Multiple Voting Rights Tax Deferral... Venture Industry Says "Requirements Must Be Relaxed for Activation"

Multiple Voting Rights System Implemented in November Last Year
Only One Company Issued Due to Stringent Requirements
"Additional Improvements Needed Beyond Capital Gains Tax Deferral"

The ‘multiple voting rights shares (shares granted with a specially large number of voting rights)’ system, established to encourage external investment attraction for venture companies, has not been activated due to various restrictive conditions. Recently, the government proposed a plan to “defer capital gains tax when contributing in-kind assets to acquire multiple voting rights shares,” but the venture industry pointed out that “the complicated stock issuance requirements must be improved first for companies’ participation to be activated.”

According to the venture investment industry on the 29th, the Ministry of Economy and Finance announced in the ‘2024 Tax Reform Proposal’ released on the 25th that “a tax special case will be newly established to defer capital gains tax when contributing in-kind assets to acquire multiple voting rights shares of venture companies.”

If the amendment is finalized after discussions in the National Assembly, the deferred capital gains tax will be levied when the multiple voting rights shares are converted into common shares (upon expiration of the duration, inheritance/transfer, loss of the founder’s director position, stock market listing, etc.). The special case applies to contributions in-kind made after January 1 next year, and to receive the special case, an application must be submitted within two months from the end of the half-year period in which the in-kind contribution date falls.

The government expects that the number of companies utilizing multiple voting rights will increase through this measure. Originally, the multiple voting rights system was regarded as a long-standing wish of startups, ventures, and the investment industry. This was because founders hesitated to receive external investment funds due to concerns that “large-scale investments could cause share dilution and management instability.” Since external investment and support from venture capital (VC) and others are essential for startups and venture companies to grow, about 17 OECD member countries, including the United States, the United Kingdom, and France, have implemented the multiple voting rights system ahead of South Korea.

Accordingly, since November last year, a partial amendment to the ‘Enforcement Decree of the Special Measures Act on the Promotion of Venture Businesses’ has been implemented, allowing unlisted venture company founders to have up to 10 multiple voting rights per share. The duration of multiple voting rights is up to 10 years, after which they are immediately converted into common shares. If the company goes public, the duration changes to the shorter period between the remaining duration and three years from the listing date.

However, as of about nine months after the system was implemented, only one company has introduced multiple voting rights. This contrasts with a survey by the Korea Venture Business Association last year, where 70.8% of 291 venture companies responded that they planned to issue multiple voting rights shares. The Ministry of SMEs and Startups estimates that about 300 to 400 companies could use the multiple voting rights system.

One of the biggest concerns in the industry regarding issuing multiple voting rights shares has been that “a large amount of capital gains tax may be imposed when contributing old shares as in-kind assets.” A VC official said, “Startup and venture company founders do not have much cash. So, when issuing multiple voting rights shares, they want to contribute the old shares they hold as in-kind assets, but this is subject to capital gains tax for reasons such as profit realization,” adding, “This is likely why many companies hesitated to utilize the system, contrary to the initial expectation that external funding and IPOs would increase.” Accordingly, related ministries including the Ministry of SMEs and Startups have been promoting the introduction of tax deferral special cases since early this year.

The venture industry generally welcomes the government’s improvement plan itself. Lee Min-hyung, head of the policy research team at the Korea Venture Business Association, said, “When the association compiled founders’ opinions, many expressed concerns that ‘a large amount of tax could occur when acquiring multiple voting rights shares,’ so this improvement plan is very encouraging.” However, the industry expressed regret that retroactive application to companies that have already issued multiple voting rights shares was not reflected in this improvement plan. Since the application period is set from next year, companies issuing multiple voting rights shares in the second half of this year will also find it difficult to receive related benefits.

There are also criticisms that before tax issues, the “complicated stock issuance requirements” must be improved to activate the multiple voting rights system. Currently, to issue multiple voting rights shares, cumulative investment must be at least 10 billion KRW, and the last investment must be at least 5 billion KRW. In addition, the issuance requirements are met only if the founder’s shareholding falls below 30% or if they lose the status of the largest shareholder due to investment attraction. Many startups and venture companies cannot utilize the system because they do not meet these requirements.

Team leader Lee Min-hyung said, “This has been a continuous request for improvement at the association level since the introduction,” adding, “The scale of investment-related requirements tends to be excessive, and there are not many companies that meet them. Many companies have already experienced a decline in the founder’s shareholding due to investment, and in the current investment market contraction, it is even more difficult to attract follow-up investments.”

There is also a need for improvement regarding the ‘duration of multiple voting rights related to listing.’ Professor Son Young-hwa of Inha University Law School emphasized in a paper titled ‘A Study on the Multiple Voting Rights System under the Special Act on the Promotion of Venture Businesses’ published last month, “It is meaningful to establish an institutional device that allows founders to actively list the company and maintain management leadership without being unilaterally swept away by short-term financial performance pressures from various investors even after listing,” adding, “In the United States and Hong Kong, the multiple voting rights system is recognized even after listing. Japan operates by allowing the listing of shares with fewer voting rights. The multiple voting rights system is not terminated upon listing. This is a legislative task to be reviewed.”

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