Misunderstanding for dual-class shares

The South Korean government plans to test out 'dual-class share' structure in Korea, starting with unlisted venture enterprises to enable startup founders to build their fledgling businesses through stock issues without concerns about threats to management. Deputy prime minister for economy Hong Nam-ki in a cabinet meeting discussed various measures to stimulate investment to venture enterprises and encourage their growth that would be included in the additional government economic actions for the second half.

 

Korea’s Commercial Code strictly abides by ‘one voting right for one share.’ This means founders and investors are entitled to exercise their power and control over business matters through votes based on the number of shares they hold, which companies complain as a burden on management against predatory forces. However, under the dual-class share structure, as opposed to the one share, one vote, they can issue and own a different class of shares that gives them more voting rights than those who invest in and hold other classes of shares at the same price.

 

As being common in most major financial hubs and advanced markets such as New York, Hong Kong, Paris, Toronto and Tokyo, dual-class stock allows a company to issue two types of stock, each with equal economic rights but with unequal voting rights. The issues have helped successful initial public offerings and growth of tech companies like Facebook and Snap by allowing founding entrepreneurs to command management with fewer stocks than normally and push ahead with bold decisions. 

 

The government plans to restrict the new rule to unlisted venture enterprises as it fears its abuse by family-owned businesses for hereditary successions.  

 

However, analysts call for the adoption of the dual-class system in the capital market. They said as the capital market here further opens and grows, companies need that kind of protection mechanism so that they can focus on carrying out their long-term vision and not be swayed by demands from investors that seek to exit soon after making a fast buck. 

 

Analysts also point out that there is "big misunderstanding" about the dual-class share structure. It cannot be adopted by companies or chaebol that are already listed on the stock market. This only applies to startups or newcomers, which can operate under that structure when they are a privately-held company and on their way to going public. Once they choose that path and launch an IPO, for instance in New York, there is no turning back.

 

That is, there is a misunderstanding as to how this works. The protection mechanism is not for listed chaebol as the public has feared over the years. The dual-class voting system would be a barrier for financial investors and strategic investors who seek to acquire targeted companies. 

 

https://www.straitstimes.com/opinion/dual-class-shares-a-must-or-a-bust