On July 13, 2023, the Supreme Court reversed and remanded the lower court’s decision (Seoul High Court Decision 2020Na2049059, October 28, 2021) that invalidated provisions on shareholders’ right to consent to major managerial matters of a company under a share subscription agreement and held that the validity of the relevant provisions cannot be recognized for the issuing company as they contravene the principle of shareholder equality. The Supreme Court remanded the case to the lower court for further proceedings under the premise that the validity of provisions on shareholders’ consent right may be recognized depending on relevant factual circumstances (Supreme Court Decision 2021Da293213, July 13, 2023; hereby referred to as the “Decision”).
 
As shown below, recent decisions rendered by the Supreme Court have ruled that an issuing company’s guarantee of (i) a shareholder’s right to recommend an executive officer, or (ii) return on investment to a shareholder through a share subscription agreement or an investment agreement, is invalid, as these acts go against the principle of shareholder equality. Similarly, the abovementioned lower court’s decision had ruled that a shareholder’s right to consent (or object) to major managerial matters was invalid, as it contravened the principle of shareholder equality. This has led to significant confusion and to challenges being raised with regard to the validity of provisions on the rights to monitor and check the management, etc., of a company, which are rights customarily granted to shareholders who invest in new shares of the relevant company under a share subscription agreement.
 

Through the Decision, the aforesaid confusion about the validity of the provisions on shareholders’ right to consent to major managerial matters of a company under a share subscription agreement, has been considerably resolved, and the Supreme Court has also specifically ruled on the meaning and scope of application of the principle of shareholder equality.
 
Therefore, it would be advisable to pay attention to the Decision in the practice of executing investment agreements, such as the issuance of new shares, which frequently raises issues in the management of a joint stock company.
 
The details of the Decision are as follows.
 

At the time of execution of the share subscription agreement in this case (the “Share Subscription Agreement”), the Defendant Company entered into an agreement with the Plaintiff, under which (i) following the Plaintiff’s investment into the Company, the Defendant Company must notify the Plaintiff in advance and obtain prior consent from the Plaintiff on major managerial matters, such as conducting a capital increase with consideration, etc., at a price lower than the Plaintiff’s final per share purchase price or increasing or decreasing the paid-in capital, and in case of any breach of the foregoing, the Defendant Company must grant the Plaintiff the right to claim early redemption of the shares in this case (the “Shares”) as compensatory damages, and pay penalty in addition thereto, and (ii) Defendant C must jointly and severally perform the obligations owed by the Defendant Company to the Plaintiff.

Thereafter, on August 28, 2018, and September 4, 2018, the Defendant Company held the board of directors’ meetings and resolved to issue 160,000 redeemable convertible preferred shares to Company D at KRW 2 billion in total (KRW 12,500 per share), and subsequently allocated 160,000 redeemable convertible preferred shares to Company D on September 6, 2018 (the “First Paid-in Capital Increase”). On November 20, 2018, the Defendant Company resolved to issue 80,000 redeemable convertible preferred shares to Company F, which is a general partner of Company E, at KRW 1 billion in total (KRW 12,500 per share), and subsequently allocated 80,000 redeemable convertible preferred shares to Company F on November 29, 2018 (the “Second Paid-in Capital Increase”). However, the Defendant Company did not notify the Plaintiff of the First or Second Paid-in Capital Increases in advance, nor obtained the Plaintiff’s prior consent. The Plaintiff filed an action in this case against the Defendants, seeking payment of the early redemption price for the Shares and penalty for the breach of the agreement, on the grounds that the Defendant Company conducted both the First and Second Paid-in Capital Increases in violation of its obligation to give prior notice to and obtain prior consent from the Plaintiff, and did not comply with the Plaintiff’s request for correction.
 

The lower court ruled that (i) the Plaintiff’s claim against the Defendant Company is invalid, on the grounds that the agreement on the right to consent to major managerial matters under the Share Subscription Agreement violates the principle of shareholder equality, as such agreement grants the Plaintiff, who is one of the Defendant Company’s shareholders, a superior right not extended to other shareholders, and in substance, absolutely guarantees the Plaintiff’s recovery of the invested capital, and (ii) the degree of the breach of the obligation to give prior notice to the Plaintiff alone is minor, and thus, the Plaintiff cannot claim early redemption or a penalty based on such reasoning.
 

In the Decision, the Supreme Court ruled that the principle of shareholder equality sets forth that a shareholder in a legal relationship with a company should receive equal treatment based on the number of shares he or she holds, and thus, an agreement by a company to grant superior rights or benefits to certain shareholders in violation of the foregoing is invalid barring special circumstances. However, the Supreme Court concluded that even in cases where a company treats certain shareholders differently from other shareholders by granting them superior rights or interests, if such differentiated treatment follows the procedures and methods permitted by law, or if there are any special circumstances that justify such differentiated treatment, such differentiated treatment may be allowed.

Furthermore, the Supreme Court stated that whether differentiated treatment is permissible should be carefully determined in light of the concept of justice and equity by considering the following factors:
 

Based on the above decision, the Supreme Court ruled that when a company enters into a share subscription agreement for financing purposes, and agrees to obtain prior consent as to the company’s decision-making from such contracting party who obtains shareholder status, such an agreement constitutes differentiated treatment of shareholders if it grants a superior right to a certain shareholder only; however such an agreement may be permitted if there are special circumstances that could justify the differentiated treatment, such as the following: (i) the share subscription price paid by the pertinent shareholder was necessary for the survival and development of the company, (ii) granting such shareholder the right to consent to the company’s decision-making was inevitable in order to attract investment, and (iii) such granting of the right to consent would not cause any actual or direct damages or disadvantages to other shareholders, but instead provide certain shareholders with an opportunity to monitor the company’s management activities, thereby benefiting other shareholders and the company.

In addition, the Supreme Court stated that the consent right agreement entered into between the company and a shareholder may be exceptionally permitted when the differentiated treatment derived from an agreement, if an agreement to pay certain amounts (such as compensatory damages for breach of the agreement on the grant of the consent right) was concurrently entered into, and such agreement can be deemed to have been made for the purpose of compensating for, or recovering damages incurred by, the shareholder due to the company’s breach of the obligation to obtain prior consent; such agreement is an agreement on liquidated damages for default between the company and the shareholder, and thus valid barring any special circumstances, and it cannot be readily concluded that guaranteeing the recovery of invested capital to certain shareholders violates the principle of shareholder equality.

As such, the Supreme Court ruled in this case that the lower court’s decision should be reversed and the case should be remanded to the lower court for further proceedings, as the validity of the provisions on the investor’s consent right and penalty for breach thereof under the Share Subscription Agreement may be subject to the application of the above legal principles.

[Korean Version]