Many people experience confusion about the authorized share capital system when establishing or operating a company in Korea.
With continuous amendments to the Commercial Code, outdated and current information have become mixed, making accurate understanding challenging.
Today, let's systematically explore everything from what the authorized share capital system is to practical operational considerations.
What Exactly Is Authorized Share Capital?
The authorized share capital is officially called "the total number of shares a company may issue" in the Commercial Code, and is also known as authorized capital stock.
This concept refers to the maximum limit on the number of shares a company can issue in the future.
It is an absolute requirement that must be included in the articles of incorporation when establishing a company, and simultaneously must be registered in the corporate register.
Simply put, it's a system that pre-establishes an upper limit on shares the company can issue in the future.
For example, if Company A sets its authorized share capital at 100,000 shares, even if the company issues additional shares through capital increases after establishment, it cannot exceed a total of 100,000 shares.
If 80,000 shares have already been issued, only an additional 20,000 shares can be issued in the future.
The Need for Adjusting Authorized Share Capital Through Articles Amendment
Authorized share capital may need adjustment based on the company's growth and funding plans.
Particularly for startups or growth-stage companies where new share issuances frequently occur for investment attraction or business expansion, the articles must first be amended if the authorized share capital is insufficient.
To change the authorized share capital, a special resolution at a shareholders' meeting is required, needing approval from at least two-thirds of the voting rights of attending shareholders.
Additionally, the quorum requirement that shareholders representing at least one-third of total issued shares must attend must be satisfied.
An important point in this process is that both the articles amendment through the shareholders' meeting and the change registration at the Ministry of Justice registry office must be completed.
Registration applications must be made within two weeks from the date of the shareholders' meeting resolution, and failure to comply may result in fines of up to 5 million won.
Understanding the Relationship Between New Share Issuance and Authorized Share Capital
When planning new share issuances, it's essential to verify the margin between the current total issued shares and authorized share capital.
If the total issued shares after new issuance exceeds the authorized share capital, the new share issuance becomes invalid, and related executives may face criminal penalties.
According to Article 629 of the Commercial Code, the crime of exceeding authorized share issuance is punishable by imprisonment of up to 5 years or a fine of up to 15 million won.
While this applies to intentional acts rather than simple negligence, it requires very careful consideration in practice.
Therefore, when planning new share issuances, you must first accurately determine the current total issued shares and verify that adding the planned new shares stays within the authorized share capital range.
If it exceeds the range, the procedure to increase authorized share capital through articles amendment must be conducted before the new share issuance.
Principles and Exceptions Applying to All New Share Issuances
The authorized share capital applies to all types of shares issued by the company.
Not only common shares but also all classes of shares including preferred shares, redeemable shares, and convertible shares are included in this limit.
This principle also applies to all cases where new shares are issued, including paid-in capital increases, stock dividends, bonus issues, and stock conversions from convertible bonds.
However, exceptional situations exist.
In cases of capital reduction through share consolidation or cancellation, or cancellation of treasury shares by board resolution, the authorized share capital doesn't automatically decrease by the number of cancelled shares.
This is because authorized share capital represents the upper limit of issuable shares, not an obligation to issue.
Additionally, in the case of stock splits, since existing shares are divided into multiple shares, the authorized share capital is also adjusted according to the split ratio.
For example, if 1 share is split into 10 shares, the authorized share capital also increases by 10 times.
Practical Considerations and Efficient Processing When Changing Authorized Share Capital
There are practical matters to consider when changing authorized share capital.
First, when determining the change scale, rather than simply increasing only what's immediately needed, it's better to allow sufficient margin considering future business plans.
Frequent articles amendments incur costs and time, so setting an appropriate level reflecting mid-to-long-term plans is more efficient.
In registration practice, new share issuances and authorized share capital changes are often processed simultaneously.
If applied together on the same application form, only the registration license tax for the new share issuance needs to be paid, saving costs.
However, even in this case, the order must be maintained: first resolving the authorized share capital change at the shareholders' meeting, then resolving the new share issuance.
Additionally, for listed companies, the impact of authorized share capital changes on stock prices must be considered.
Substantial increases may raise concerns about dilution of existing shareholders' equity, so clearly explaining the reasons for change and future plans to investors is important.
Recent Commercial Code Amendments and Changes to the Authorized Share Capital System
As of 2025, there have been notable changes related to the authorized share capital system.
Previously, there was a restriction that the total number of shares to be issued at company establishment must exceed one-quarter of the authorized share capital, but this restriction was completely abolished in the 2011 Commercial Code amendment.
Also, the restriction that authorized share capital increases couldn't exceed 4 times the existing total issued shares was removed in the 1995 amendment, so there are currently no special upper limits on determining authorized share capital.
This has enabled companies to set authorized share capital more flexibly according to their business plans.
While recent Commercial Code amendment discussions have focused on expanding directors' duty of loyalty and improving audit committee member election methods, fundamental changes to the authorized share capital system itself are not being discussed, so the current system is expected to be maintained for the time being.
Securing Authorized Share Capital When Issuing Convertible Bonds
A particularly important consideration when companies issue convertible bonds is securing authorized share capital.
While convertible bonds are bonds at issuance, the company must comply when investors request conversion to shares, so there must be sufficient margin in the authorized share capital for the convertible shares.
If assuming all convertible bonds are converted to shares would exceed the authorized share capital, the authorized share capital must be increased before issuing the convertible bonds.
Overlooking this and issuing convertible bonds, then being unable to convert due to insufficient authorized share capital when conversion is requested later, can lead to serious legal disputes.
Similarly, for bonds with warrants, sufficient authorized share capital must be secured considering the shares to be issued when warrants are exercised.
As this directly relates to the company's credibility, thorough review is necessary before issuance.
Processing Methods and Practical Considerations for Share Cancellation
Many people wonder about handling authorized share capital when companies cancel treasury shares or cancel shares through capital reduction.
In conclusion, cancelling shares doesn't automatically reduce the authorized share capital.
Since authorized share capital means the upper limit of shares a company can issue, this upper limit doesn't decrease just because some shares are cancelled.
Therefore, the authorized share capital remains unchanged after share cancellation, creating margin to issue new shares again in the future as needed.
However, if a company intentionally wants to reduce its authorized share capital, it's possible through a separate articles amendment procedure.
This can be interpreted as a signal to shareholders that the company has no plans for large-scale capital increases in the future, potentially expecting positive stock price effects in some cases.
Complete Guide to Documents and Procedures for Authorized Share Capital Change Registration
It's important to accurately prepare the necessary documents when applying for authorized share capital change registration.
Basically, a registration application, shareholders' meeting minutes, articles amendment, and board meeting minutes are required, with additional documents potentially required depending on the company's size and situation.
The shareholders' meeting minutes must clearly state specific resolution content regarding the authorized share capital change and include content confirming that quorum and voting requirements were met.
Additionally, the articles amendment must clearly contrast the existing authorized share capital with the post-change authorized share capital.
Registration processing typically takes 2 to 3 days, though this may vary depending on the company's situation.
After registration completion, it's advisable to obtain a new corporate registry transcript to verify that changes were accurately reflected.
Particularly if documents need to be submitted to other institutions, work schedules should be adjusted considering the registry transcript issuance date.
The authorized share capital system is an important institution directly affecting a company's capital structure and future growth plans.
Please remember that this matter requires careful approach from a strategic company perspective, beyond simply meeting legal requirements.