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Analysts call for adoption of 'super, multiple voting' for startups
By Park Hyong-ki
The debate on whether the capital market should allow companies here to adopt a dual-class share structure has been rekindled amid a growing number of short-term investors rapidly entering and leaving Korea.
The country has maintained equal voting rights, or the "principle of one share, one vote" so far. This means founders and investors are entitled to exercise their power and control over business matters through votes based on the number of shares they hold.
In mid-October, Financial Services Commission (FSC) Chairman Choi Jong-ku said perhaps, it was time to reconsider this and allow a dual-class voting system for startups so that their founders can "better protect themselves" against demands from short-term investors and hostile takeovers.
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| Financial Services Commission Chairman Choi Jong-ku said, "It is time to reconsider allowing the dual-class share structure that can help startups protect against hostile takeovers." Yonhap |
Under the dual-class share structure, as opposed to the one share, one vote, they can issue and own a different class of shares that gives them more voting rights than those who invest in and hold other classes of shares at the same price.
Most major financial hubs and advanced markets such as New York, Hong Kong, Paris, Toronto and Tokyo allow the dual-class voting system, according to the Korea Economic Research Institute (KERI).
The debate over the issue here has been going on for more than 10 years since the emergence of corporate raiders such as Carl Icahn and activism funds in the stock market.
Civic groups and funds such as ones managed by BlackRock have opposed the principle of "super and multiple voting."
The Citizens' Coalition for Economic Justice said in a statement that chaebol, or family-run conglomerates could "misuse the system" in their favor, and that it is not aligned with the incumbent government's pledge for chaebol reform.
In favor of multiple voting
However, analysts call for the adoption of the dual-class system in the capital market.
"We should move on and stop debating whether this system, mechanism or policy ― whatever you call it ― is good or bad for the market," said Yoo Jung-joo, a researcher at KERI.
"As the capital market here further opens and grows, companies need that kind of protection mechanism so that they can focus on carrying out their long-term vision and not be swayed by demands from investors that seek to exit soon after making a fast buck."
U.S. tech giants such as Google and Facebook are the prime example, Yoo noted.
He added without the dual-class share voting, Google could not have risked investing in Motorola and a long line of startups, and go through the "positive cycle" of failure and success.
"And they tend to perform exceptionally well as they invest in the long term, creating a lot of jobs," Yoo said.
Han In-goo, a professor of finance at the KAIST Business School, agreed.
"The country should adopt it for startups on a par with other major OECD economies," he said.
"The market will be able to see a win-win model between founders and investors."
Han, a former president of the Korean Academy of Business Administration, pointed to the relationship between Alibaba and SoftBank.
SoftBank, founded by Masayoshi Son, holds a 29 percent stake in Alibaba, which is a lot more than Alibaba Executive Chairman Jack Ma's 7 percent. But Ma holding a different class of shares has greater power and control over his e-commerce giant listed on the New York Stock Exchange.
Alibaba's $25 billion initial public offering (IPO) in 2014 made it a "win-win" for both companies, Han noted.
Alibaba chose to go public in New York as Hong Kong then did not allow the listing of dual-class shares. This prompted the Hong Kong Stock Exchange to pursue regulatory reforms and allow it to do so in April 2018. It was then able to attract Xiaomi, a Chinese tech giant, to go public in July.
Not foolproof
Analysts say there is "big misunderstanding" about the dual-class share structure.
It cannot be adopted by companies or chaebol that are already listed on the stock market.
This only applies to startups or newcomers, which can operate under that structure when they are a privately-held company and on their way to going public, Han said.
But once they choose that path and launch an IPO, for instance in New York, there is no turning back.
And this share structure is "not foolproof," said Shin Jhin-young, a professor of finance at Yonsei University Business School.
"There is a misunderstanding as to how this works. The protection mechanism is not for listed chaebol as the public has feared over the years," Shin said.
"The negative side is startups could find it hard to attract investors, or sell their companies when they face difficulties in management and finance."
The dual-class voting system would be a barrier for financial investors and strategic investors who seek to acquire targeted companies, analysts say.
