In this blog post, we examine how the capital-raising capacity of joint-stock companies promotes innovation while simultaneously causing certain problems.
The corporation can be considered the archetype of modern business enterprises. This is because corporations possess superior capital-raising capabilities compared to other types of companies; a corporation’s capital raising is linked to its essential elements: capital stock, shares, and limited liability. A corporation’s capital stock serves as the foundation for its establishment and is raised through the issuance of shares. Under the current Commercial Act, there are no restrictions on the minimum capital required to establish a corporation, nor is capital specified as a mandatory item in the articles of incorporation. Instead, the articles of incorporation must specify the total authorized shares to indicate the maximum limit of capital.
The total authorized shares of a corporation refer to the total number of shares the company is authorized to issue; through this figure, one can determine the authorized capital, which represents the maximum limit of the capital stock. When establishing a corporation, only a portion of the total authorized shares need to be issued, but all issued shares must be subscribed. Here, “subscribing for shares” means determining who the investors will be and how many shares each investor intends to acquire. When investors subscribe to the shares issued by the company and pay the corresponding amounts, the total sum of those amounts constitutes the corporation’s capital. Shares within the authorized capital that have not yet been issued may be issued later solely by a resolution of the board of directors; this is to enable the corporation to easily raise capital as needed.
Shares are the units that constitute the capital stock, and a corporation can raise large amounts of capital from many people through the issuance of shares. Shares are freely transferable on the stock market, but a single share with a par value cannot be divided into two or more parts and transferred to another person. When a corporation issues par value shares, the par value of each share must be uniform, and the amount per share must be at least 100 won. The total par value of the shares issued by a corporation is equal to the total amount paid in by the subscribers upon the corporation’s incorporation.
Shareholders, as owners of shares, have rights such as the right to dividends in proportion to the value of the shares they hold, and bear limited liability to the company. Limited liability means that shareholders bear a limited obligation to contribute capital to the company, limited to the subscription price of their shares, and bear no direct liability to the company’s creditors. A shareholder’s limited liability cannot be increased by the articles of incorporation or a resolution of the general meeting of shareholders. For this reason, in a corporation, only the assets currently held by the company serve as the sole security for the company’s creditors.
While a corporation possesses the ability to raise capital due to its essential elements—capital stock, shares, and limited liability—this can also lead to economic harm. In cases where a company has a large amount of capital but the assets it actually holds are unreasonably small, the company’s creditworthiness cannot be properly assessed based on the size of its capital. Furthermore, situations may arise where major shareholders abuse their authority to pursue personal gain without bearing responsibility for the resulting losses to the company or its business partners. Additionally, in crisis situations such as bankruptcy or insolvency, stakeholders including creditors, employees, and consumers may suffer harm.
To prevent such problems, legal regulations governing corporations establish several principles regarding capital. The principle of capital maintenance—also known as the principle of capital integrity—requires that capital be actually contributed to the company and that the company substantially maintain assets corresponding to that capital. If a situation arises where companies repeatedly contribute capital to one another in a circular manner, the actual capital contributed does not increase; instead, only the nominal capital on paper grows, leading to the company’s insolvency and making it vulnerable to external risks. The principle of capital immutability stipulates that capital cannot be altered arbitrarily and that any change to capital must follow legal procedures. Under Korean law, while an increase in capital can be approved solely by a resolution of the board of directors, a decrease in capital requires strict legal procedures. In addition, the law regarding joint-stock companies is treated as mandatory law, requiring strict compliance with statutory provisions, and measures are in place to minimize the negative effects of such companies, such as mandating the public announcement of important corporate matters and changes to the articles of incorporation.
Furthermore, this capital-raising capability of joint-stock companies significantly contributes to the growth of startups and venture companies. Since initial capital can be easily raised through stock issuance, this lowers the barriers to market entry for companies with innovative ideas. For example, technology startups can raise the necessary funds through the stock market to continue research and development, thereby securing competitiveness in the market. In this regard, joint-stock companies play a crucial role in the innovation and development of the economy as a whole.
However, the capital-raising capacity of joint-stock companies also has its drawbacks. Depending on stock market volatility, a company’s value can fluctuate sharply, which can make it difficult for management to formulate long-term strategies. Additionally, as the number of external investors increases through stock issuance, control over the company may become diluted, potentially hindering management’s ability to make key decisions swiftly and consistently. To address these issues, companies sometimes employ strategies such as issuing various types of stock to protect management control.
Finally, transparent management and rigorous internal controls are essential for the successful operation of a corporation. This builds trust among shareholders and investors and enables sustainable growth. The management of a corporation must promote the company’s long-term prosperity by complying with legal regulations and market demands while fulfilling its social responsibilities. This will ultimately have a positive impact not only on the corporation itself but also on the stability and growth of the economy as a whole.
