New dual-class share system should serve as priming water for 2nd venture boom
The South Korean government has decided to introduce the dual-class share system limitedly to private venture companies. The government’s announcement on coming up with a measure to allow the issue of dual-class shares under strict conditions, such as the consent of shareholders, by the end of this month came in during a Wednesday meeting to discuss ways to vitalize the economy presided by Minister of Economy and Finance and Deputy Prime Minister Hong Nam-ki. The dual-class share system allows an easier defense of management rights by granting more than one voting right to shares held by founders or majority stakeholders.
Venture companies have been calling for the introduction of the system, citing that they are hesitant to accept large investment due to the potential dilution of management control. With dual-class shares, founders can focus on growing their businesses with long-term visions as they can maintain stable management control, even after receiving external investment. World-class IT companies, such as Google, Alibaba, and Facebook, give about 10 voting rights per share held by majority shareholders and 15 of OECD member countries have allowed the system.
The number of venture companies in South Korea increased from 24,000 in 2010 to 37,000 in September this year. However, there are only nine South Korean venture companies out of over 370 unicorn companies, a term referring to startups valued at over one billion dollars. This figure indicates that despite active efforts to start venture companies in the country only a small share of them get a chance to grow large. There are many instances that the country’s startups remain as small or medium-sized businesses due to various regulations.
The Chinee government has recently allowed the dual-class share system limitedly to innovative technology companies as the country’s leading corporations, such as Alibaba and Xiaomi, decided to become listed on foreign exchanges, such as New York’s or Hong Kong’s, to obtain the right to issue dual-class shares. South Korea also should reform its regulations to ensure the growth of innovative venture companies to bring in the second wave of venture boom without having them taken away to overseas markets. However, it is critical to come up with relevant measures to address concerns over the dual-class share system’s adverse effects, such as abuse of power by majority shareholders, before expanding the system to public companies.