A landmark bill mandating the cancellation of treasury shares has passed a key legislative committee, marking a significant step toward addressing the 'Korea Discount'.
On February 23, 2026, South Korea's National Assembly Legislation & Judiciary Committee approved a pivotal amendment to the Commercial Act. This new rule makes it mandatory for companies to cancel, or 'retire,' any treasury shares they buy back within one year. An exception is possible, but only if the company presents a specific disposal plan for those shares and gets it approved by shareholders at the annual general meeting (AGM). This is designed to ensure that buybacks directly benefit all shareholders by reducing the number of outstanding shares, rather than being used as a tool for management control.
So, why is this happening now? This legislation is a cornerstone of the broader 'Value-up Program,' a multi-year government initiative to tackle the chronic undervaluation of the Korean stock market. For years, Korean companies have traded at lower multiples compared to their global peers. One reason cited is that treasury shares were often held indefinitely on the balance sheet, sometimes used to defend management during takeover battles or for other insider-friendly purposes, rather than being returned to shareholders. This bill aims to change that practice for good.
The path to this moment was paved by a series of deliberate steps. First, the immediate momentum was built in February 2026, when a subcommittee passed the draft, which was followed by a positive market reaction, reinforcing the political will for reform. Second, the groundwork was laid in late 2025 as the bill was formally scheduled for review and public pressure mounted for its swift passage. Third, the long-term context dates back to 2024, with the Financial Services Commission (FSC) revising the Stewardship Code to encourage value-enhancing actions and corporate pioneers like LG Uplus demonstrating the benefits of cancellation.
Of course, the change is not without debate. The upside is clear: mechanically, cancelling shares boosts key metrics like Earnings Per Share (EPS) and Price-to-Book Ratio (PBR). For the market average, this could mean a 2-3% lift in valuations. However, business groups, represented by the Korea Chamber of Commerce & Industry (KCCI), have warned of potential downsides. They argue that removing treasury shares eliminates a crucial defensive tool against hostile M&A, a significant concern in a market without poison pills. The new law attempts to balance this by allowing AGM-approved exceptions, preserving some flexibility.
In essence, this bill hard-codes a 'cancellation-first' principle for treasury shares. It directly supports the value-up narrative through a clear, mathematical boost to valuations. The ultimate success, however, will depend on whether companies continue their buyback programs and if further reforms are introduced to address corporate governance and control-related concerns.
- Treasury Shares: Shares that a company has repurchased from the open market. Holding them reduces the number of shares available to the public, and cancelling them permanently removes them from existence.
- Korea Discount: A term referring to the tendency for South Korean companies to have lower valuations (e.g., lower price-to-earnings ratios) compared to similar firms in other developed markets.
- PBR (Price-to-Book Ratio): A financial ratio used to compare a company's current market price to its book value. A lower PBR can sometimes indicate that a stock is undervalued.