This blog post examines how the capital raising power of joint-stock companies promotes innovation while simultaneously causing certain problems.
The joint-stock company can be considered the archetype of modern corporate entities. This is because joint-stock companies possess superior capital raising capabilities compared to other corporate forms, with their capital raising tied to the essential elements of share capital, stock, and limited liability. The share capital of a joint-stock company forms the foundation for its establishment and is raised through the issuance of shares. Under the current Commercial Act, there is no minimum capital requirement for establishing a stock corporation, nor is capital specified as a mandatory item in the articles of incorporation. Instead, the articles must state the authorized share capital, indicating the maximum limit of the capital.
The authorized share capital of a corporation refers to the total number of shares the company may issue. This authorized share capital indicates the maximum possible amount of capital, known as the authorized capital. When establishing a corporation, only a portion of the authorized share capital needs to be issued, but all issued shares must be subscribed. Here, subscribing to shares means determining who the investors are and how many shares each investor intends to subscribe to. When investors subscribe to the shares issued by the company and pay the corresponding amount, the total sum of these payments becomes the corporation’s capital. Shares within the authorized capital that have not yet been issued can be issued later solely by a resolution of the board of directors. This allows the corporation to easily raise capital as needed.
Shares are the units constituting capital stock, enabling a corporation to raise substantial funds from multiple individuals through share issuance. Shares are freely transferable on the stock market, but a single share of par value stock cannot be divided into two or more parts and transferred to others. When a corporation issues par value shares displaying a face value, the par value must be uniform, and the value per share must be at least 100 won. The total par value of shares issued by a corporation equals the total amount contributed by shareholders upon the corporation’s establishment when they subscribed to and paid for the shares.
Shareholders, as owners of shares, hold rights such as profit distribution proportional to the value of their shares while bearing limited liability toward the company. Limited liability means shareholders bear a limited obligation to contribute capital to the company, capped at the subscription price of their shares, and bear no direct liability whatsoever to the company’s creditors. A shareholder’s limited liability cannot be increased by the articles of incorporation or a resolution of the shareholders’ meeting. Consequently, in a corporation, only the assets currently held by the company serve as the sole security for the company’s creditors.
Corporations possess capital-raising capabilities due to their essential elements of capital stock, shares, and limited liability, but they can also cause economic harm. Even if a company has a large capital stock, if the actual assets it holds are unreasonably small, the size of the capital stock alone cannot accurately gauge the company’s creditworthiness. Furthermore, major shareholders may 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 like creditors, employees, and consumers may suffer harm.
To prevent such problems, legal regulations governing corporations establish several principles concerning capital. The principle of capital maintenance requires that capital be actually contributed to the company and that the company substantially maintain assets corresponding to that capital; this is also known as the principle of capital integrity. If multiple companies repeatedly take turns contributing capital, the actual invested capital does not increase, but only the nominal capital on paper grows. This leads to the company becoming insolvent and vulnerable to external risks. The principle of capital immutability states that capital cannot be arbitrarily altered; any change to the capital must follow legal procedures. While Korean law allows capital increases through a simple board resolution, capital reductions require strict legal procedures. Furthermore, measures are implemented to minimize the drawbacks of joint-stock companies, such as mandating that laws governing them be strictly enforced as stipulated, and requiring public announcements of significant company matters and amendments to the articles of incorporation.
Additionally, this capital-raising capability of joint-stock companies significantly contributes to the growth of startups and venture companies. Because initial capital can be easily raised through stock issuance, it lowers the barrier for companies with innovative ideas to enter the market. For example, technology startups can secure necessary funds through the stock market to continue research and development, thereby gaining competitiveness in the market. In this regard, stock corporations play a crucial role in the innovation and development of the overall economy.
However, the capital-raising ability of stock corporations also has drawbacks. The company’s value can fluctuate sharply depending on stock market volatility, which can make it difficult for management to formulate long-term strategies. Furthermore, as external investors increase through stock issuance, management control can become diluted, potentially hindering management’s ability to execute key company decisions swiftly and consistently. To address these issues, companies sometimes employ strategies to protect management control by issuing various types of stock.
Finally, transparent management and rigorous internal controls are essential for the successful operation of a corporation. This fosters trust among shareholders and investors, enabling sustainable growth. Corporate management must comply with legal regulations and market demands while fulfilling social responsibilities to promote the company’s long-term prosperity. This ultimately positively impacts not only the corporation itself but also the stability and growth of the entire economy.
