extraordinary general meeting.
- Comprehensive Review of Treasury Share Holdings: Companies should assess treasury shares by acquisition timing and structure (direct or indirect), calculate applicable cancellation grace periods, and establish a clear roadmap for compliance within the relevant timelines.
- Reassessment of Financing Strategies: As the use of treasury shares for financing structures such as exchangeable bonds (EBs) is no longer permitted, companies should proactively consider alternative financing options.
