In this blog post, we examine how the capital-raising capacity of joint-stock companies promotes innovation while simultaneously causing certain problems.
The joint-stock company can be considered the archetype of modern corporations. This is because joint-stock companies possess superior capital-raising capabilities compared to other types of companies; their capital raising is linked to the essential elements of the joint-stock company: capital stock, shares, and limited liability. A joint-stock company’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 joint-stock company, 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 payments constitutes the corporation’s capital stock. Shares within the authorized capital that have not yet been issued may be issued at a later date 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 shares issued by a corporation is equal to the total amount paid in by 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, while bearing limited liability to the company. Limited liability means that shareholders bear a limited obligation to contribute capital to the company, limited to the amount paid for the 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 collateral 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—it 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 private interests 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 adequacy—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 fictitious capital on paper increases, leading to corporate insolvency and making the company vulnerable to external risks. The principle of capital immutability stipulates that capital cannot be arbitrarily altered and that any change to capital must follow legal procedures. Under Korean law, while an increase in capital can be achieved solely through a resolution of the board of directors, a decrease in capital requires strict legal procedures. In addition, the Act on Joint-Stock Companies is treated as a mandatory law that must be strictly adhered to, and measures to minimize the negative effects of joint-stock companies—such as requiring the public announcement of important company matters and changes to the articles of incorporation—are also in place.
Furthermore, this capital-raising capability of joint-stock companies contributes significantly to the growth of startups and venture companies. Since initial capital can be easily raised through the issuance of shares, 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 a competitive edge in the market. In this regard, joint-stock companies play a vital role in the innovation and development of the economy as a whole.
However, the capital-raising capabilities of joint-stock companies also have 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, management control may become diluted, which can hinder management’s ability to make key corporate 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.
