The amended Act on Special Measures for the Promotion of Venture Businesses (the “Amended Act”), which provides an exception to the one-share-one-vote rule set forth under the Korean Commercial Code (the “KCC”) whereby the issuance of dual-class shares with multiple voting rights (“Dual-Class Shares”) to a founder of an unlisted venture business would be permitted, was passed at the April 27, 2023 plenary session of the National Assembly and will take effect on November 17, 2023. It was also announced on August 21, 2023, that the amended Enforcement Decree and amended Enforcement Rule of the Act on Special Measures for the Promotion of Venture Businesses (the “Act”), which will supplement the Amended Act, will also come into effect.

Under the KCC, there is a mandatory provision providing that a shareholder of a company may only be awarded one vote for each share held (Article 369 (1) of the KCC, hereinafter the “One-Share-One-Vote Rule”). In light of such mandatory provision, court precedents provide that unless a law or regulation specifically sets forth an exemption thereof, any restrictions placed on voting rights (through the relevant company’s articles of incorporation, resolution of the shareholders meeting, etc.) in breach of the One-Share-One-Vote Rule would be deemed invalid (Supreme Court Decision 2009Da51820, November 26, 2009, etc.). In light of such principle of shareholder equality, no exception to the One-Share-One-Vote Rule is currently accepted under the KCC, except for (i) “class shares without voting rights” (i.e., shares without voting rights for all agenda items), and (ii) “class shares with limited voting rights” (i.e., shares without voting rights for certain agenda items), each as set forth under Article 344-3 of the KCC.

The One-Share-One-Vote Rule does not apply to Dual-Class Shares, which, unlike ordinary shares, provide for separate “classes” of shares differing in the number and type of voting rights attached thereto. In general, Dual-Class shares come in the form of, among others, (i) dual-class voting shares (i.e., shares with differing numbers/types of voting rights), (ii) shares with veto power (also known as “golden shares,” the holders of such shares would have the right to exercise veto power over material decisions to be made by the company), and (iii) the tenure voting scheme, in which shares accrue voting power/rights over time (e.g., shares with voting rights that double in number if held for at least two years).

Many countries, including the US, the UK, and Japan, allow unlisted companies to issue Dual-Class Shares and allow companies with Dual-Class Shares to initiate Initial Public Offerings (“IPOs”) as set forth below. Regardless of this, discussions regarding the introduction of Dual-Class Shares have been stalled in Korea over the years as a result of the view that their introduction may undermine the One-Share-One-Vote Rule. However, the Amended Act introduces Dual-Class Shares to the Korean market, albeit in a restricted manner.
 

The Dual-Class Share system as contemplated under the Amended Act, which is set to take effect on November 17, 2023, following discussions lasting approximately 28 months, is meaningful in that it would be the first legislation of its kind as it introduces Dual-Class Shares into the Korean market. The key details of the Dual-Class Share system as contemplated under the proposed amendments to the Amended Act and the Enforcement Decree of the Act (as announced on August 21, 2023) are as follows:

Moreover, it is worth noting that a “venture business” that is allowed to use the Dual-Class Share system under the Act is a business that meets each of the requirements set forth under Article 2-2 (1) of the Act, including, among others, being a “small and medium enterprise” as defined under Article 2 of the Framework Act on Small and Medium Enterprises.
 

An unlisted venture business that has received investments of KRW 10 billion or more in total after its establishment from persons who are neither the founder nor a “related party” as defined under Article 34 (4) of the Enforcement Decree of the KCC would be eligible to issue Dual-Class Shares that hold up to ten voting rights per share to its founder¹ upon the receipt of an investment of KRW 5 billion or more that results in the founder either (i) holding less than 30% of the total voting rights outstanding (in the event there are multiple founders, upon the aggregate voting rights held by such founders becoming less than 50%) or (ii) losing his/her status as the largest shareholder of the venture business (in the event there are multiple founders, upon the founders losing their status, in aggregate, as the largest shareholders in the venture business) (Articles 16-11 (1) and (7) of the Amended Act and Article 11-14 of the proposed amendment to the Enforcement Decree of the Act).

In order to issue Dual-Class Shares, an affirmative vote of at least 3/4 of the total number of issued and outstanding shares at a general meeting of shareholders is required to amend the relevant venture business’s articles of incorporation to include the matters set forth in Article 16-11 (2) of the Amended Act, such as the authorization of the issuance of Dual-Class Shares, the eligibility requirements of persons to whom Dual-Class Shares may be issued to, the total number of Dual-Class Shares that may be issued, the number of voting rights a particular Dual-Class Share would hold, and the time period during which the Dual-Class Shares would be valid. In addition, prior to the actual issuance of Dual-Class Shares, matters set forth in Article 16-11 (3) of the Amended Act, including, among others, the name of the recipient of the Dual-Class Shares, the number of such shares to be issued and the payment in relation thereto, must be resolved by the affirmative vote of at least 3/4 of the total number of issued and outstanding shares at a general meeting of shareholders (Article 16-11 (4) of the Act).

A founder may make payment for Dual-Class Shares using common shares upon receiving unanimous consent from the shareholders at a general meeting of shareholders. If so, Articles 341, 341-2 and 422 of the KCC would not be applicable.
 

A Dual-Class Share may remain outstanding and valid for ten years from the date of its issuance (Article 16-11 (1) of the Act) provided, however, that if the relevant venture business is listed, the relevant Dual-Class Share (i) would only remain outstanding and valid for a period of three years from the date of listing, and (ii) upon the expiration of such period, would be converted into common shares. Dual-Class Shares would also be immediately converted into common shares upon inheritance, transfer, and gifting, and/or upon a founder’s resignation from his/her role as an executive director of the relevant venture business.

In the event the relevant venture business is (i) deemed a business group subject to public disclosure under the Monopoly Regulation and Fair Trade Act (the “MRFTA”) or (ii) required to become an affiliate of a Korean company deemed a business group subject to public disclosure but receives a notice of exclusion as it satisfies the requirements set forth under Article 5 of the Enforcement Decree of the MRFTA (e.g., by ensuring separation of relatives, and/or by ensuring independent management), the relevant venture business would be required to convert its Dual-Class Shares into common shares upon receipt of such notice of exclusion (Article 16-12, Paragraph (1) of the Act).
 

Even with a validly issued Dual-Class Share, only one vote per share would be allowed when casting votes with respect to certain items, including among others, the following: (i) an amendment to the articles of incorporation to extend the period during which Dual-Class Shares would remain valid, (ii) director remuneration, (iii) the indemnification of directors, (iv) the appointment and dismissal of statutory auditors (audit committee members), (v) capital reduction, (vi) the issuance of dividends, and (vii) dissolution (Article 16-13 of the Act).
 

A company that has issued Dual-Class Shares is required to (i) report material matters (e.g., changes in said company’s articles of incorporation) to the Ministry of SMEs and Startups, and (ii) keep/disclose the details of its issuance of Dual-Class Shares at its head office and branches. Following the receipt of reports from the relevant companies, the Minister of SMEs and Startups is required to, through the official gazette of the ministry, publish the list of companies that have issued Dual-Class Shares (Article 16-14 of the Act).
 

Given that the upcoming introduction of the Dual-Class Share system through the Amended Act would be the first time an exception to the One-Share-One-Vote Rule is officially recognized in the Korean legal system, it will be intriguing to observe how this new system will be used in practice.

The Dual-Class Share system is expected to have a significant impact on future market practices in the field of M&A and equity investments with respect to venture businesses. For example, it is expected that many venture businesses will actively seek out investments, in light of the fact that the new Dual-Class Share system would provide a means for a founder of a venture company to maintain management control despite undertaking multiple financing rounds. It is also advisable for venture business investors to preemptively analyze the impact that the introduction of the Dual-Class Share system would have on venture businesses that they have already invested in, or plan to invest in.

According to the Amended Act, if a company that has issued Dual-Class Shares becomes listed, any outstanding Dual-Class Shares would be converted into common shares within three years from the date of listing. Accordingly, it appears that, in principle, Dual-Class Shares would not be permitted with respect to listed companies. However, in light of (i) the need for certain companies to ensure that their founder maintains management control through financing rounds, and (ii) the fact that there have been instances in other countries in which the listing of companies with Dual-Class Shares was permitted through legislation, following up on discussions related to the possibility of listed venture businesses being able to issue (following additional amendments to the laws, etc.) Dual-Class Shares in the future will be important.

It is also possible that going forward, if the introduction of the Dual-Class Share system with respect to venture businesses is proven to be effective, such system may be introduced with respect to ordinary non-listed joint stock companies through amendments to relevant laws, including the KCC.

¹   The term “founder” refers to the shareholder with the largest number of shares, equivalent to 30% or more of the total number of issued and outstanding shares at the time of establishment of the venture business, who meets all of the requirements set forth in each subparagraph of Article 16-11 (5) of the Amended Act, including, among others, being a registered director who actually works for the business.

[Korean Version]