Companies Bought Back Shares for Shareholders, Then Used 22% for Employee Rewards

Hanwha Systems shares surged more than 13% intraday on Dec. 24, 2020, after the company announced a major buyback alongside investment in new businesses. The stated purpose was “enhancing shareholder value through share-price stabilisation,” prompting expectations that the company would eventually cancel the treasury shares.

Six years later, Hanwha Systems reached a different conclusion. It decided to convert all of those shares for employee compensation, including restricted stock units promised to staff and due for distribution from next year. Once the shares go to employees, they can return to the market, making the expected long-term boost from cancellation difficult to achieve.

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shareholder value does not necessarily have to lead to the cancellation of treasury shares

An analysis of the half-year reports of the 100 largest companies listed on South Korea’s KOSPI market found that 22 had changed the purpose of treasury shares bought to enhance shareholder value. The review covered companies that held treasury shares at the end of the first half of the year. The disclosures became visible after financial authorities strengthened reporting requirements.

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It is burdensome to cancel all the shares bought for the purpose of enhancing shareholder value

Major companies were among those changing their plans. Kia converted about 1.76 million shares bought in 2023, equal to 0.45% of its issued shares, for employee compensation and an employee ownership scheme. Doosan changed the stated purpose of about 670,000 shares, or 3.20% of its treasury stock, from securing investor confidence and enhancing shareholder value to employee compensation. Samsung Life Insurance added business competitiveness and new-business development to the stated use of 17.5 million shares bought for shareholder value, leaving open another route that could qualify for an exception to cancellation.

The companies relied on exceptions in an amended commercial law that took effect in March. The law makes treasury-share cancellation mandatory in principle, but allows companies to retain shares for purposes such as employee compensation or employee ownership plans if shareholders approve. Companies argue that the buybacks themselves already stabilised share prices and therefore did not break their original promises. Hanwha Systems said shareholder value does not necessarily require cancellation. A financial authority official said stronger disclosures would allow investors to monitor changes in purpose and gradually improve the practice. The law was introduced partly in response to concerns that failing to cancel treasury shares contributes to South Korea’s “Korea discount.”

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Investors can now properly monitor how companies change the use of treasury shares