[Implementation of Multiple Voting Rights] ① Reduced Founder Equity Concerns and Expected Activation of VC Investment

Allowing Up to 10 Multiple Voting Rights Per Share for Founders of Unlisted Venture Companies
70.8% of Venture Firms "Plan to Use the System"…VC Industry Sees Positive Impact on Exit and Valuation Calculations

The multiple voting rights system for venture companies, which allows founders to defend their management rights even after receiving large-scale investments, was officially implemented on the 17th. The need for the multiple voting rights system has been raised since the end of 2020 to address the risk that founders’ management rights become unstable when receiving external investments, and the system took its first step about three years after the law was promoted.

The partial amendment to the "Enforcement Decree of the Special Measures for the Promotion of Venture Businesses," which was implemented on this day, mainly allows founders of unlisted venture companies to have up to 10 votes per share. To issue multiple voting rights shares, the founder must currently be managing the company. Additionally, cumulative investments must be at least 10 billion KRW, and the last investment must be at least 5 billion KRW. If the founder’s stake falls below 30% or they lose the status of the largest shareholder due to investment attraction, the conditions for issuing multiple voting rights are met.

To this end, when amending the company’s articles of incorporation or issuing multiple voting rights, approval from at least three-quarters of the issued shares must be obtained. The duration of the multiple voting rights is up to 10 years, after which they are immediately converted to common shares. If the company becomes listed, the remaining period and three years from the listing date, whichever is shorter, will be the new duration. Matters related to directors’ remuneration and liability relief, auditor appointments, dividends, and other shareholder rights or issues related to the founder’s private interests cannot utilize this system. Voting rights on these matters are limited to one vote per share.

Some founders had previously been reluctant to seek external investment, fearing that their management rights might be shaken after giving up part of their shares. Unlike Korea, 17 OECD member countries including the United States, the United Kingdom, and France have already implemented multiple voting rights systems to allow founders to defend management rights even after large-scale investments. According to the Korea Economic Research Institute and the US corporate analysis firm CB Insights, as of the end of May, the country-wise distribution of the top 100 global unicorn companies (unlisted companies with a valuation under 1 trillion KRW and founded within 10 years) was 59 in the US, 12 in China, 7 in the UK, 6 in India, 3 in Germany, 2 in Canada, 2 in Israel, and only 1 in Korea.

The Ministry of SMEs and Startups has been promoting the implementation of the multiple voting rights system since the end of 2020. However, the amendment bill failed to pass the National Assembly for over three years. It faced opposition due to concerns about misuse as a succession tool by chaebol conglomerate heads, conflicts with the principles of commercial law, and potential harm to minority investors. After raising issuance requirements and other adjustments, the amendment finally passed the plenary session of the National Assembly in April. At that time, the Innovative Venture Organizations Council and Korea Startup Forum both welcomed the move. According to a survey released the day before by the Venture Business Association, 70.8% of 291 venture companies responded that they plan to issue multiple voting rights shares in the future. The Ministry estimates that 300 to 400 companies will be able to use the multiple voting rights system.

In the long term, the entire market is expected to grow, and the venture investment industry is also positive. Yoon Geon-su, chairman of the Korea Venture Capital Association (and CEO of DSC Investment), said, "If the founder’s stake is too low, it can be difficult to go public (IPO), but the multiple voting rights system makes the process (such as listing review) easier," adding, "it also makes it much easier for investors to exit." He added, "Founders often tried to raise valuations by worrying about their stake, but investors who intended to invest at a lower valuation turned away. With the implementation of multiple voting rights, founders’ concerns will decrease, and investment will be further activated."

Jung Il-bu, CEO of IMM Investment, Korea’s largest venture capital (VC), also said, "Multiple voting rights are a necessary system for IPOs," explaining that "unlike the US and other countries where companies can list even if the largest shareholder’s stake is not 20-30%, the Korea Exchange requires a stake of about 30% that can be held for at least one year." He added, "In Korea, where companies are managed centered on major shareholders, stake ratio is key. When receiving external investments for growth, there is a risk of losing voting rights, which can prevent IPOs, but this problem will be resolved."