The purpose of introducing this system is to enable large-scale investments without such concerns, marking a pivotal moment in corporate governance. (Image courtesy of Pixabay)
SEOUL, Nov. 17 (Korea Bizwire) – In a landmark development, a dual-class voting rights system long advocated by the venture capital industry has been implemented in South Korea for the first time. Under this new framework, shares now carry a maximum of 10 voting rights each.
In the past, there have been cases where company founders who received large investments for corporate growth faced difficulties securing management control as their own stake was diluted during the fundraising process.
The purpose of introducing this system is to enable large-scale investments without such concerns, marking a pivotal moment in corporate governance.
When dual-class voting rights shares are issued, each share is granted more than one and up to 10 voting rights. Only founders who have invested capital to establish a corporation and are currently managing the company can issue these shares, and the option is only available to unlisted companies.
The issuance conditions are met when the founder’s existing ownership falls below 30 percent or loses the position of the largest shareholder during the fundraising process.
Additionally, the cumulative investment amount after founding must be over 10 billion won, and the last received investment amount must be over 5 billion won.
Dual-class voting rights shares can be temporarily issued through an amendment of the company’s articles of incorporation, which requires a ‘weighted special resolution’ with the agreement of over 75 percent of shareholders.
These shares have a lifespan of up to 10 years as specified in the articles of incorporation, and shares that exceed this period are immediately converted into common shares. To prevent misuse in the succession of management control, these shares are also converted into common shares in case of inheritance, transfer, or loss of the founder’s directorship.
Once a company that has issued dual-class voting rights shares is listed as a public disclosure company, the shares are immediately converted into common shares, making large corporations ineligible.
Companies that issue dual-class voting rights must report relevant facts to the Ministry of SMEs and Startups, and display and disclose the articles of incorporation at the main and branch offices.
Those who violate disclosure obligations may be fined up to 3 million won, and failure to report the issuance of dual-class voting rights to the government may result in a fine of up to 5 million won. Issuing dual-class voting rights falsely may lead to imprisonment for up to 10 years or a fine of up to 50 million won.
Meanwhile, the Korea Venture Business Association announced the results of a survey of 291 startups conducted ahead of the implementation of dual-class voting rights.
Among the respondents, 70.8 percent responded that they have plans to issue dual-class voting rights shares in the future.
The timing of implementation was reported as ‘no specific plans’ (52.4 percent), ‘within the next three years’ (30.1 percent), and ‘within one year’ (13.1 percent). Some companies (9 out of 291) stated that they would issue dual-class shares immediately.
The anticipated difficulties in issuing dual-class voting rights shares include meeting the issuance requirements (31.1 percent), obtaining total shareholder approval (29.4 percent), payment of stock price (18.9 percent), and conversion to common shares (10.3 percent).
J. S. Shin (js_shin@koreabizwire.com)
