Korean govt mulls allowing dual stock structure in unlisted startups

2019.09.05 13:59:27 | 2019.09.05 15:07:52

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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.

Dual-class stock, common in the United States and elsewhere, 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.

Korea’s Commercial Code strictly abides by ‘one voting right for one share,` which companies complain as a burden on management against predatory forces.

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

According to a study on 242 companies trading on the main U.S stock exchange by the Korea Economic Research Institute (KERI), sales were 1.6 times higher than the market average, operating profits 1.7 times higher and employment 1.3 times higher in the companies under dual stock structure.

The study also found that 110 Nasdaq-listed companies with multiple voting right shares recorded 2.9 times, 4.5 times and 1.8 times bigger sales, operating profit and employment, respectively, compared to others listed on the same market without the same voting rights. The KERI said the right to issue dual-class stocks would lead to performance improvement by helping management of companies to just focus on business.

The government on the same day also decided to raise 2.6 trillion won ($2.2 billion) from the government funds and public institutions to inject the fund to rejuvenate the economy by the end of this year. In addition, it will offer tax exemptions on stock option gains of up to 20 million won per year to employees of startups listed on the Konex market, a benefit that is now just confined to unlisted venture firms. Konex is the country’s smallest stock exchange exclusive for small- and mid-sized companies.​

By Lee Yu-sup and Choi Mira

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