[Opinion] Differential Voting Rights Approaching and Future Challenges

Nam Gil-nam, Director of the Capital Market Office, Korea Capital Market Institute

On December 2nd, the National Assembly's Industry, Trade and Energy Committee passed the "Special Act on the Promotion of Venture Businesses" amendment bill, which allows unlisted venture companies meeting certain conditions to issue multiple voting right shares (differential voting rights) with up to 10 votes per share valid for up to 10 years. Although approval from the Legislation and Judiciary Committee and the plenary session remains, the possibility of introducing differential voting rights has increased more than ever. Civic groups and others have raised opposition voices, arguing that allowing differential voting rights would further solidify the position of controlling shareholders, including chaebols, who seek to dominate companies with minority stakes, especially given the already low level of corporate governance in domestic companies.

In fact, a recent incident in Canada, where the practice of adopting differential voting rights in family businesses is deeply rooted, clearly illustrates the negative aspects of differential voting rights. Rogers Communications, a major Canadian telecommunications media company, saw its CEO and almost all directors in conflict with Edward Rogers, the son of the founder. On October 21, when the board removed Edward Rogers from the chairman position, he unilaterally dismissed all directors without a shareholders' meeting and appointed directors and a CEO of his choosing. Edward Rogers was able to make such unilateral decisions because he held differential voting right shares accounting for 97.5% of the total voting rights. Although the existing management opposed this and legal disputes ensued, on November 5, the provincial Supreme Court ruled that Edward Rogers' actions were lawful. This sparked critical voices across Canadian society calling for fundamental improvements to the current corporate governance system, where many major listed companies adopt differential voting rights.

If a similar case to Rogers Communications were to occur domestically in the future, few would welcome the introduction of differential voting rights. However, the current bill prohibits listed companies from adopting differential voting rights, disallows transfer and inheritance of differential voting right shares, and includes a 10-year sunset clause to prevent the permanent entrenchment of differential voting rights. Thus, it fundamentally differs from countries like the United States, Canada, and Sweden, where there are few restrictions on listing companies with differential voting rights.

Meanwhile, proponents of differential voting rights emphasize that innovative entrepreneurs need to secure stable management rights to avoid being swayed by short-term performance and highlight that the introduction of differential voting rights is an international trend. In fact, as competition among stock exchanges to attract unicorn companies intensified, financial hubs such as Hong Kong and Singapore accepted listings of companies with differential voting rights in 2018. On December 3, even the London Stock Exchange, which had struggled in the IPO market for over a decade, removed remaining barriers. Emerging markets also joined this trend, with China and India in 2019, followed by Indonesia on December 2.

However, the domestic legislative direction does not align with recent trends. Allowing differential voting rights from Hong Kong to the UK means that companies with differential voting rights can be listed on stock exchanges under certain conditions, not that unlisted companies are the target as in Korea. This is because unlisted companies have a very low risk of infringing on the interests of ordinary shareholders due to the separation of ownership and control, so most countries strictly regulate the adoption of differential voting rights by unlisted companies. In contrast, the domestic bill focuses on allowing unlisted companies to circumvent the mandatory one share, one vote rule under Article 369 of the Commercial Act, so discussions on differential voting rights for listed companies from a capital market perspective have not progressed. Ultimately, even if the National Assembly decides to introduce differential voting rights, it will be necessary to establish capital market regulations such as listing rules and investor protection measures for companies with differential voting rights to realize their full effect.

Nam Gil-nam, Director of the Capital Market Research Institute, Capital Market Division

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