[Startup×Law] The main points of the multiple voting system finally introduced in Korea
The introduction of a multiple voting system for venture companies is imminent. On April 27, 2023, the plenary session of the National Assembly passed a bill to amend the Act on Special Measures for the Promotion of Venture Businesses (the “Venture Business Act”) to grant multiple voting rights to the founders of venture businesses. The amendments to the Venture Business Act to introduce multiple voting rights will be submitted to the government and implemented after deliberation by the Cabinet and promulgation.
This article will summarize how the multiple voting system has been finalized and is about to be implemented, focusing on the key points.
The Multiple Voting System in a Nutshell
While shareholders are entitled to one vote for each share they own at the general meeting of shareholders, the highest governing body of a corporation, the multiple voting rights that can be granted to a venture founder’s shareholding can range from two to ten votes per share.
Even if a founder owns only 25% of the shares, if he is granted multiple voting rights, he or she will be able to exercise more than 50% of the voting rights at the shareholders’ meeting.
Multiple Voting Rights Can Only Be Granted to the “Founder”
The multiple voting system is designed to protect the management rights of the “founder”. Multiple voting rights are not available to founders of all companies, but only to founders of “unlisted ventures”. And even if you are a founder of an “unlisted venture”, you must have been a “promoter” of the venture from its inception and continue to hold at least 30% of the shares until you receive the final investment.
Multiple voting rights may also be granted if a venture is formed and operated with co-founders rather than a sole founder. For example, if co-founders A, B, and C each own 25% of the venture from inception, multiple voting rights can be granted to each of A, B, and C as long as their combined ownership exceeds 50%.
Conditions for issuing shares with multiple voting rights.
This is possible when a venture raises a large amount of funding, and the “founders” are diluted to 30% or less or are no longer the majority shareholder. For example, if a Series C round of funding results in excessive dilution of the founders’ stake to 30% or less, or if a large investment firm becomes the largest shareholder.
Approval of at least 3/4 of the outstanding shares at a shareholders’ meeting required.
You’re probably familiar with the idea of ordinary and special resolutions at a shareholders’ meeting, but if you want to introduce multiple voting rights into your bylaws and issue shares with multiple voting rights, you’ll need a stricter quorum and number of shares in favor than is required for ordinary and special resolutions. A whopping three-quarters of the outstanding shares must be in favor.
You can pay with founder-owned common stock instead of money.
This is where many people get confused. When multiple voting is introduced to a venture company, the founder’s common shares are not immediately converted to multiple voting shares. Multiple voting shares must be allocated and issued to the founder through a rights issue process, and the founder must pay the share price accordingly. However, the amendments to the Venture Business Act provide an exception in cases where the value of the venture company’s equity is highly valued. Considering that the obligation to pay the share premium would be excessively burdensome for the founder, the founder may pay the share premium for the issuance of multiple voting shares using the ordinary shares he or she already owns. As for the practical procedure, it remains to be seen how the details of the subordinate laws, including the Enforcement Decree and the Implementing Rules, will be organized in the future.
Not applicable to matters relating to the private interests of the founder.
Founders may not exercise multiple voting rights for all general meeting resolutions. For matters such as executive compensation and reduction of executive liability, founders can only exercise one vote per share, even if they hold multiple voting shares.
How long can multiple voting rights be exercised?
The maximum period of validity of multiple voting shares recognized by the amendment to the Venture Business Act is 10 years, after which the shares are converted into ordinary shares on the following day. If the company grows and goes public, will the multiple voting shares be converted into common shares? No. If the company goes public, there is a grace period until the third anniversary of the listing date.
As mentioned above, we have reviewed the main points regarding the introduction of the multiple voting system and the issuance of shares with multiple voting rights. Of course, we will have to wait and see how the subordinate laws, such as the Enforcement Decree and the Implementing Rules, are formulated in the future to determine the specific practical procedures. We hope that the purpose and objectives of the introduction of the multiple voting system can be properly realized.
Dong-Myung Lee Attorney at Choi & Lee Law Firm