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New Treasury Shares Cancellation Requirement under the Korean Commercial Code: A Turning Point in Corporate Governance

2026.04.06

Introduction
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Effective March 6, 2026, the Korean Commercial Code (“KCC”) requires, as a general rule, the cancellation of treasury shares within one year of acquisition.  The reform tightens the rules governing the retention and disposal of treasury shares and limits how they may be used in financing and corporate transactions.</div>
 
 
1. Background

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Under the previous framework of the KCC, companies could hold treasury shares without a general cancellation duty and could dispose of them to third parties by board resolution.1)  This allowed treasury shares to function as a practical tool for investment, financing, restructuring, and in some cases corporate governance purposes.  The amendment, which was intended to curb the misuse of treasury shares and ensure they operate in the genuine interests of all shareholders, fundamentally changes existing practice by limiting the situations in which treasury shares can continue to be held or deployed.</div>
 
 
2. Mandatory Cancellation Requirement and Exceptions

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The amended KCC establishes cancellation of treasury shares as the default rule as opposed to retention.  Starting March 6, 2026, when a company acquires treasury shares, it must cancel them within one year from the date of acquisition (Article 341-4(1)) absent an applicable exception.  With respect to treasury shares held by the company prior to March 6, 2026, such shares must be cancelled within 18 months from that date, unless the company establishes a treasury share retention and disposal plan and obtains approval from a general meeting of shareholders (Addenda to the KCC, Article 2(1)1). 
 
The one-year cancellation may be deferred where treasury shares are retained for purposes permitted under the amended KCC or for management purposes expressly set out in the articles of incorporation, including: (i) the payment of bonuses, retirement benefits, service awards, or incentives to officers and employees; (ii) contributions to an employee stock ownership association or an employee welfare fund; (iii) transfers upon the exercise of stock options; (iv) corporate reorganizations such as mergers or splits; or (v) the pursuit of management purposes set out in the articles of incorporation.  In such cases, the board must prepare a treasury share retention and disposal plan and obtain approval for that plan at each annual general meeting of shareholders (Article 341-4(2), (3)). 
 
In addition, when a company disposes of treasury shares, it must offer them to all shareholders on equal terms and on a pro rata basis, except in limited circumstances where disposition to a third party is permitted on statutory grounds (Articles 342(2)(1), 341-4(2) to (5)).  This has three principal implications: first, where the disposition of treasury shares is markedly unfair and prejudicial to shareholder interests, shareholders may seek injunctive relief against the company pursuant to Article 424, which applies mutatis mutandis; second, improper dispositions of treasury shares are therefore likely to face increased judicial scrutiny; and third, it will become substantially more difficult for a company to place treasury shares selectively with friendly parties. </div>
 
 
3. Limits on the Uses of Treasury Shares

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The amended KCC clarifies that treasury shares carry no shareholder rights, including voting rights, preemptive rights, and dividend rights (Article 341-3(1)), and further restricts their use as a financing or restructuring tool.  In particular, the amended KCC prohibits the issuance of bonds that are exchangeable for or redeemable with treasury shares (Article 341-3(2)); bars the creation of pledges over treasury shares (Article 341-3(3)); and provides that treasury shares may not receive new share allocations in mergers, divisions, or spin-offs (Articles 529-2 and 530-13). 
 
Following the introduction of the bill in late 2025, a number of listed companies took preemptive steps, including accelearting treasury share cancellations, advancing financing through exchangeable bonds, and amending their articles of incorporation to preserve flexibility of acquisition and disposition under the amended KCC.  These market responses underscore the extent to which the amendment is expected to reshape capital management and transaction planning. </div>
 
 
4. Time-Limited Carve-Out for Companies Subject to Foreign Ownership Caps

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The amended KCC also recognizes that the mandatory cancellation of treasury shares may create unintended consequences for companies subject to foreign ownership limits under applicable statutes.2)  For instance, cancellation reduces the total number of outstanding shares and may thereby increase the foreign ownership ratio, causing the company to exceed an applicable foreign ownership cap.  To address this issue, the company may dispose of the treasury shares within three years from the effective date. 
 
As a practical matter, companies operating in regulated industries may need to take a more cautious approach to treasury share repurchase and cancellation programs, including by adjusting the size and timing of buybacks. </div>
 
 
Conclusion

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The amendment is expected to strengthen shareholder protection and improve transparency in capital allocation by reducing the scope for strategic uses of treasury shares that may not serve the interests of all shareholders.  More broadly, as part of Korea’s ongoing efforts to address governance concerns associated with the so-called K-discount, which has historically suppressed valuations of Korean equities relative to other markets, the amendment is expected to align corporate practices more closely with global investor expectations. 
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<div style="margin-bottom: 8px; font-size: 16px; line-height: normal;">1) <a href="https://www.law.go.kr/LSW/lsInfoP.do?lsiSeq=272919&ancYd=20250722&ancNo=20991&efYd=20250722&nwJoYnInfo=N&efGubun=Y&chrClsCd=010202&ancYnChk=0#0000" target="_blank">Former Article 342 of KCC</a>.</div>

<div style="margin-bottom: 8px; font-size: 16px; line-height: normal;">2) See Addenda to the KCC, Article 2(2).</div>

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