[Opinion] Why Did Coupang Head East?

Seong Hee-hwal, Professor at Inha University School of Law

Director Baek Yong-gyun made a film titled “Why Did Dalma Go East?” (1989), a third-person perspective question inspired by the Chinese Zen Buddhist koan “Why Did Dalma Come from the West?” This film, the first Korean movie to win a grand prize at an international film festival, is reportedly undergoing digital restoration, and I would definitely like to watch it again if it is re-released.

As news spread that Coupang would be listed on the New York Stock Exchange, debates have been raging about the reason Coupang went east. Since the listing entity, Coupang’s holding company, is originally an American company, it is understandable that in the U.S., people might wonder why it came from Korea. However, since Koreans consider Coupang a Korean company, they naturally wonder why it went to the U.S. It seems only natural, both from a business base and public perception, for Coupang to list in Korea, and it could have done so, so why did Coupang deliberately go east? Let us examine three frequently mentioned factors in media analyses to guess the reasons.

First, it is analyzed that the risk of doing business in Korea is high. This argument is based on the fact that Coupang’s securities registration statement (Form S-1) describes Korea’s business environment negatively as a ‘risk factor.’ Coupang lists a total of 16 risk factors, and the eighth, unique risks in Korea, mentions regulatory risks such as the need for prior government approval under the Foreign Exchange Transactions Act when trading securities or remitting dividends in emergencies, the risk that executives may face criminal penalties due to actions by Korean affiliates’ employees, the possibility that transactions with affiliates may be subject to the Fair Trade Act, and other related risks including tax and labor laws.

While it is true that corporate regulations in Korea have recently been strengthened, these risks in the registration statement are close to universal risks surrounding companies and are not particularly unique to Korea. On the other hand, there are cases where risks such as litigation systems are greater in the U.S., and even if Coupang’s holding company is a U.S. listed corporation, there is a risk that Korean laws may apply through international jurisdiction or extraterritorial application. Securities registration statements are characterized by harsh legal sanctions if there are false or misleading descriptions, so they are filled only with negative and pessimistic outlooks without any positive or optimistic forecasts. Therefore, the analysis that the Korean corporate environment is especially risky based solely on the registration statement’s description is not sufficiently persuasive.

Second, it is analyzed that listing on the Korea Exchange was difficult because Coupang is a deficit company. Coupang has been in the red since its establishment. The cumulative deficit over the past three years is in the 5 trillion won range, and the future outlook is not optimistic, as stated in the registration statement. Nevertheless, some argue that Coupang went to the U.S. because it is easier to list there with a high valuation. However, the Korea Exchange has also adopted flexible listing standards modeled after the U.S. since 2017, called the ‘Tesla requirement,’ allowing deficit companies to list if their market capitalization is large. Therefore, a company like Coupang could have been listed on the Korea Exchange despite the huge deficit, although it might have been controversial. Of course, it would have been difficult to receive as high a valuation as in the U.S., but this point is also not easily accepted.

Third, it is analyzed that the reason is the dual-class voting rights. After listing, founder Kim Beom-seok, chairman of the board and CEO, will hold only 10.2% of shares but 76.7% of voting rights because the Class B shares held solely by Chairman Kim have 29 times the voting rights of ordinary shares. Since voting rights are the core of control in a joint-stock company, dual-class voting rights are one of the most important investment decision factors for shareholders and investors and are listed at the very front of the U.S. securities registration statement.

Dual-class voting rights are not recognized in Korea, but recently the government submitted a bill to the National Assembly to allow dual-class voting rights only to founders of venture companies under the ‘Special Measures for the Promotion of Venture Businesses’ amendment. According to this amendment, dual-class voting rights are limited to a maximum of 10 times that of common shares, have a sunset period of 10 years, a survival period of 3 years after listing, and are non-transferable and non-inheritable. Coupang’s Chairman Kim Beom-seok’s dual-class voting rights have none of these restrictions. There is no sunset period or survival period after listing, and even inheritance and transfer are possible within a limited scope.

Considering these points, while there may be several reasons why Coupang went east, it is presumed that dual-class voting rights were the key factor.

Seong Hee-hwal, Professor, Inha University School of Law