Will activist funds gain more clout amid growing talks on mandatory treasury stock cancellation?
The KOSPI index and the won-dollar exchange rate are displayed on an electronic board at Hana Bank’s headquarters in Seoul, Wednesday. Yonhap
With Korea's political sphere actively discussing making the cancellation of treasury shares mandatory, attention is turning to whether the influence of activist funds, which have long advocated for such measures, will grow, industry officials said Wednesday.
Repurchasing and canceling treasury shares typically reduces the total number of shares in circulation, which in turn helps boost stock prices.
However, Korean companies have often been criticized for using treasury stocks not for cancellation but as a means to protect the management control of majority shareholders. This has drawn repeated objections from activist investors and minority shareholders.
Since the new administration took office on June 4, momentum has been building around the proposal as part of broader shareholder-friendly reforms.
According to industry insiders, Value Partners Asset Management, an activist fund, recently sent a shareholder letter to NICE Information & Telecommunication, calling for the cancellation of treasury shares. The fund criticized the company for allowing its stock to trade below book value while holding excessive cash without taking action.
The fund demanded the immediate repurchase and cancellation of at least 10 percent of outstanding shares.
The Korea Corporate Governance Forum pointed out that in Korea, companies commonly repurchase treasury shares using corporate funds without canceling them, often leveraging these shares to benefit controlling shareholders. This practice, the forum argued, has undermined the original purpose of the treasury share system and has remained a central issue in efforts to address the persistent Korea discount, where Korean firms are generally valued lower than their international peers.
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To advance the push for mandatory treasury share cancellation, the presidential state affairs committee and the ruling Democratic Party of Korea's special committee are currently reviewing existing regulations on the matter.
In addition, on Monday, Rep. Cha Gyu-geun of the minor progressive Rebuilding Party Korea proposed a revision to the Commercial Act that would require companies to cancel treasury shares within six months of acquisition in principle. Under this revision, holding such shares would only be permitted in exceptional cases, such as for employee performance-based compensation.
Lee Jae-won, an analyst at Shinhan Securities, acknowledged concerns about overhang — potential sell-off pressure — before the law's implementation, as well as the possibility of third-party block trades — large off-hours transactions.
"Criticisms of excessive infringement on management rights have also been raised. However, the direction itself is aimed at resolving the Korea discount," Lee said. "As of the end of 2024, the total treasury share ratio of KOSPI-listed companies is 3.2 percent. If all these shares were canceled, the price-to-book ratio would increase by 3.3 percent purely from the cancellations, which would contribute positively to the revaluation of KOSPI stocks."