[Issue Q&A] 'Half-baked' Dual-Class Shares... Both Business and Venture Sectors Dissatisfied

Controversy Raised by Coupang... Growing Calls for Domestic Introduction
Role in Protecting Management Rights... Expected to Reduce Hostile M&A Concerns
Venture Firms Respond "Regrettable" to 10-Year Limit
Significantly Expanded Scope Demands 'American-Style' Flexible System

[Image source=Yonhap News]

[Asia Economy Reporters Kim Cheol-hyun, Lee Chang-hwan, Kim Bo-kyung] The introduction of dual-class voting rights has become visible in South Korea. As Coupang chose to list on the New York Stock Exchange (NYSE) in the United States due to the absence of dual-class voting rights in Korea, the National Assembly is accelerating legislation on this matter.

On the 23rd, the National Assembly’s Industry, Trade, Energy, Small and Medium Venture Business Committee submitted the "Partial Amendment Bill to the Special Measures Act on Fostering Venture Businesses (Government Proposal)," outlining a concrete schedule for the introduction of dual-class voting rights. If it passes the bill subcommittee review next month, it could be processed through the Legislation and Judiciary Committee and the plenary session within the March extraordinary session. Except for the Justice Party, there is a favorable atmosphere toward the government proposal both inside and outside the National Assembly, making its passage highly likely.

However, controversy surrounding the introduction of dual-class voting rights continues. Civil society voices opposing the institutionalization of chaebol succession remain strong, while the venture industry welcomes it but expresses regret over the stringent conditions. The dual-class voting rights desired by the business community differ somewhat from the government proposal. We examined the issues raised in the dual-class voting rights debate and the solutions sought by the industry.

Why has dual-class voting rights become controversial?

A. Dual-class voting rights are a management defense mechanism that deviates from the Commercial Act’s regulation of ‘one voting right per share’ by granting more voting rights than the number of shares held. The reason why dual-class voting rights, which have not been introduced domestically, have become a "hot potato" is largely due to Coupang’s decision to enter the U.S. stock market. Coupang granted Chairman Kim Beom-seok dual-class voting rights with 29 times the voting power of common shares. Chairman Kim, having secured stable management rights, plans to pursue aggressive investment and employment in the future.

However, debate continues over whether the absence of dual-class voting rights influenced Coupang’s decision to go to the U.S. stock market. Some view that since Coupang’s parent company, Coupang LLC, is a U.S. company, it is natural for a U.S. company to list on the U.S. stock market. Independent of Coupang, there is a strong call for the introduction of dual-class voting rights domestically to foster the venture industry. Among the 36 OECD countries, 17 utilize dual-class voting rights to defend management rights of domestic companies.

[Image source=Yonhap News]

Why does the business community demand dual-class voting rights?

A. The business community expects that the introduction of dual-class voting rights will significantly reduce the risk of hostile mergers and acquisitions (M&A). For example, many leading domestic companies have been exposed to threats of hostile M&A by foreign capital due to the absence of management protection devices such as dual-class voting rights or poison pills (subscription rights). SK Group is a representative case. In 2003, SK engaged in a management dispute with the foreign asset management firm Sovereign. Sovereign purchased about 15% of SK shares and demanded the resignation of management, opposition to support for failing affiliates, and improvement of corporate governance. Besides SK, Samsung and Hyundai Motor have also faced management threats from foreign capital until recently.

What does the government’s proposed dual-class voting rights entail?

A. The core content of the government’s "Partial Amendment Bill to the Special Measures Act on Fostering Venture Businesses," which includes provisions on dual-class voting rights, is to allow unlisted venture companies to issue shares with up to 10 voting rights per share. This differs from Coupang’s granting of dual-class voting rights equivalent to 29 times the voting rights of common shares to Chairman Kim Beom-seok.

The government proposal allows venture company founders to issue multiple voting rights shares within a 10-year duration if, after attracting investment above a certain scale, they own less than 30% of the total voting shares issued.

Provisions to prevent abuse are also included. If dual-class voting rights shares are inherited or transferred, if the founder loses their director position, or if the venture company goes public, the shares will be converted to common shares. However, in the case of listing, a grace period of three years is provided. Regarding directors’ remuneration and limitation of directors’ liability to the company, dual-class voting rights shares are restricted to one voting right per share.

What does the venture industry find regrettable?

A. The venture and startup industry welcomes the fact that a foundation has been laid for founders to grow their companies into unicorns (companies valued at 1 trillion won) based on stable management rights. This is because large-scale private investment has become active, making business expansion and investment exit easier.

However, despite limiting the duration of dual-class voting rights to a maximum of 10 years, the industry expresses regret that the grace period for conversion to common shares after listing is set at only three years. They argue that setting the duration at 10 years but limiting validity to only three years after listing is a significant constraint.

In this regard, a venture industry official expressed concern that "the effectiveness of dual-class voting rights may be greatly diminished depending on the company’s circumstances." Since the period is fixed at 10 years and several conditions for conversion to common shares are imposed, the industry’s position is that the listing-related provisions should be removed so that each company can flexibly grant dual-class voting rights according to their IPO schedule.

What kind of dual-class voting rights does the business community want?

A. The business community argues that dual-class voting rights are necessary to defend against management rights attacks by foreign speculative capital.

They demand the American-style free dual-class voting rights, not the limited dual-class voting rights currently being promoted by the government and the National Assembly. As seen in the Coupang case, in the U.S., companies can issue shares with dual-class voting rights freely through board approval or amendments to the articles of incorporation.

Issuing dual-class voting rights shares helps companies not only defend management rights but also raise funds, aiding corporate management. A business organization official said, "The limited dual-class voting rights currently under discussion in the National Assembly apply only to unlisted venture companies, so most companies are excluded. Since our companies are actually exposed to management threats, the scope of allowance should be greatly expanded."

This content was produced with the assistance of AI translation services.