As mentioned in our previous newsletter (Link), the Supreme Court reversed and remanded a lower court’s decision (Seoul High Court Decision 2020Na2049059, October 28, 2021), which invalidated provisions on shareholders’ right to consent to major management decisions of a company under a share subscription agreement on the basis that the relevant provisions contravened the principle of shareholder equality. The Supreme Court instead ruled that the validity of shareholders’ consent right provisions may be recognized depending on relevant factual circumstances (Supreme Court Decision 2021Da293213, July 13, 2023).
 
Approximately two weeks thereafter, on July 27, 2023, the Supreme Court issued a ruling on the validity of a provision guaranteeing the recovery of invested capital (hereby referred to as the “Investment Recovery Provision”) in relation to an investment agreement executed between a company and certain shareholders via issuance of new shares. In the decision, the Supreme Court ruled that the Investment Recovery Provision was invalid in relation to the company and the new shareholders, finding that the Investment Recovery Provision guaranteed the absolute recovery of the invested capital and thereby conferred upon said shareholders a right that is superior and not extended to other shareholders in violation of the principle of shareholder equality, whereas the same provision could be valid between such new shareholders and the other shareholders as the principle of shareholder equality did not directly apply between the shareholders (Supreme Court Decision 2022Da290778, July 27, 2023; hereby referred to as the “Subject Decision”).
 
Prior to the two Supreme Court decisions mentioned above, the Supreme Court had issued a ruling invalidating provisions that allowed an issuer company to grant a shareholder the right to recommend an executive officer or to recover the invested capital in share subscription agreements or investment agreements, finding that such provisions violated the principle of shareholder equality (Supreme Court Decision 2018Da9920/9937, September 13, 2018; Supreme Court Decision 2018Da236241, August 13, 2020). This has led to significant confusion and debates over the validity of provisions granting the right to participate in management or guaranteeing the absolute recovery of the invested capital to the subscribers of new shares, which are provisions customarily included in share subscription agreements.
 
Through the two aforementioned Supreme Court decisions rendered in July 2023, it has become clearer that the provisions granting shareholders’ right to consent to major management decisions in share subscription agreements may be recognized as valid despite the principle of shareholder equality, while the provisions guaranteeing the recovery of invested capital remain less likely to be recognized as valid. We believe that these rulings have greatly reduced confusion over the validity of provisions regarding shareholders’ rights in share subscription agreements and the extent to which the principle of shareholder equality applies, and increased predictability.
 
The Supreme Court’s conservative stance toward recognizing the provisions guaranteeing the recovery of invested capital, as opposed to shareholders’ right to consent, is believed to stem from the fact that such provisions are subject to the principle to prohibit return of share subscription payments or the principle of capital adequacy, in addition to the principle of shareholder equality, and that an exercise of such provisions would result in a reduction of capital without actual capital reduction procedures, posing risks of unforeseeable losses to creditors.
 
As such, relevant parties should keep the above decisions in mind when entering into share subscription agreements or investment agreements.
 
The details of the Subject Decision are as outlined below.
 

In acquiring certain class shares issued by the defendant company, the plaintiffs entered into an agreement that contained the Investment Recovery Provision, stipulating that a share subscription agreement would be rendered invalid and the defendant company, together with the other defendants (namely, the defendant company’s representative and individuals in charge of research and development), would guarantee full recovery of the invested capital to the plaintiffs in the event that the defendant company failed to register a product under research and development with a national institute within a specific timeframe. The defendant company failed to meet the timeframe referred to above, and the plaintiffs demanded the return of their investments based on the Investment Recovery Provision.
 

[Korean Version]