In counseling and consulting, we saw many companies enter into agreements with investors to purchase stocks from investors under specific conditions.
Even if many of these agreements are not valid due to violation of the Korean commercial act, there are many cases in which both companies and investors proceed with the agreement without knowing it.
(The contents below are different from the redemption stocks under the Commercial Act (Article 345 of the Commercial Act). The redemption stocks will be explained in the next article.)
The premise of the matter
- X is an investor.
- CEO Y of company A came to know X, and X decided to invest in company A, seeing the future of company A as good.
- Y proposed that company A issue new shares to X, making X a 10% equity holder in company A, with the stock price being 1 billion won.
- X liked Y's proposal, but he had no intention of investing in company A for a long time, and wanted to find 1 billion won in 5 years and use it elsewhere.
- Recognizing X's will, Y proposed to X, "If Y wants, Company A will buy back Y's shares for 2 billion won in 5 years." An investment agreement was concluded between Company A and X.
- Five years later, X believed that remaining as a shareholder of company A was ineffective and filed a claim against company A, saying, "acquire my stock for 2 billion won according to the investment agreement."
- Company A did not have enough funds, but to keep its promise, it tried to raise funds by taking out loans.
- Company A tried to acquire shares from X and pay 2 billion won to X, but other shareholders are against it.
It is not valid to make an agreement with an investor to "acquire the investor's stock in the future"
When company A buys back shares from company Y, it is an acquisition of treasury shares.
In order for a private stock limited company to acquire treasury shares, 1) it must be acquired within the scope of profit available for dividend, 2) in principle, there must be a resolution at the general shareholders' meeting, and 3) it must equally acquire stocks from shareholders in proportion to their shares (Commercial Act 341).
When Y received investment from X, he did not inform that there was an investment agreement as above, and he did not know that the acquisition of the treasury shares requires a resolution at the general shareholders' meeting.
In addition, the investment agreement between company A and X gives preferential treatment only to X, unlike other shareholders, which goes against the principle of equality of shareholders.
Supreme Court Decision 2018Da9920, 9937 Decided September 13, 2018
[1] Meaning of the principle of the equality of shareholders, and validity of an agreement by a company granting superior right or interest only to certain shareholders through breaching said principle (invalid in principle)
[2] In a case where: (a) Company A and its management and the Employee Stock Ownership Association (hereinafter “ESOA”), for the purpose of procuring operating capital, concluded with Party A a share purchase agreement detailing that “Party A shall purchase at par value partial shares owned by EOSA members issued by Company A and pay said purchase amount to Company A; extend a certain loan amount to Company A; and have the right to recommend one (1) executive officer of Company A”; (b) Company A and Party A subsequently entered into an agreement detailing that “Company A shall pay an agreed monthly amount to Party A and Party B (Party A’s wife) in consideration for Party A’s non-exercise of the foregoing right of executive officer recommendation,” and said agreed amount was accordingly paid on a monthly basis to Party A et al.; and (c) Company A suspended payment and sought a claim for restitution of unjust enrichment by asserting that the aforesaid payment agreement was invalid as it contravened the principle of the equality of shareholders, the Court affirming that Company A’s continuous payment of the agreed amount is deemed as granting Party A et al. a superior right that was not extended to Company A’s other shareholders, thereby contradicting the principle of the equality of shareholders, grounded on the basis that Party A et al. lost status as Company A’s creditor and only remained its shareholder upon having received payment in consideration from Company A for funding operating capital
What measures should be taken to protect investors?
K&P Law Firm provides advice on investment in various ways, such as convertible bonds and redeemable convertible preferred stocks.
However, if an investor or an invested company wants to receive investment in the same way as in the case above, we propose a method for the CEO of a company to purchase stocks from an investor to protect the investor.
In the case above, Y, not company A shall ensure to acquire the shares of X.
It is true that these agreements put a considerable burden on Y. And the agreements described above are not common either.
However, if Y wants to guarantee the principal amount of X's investment, this is the way to go.
Related laws
| Commercial Act Article 341 (Acquisition of Treasury Shares) (1) A company may acquire treasury shares under its own name and on its own account, in accordance with the following methods: Provided, That the total acquisition price shall not exceed the amount obtained by subtracting the amounts prescribed in the subparagraphs of Article 462 (1) from the net assets value on the balance sheet for the immediately preceding period for the settlement of accounts: 1. In cases of shares having market values on the stock exchange, the method of acquisition at the exchange; 2. The methods of acquisition under equal conditions in proportion to the number of shares owned by each shareholder as determined by Presidential Decree, except for the different classes of shares concerning the redemption of shares under Article 345 (1). (2) A company seeking to acquire its own shares in accordance with paragraph (1) shall determine the following matters in advance by a resolution of a general meeting of shareholders: Provided, That in cases where the articles of incorporation provide that distribution of profits can be made with a resolution of the board of directors, such resolution of the board of directors may substitute for that of the general meeting of shareholders: 1. The class and number of the shares that can be acquired; 2. Limit on the total acquisition price; 3. The period of not exceeding one year for acquisition of its own shares. (3) No company shall acquire shares pursuant to paragraph (1) in cases where it is likely that the net assets value on the balance sheet for the period for the settlement of accounts in the relevant business year is less than the sum of the amounts prescribed in the subparagraphs of Article 462 (1). (4) In cases where a company acquires shares pursuant to paragraph (1) although the net assets value on the balance sheet for the period for the settlement of accounts in the relevant business year is less than the sum of the amounts prescribed in the subparagraphs of Article 462 (1), directors are jointly and severally liable to compensate the company for the relevant insufficient amount: Provided, That this shall not apply where the directors determined that there was no likelihood mentioned in paragraph (3) and proved that he/she had not neglected his/her duty of care in making such decision. ENFORCEMENT DECREE OF THE COMMERCIAL ACT Article 9 (Methods for Acquisition of Own Shares) (1) "Methods determined by Presidential Decree" in Article 341 (1) 2 of the Act means either of the following: 1. Method by which a company gives a notice or public announcement to all shareholders to acquire shares; 2. Method by which a public tender offer is made under Articles 133 through 146 of the Financial Investment Services and Capital Markets Act. (2) A company that acquires its own shares shall keep at its main office the statement of acquisition of treasury stock which includes the details of acquisition for six months. In such cases, shareholders and creditors may inspect the statement of acquisition of treasury stock at any time and may request the company to issue certified transcripts or copies of such statement after paying fees determined by the company. Article 10 (Guidelines for Acquisition of Own Shares) A company shall comply with the following guidelines, when it intends to acquire its own shares in accordance with subparagraph 1 of Article 9: 1. When the company intends to acquire its own shares in accordance with a resolution adopted under Article 341 (2) of the Act, it shall determine the following matters by a resolution of its board of directors. In such cases, the conditions for acquisition of shares shall be uniformly determined each time the board of directors adopts a resolution: (a) Purpose of acquiring its own shares; (b) Classes and the number of shares to be acquired; (c) Details of the money or other assets to be delivered in exchange for each share (excluding its treasury stock; hereafter referred to as "money or other assets" in this Article) and the method of calculation thereof; (d) Total amount of the money or other assets to be delivered in exchange for the stock; (e) The period during which a share transfer application may be filed, which shall not be less than 20 days nor more than 60 days (hereafter referred to as "filing period for a transfer application" in this Article); (f) The time to deliver money or other assets in exchange for a transfer, which shall not be later than one month from the end of the filing date of a transfer application, and other conditions for acquisition of shares; 2. The company shall notify each shareholder of its financial standing, the current holdings of its own shares, and the information specified in subparagraph 1, in writing or by electronic document, subject to each shareholder's consent thereto, by not later than two weeks before the commencement of the filing period for a transfer application: Provided, That if the company has issued unregistered stock certificates, it shall give public announcement by not later than three weeks before the filing period for a transfer application; 3. A shareholder who intends to transfer his or her shares to the company shall file a share transfer application in writing, stating the class and number of shares he or she intends to transfer, by not later than the last day of the filing period for a transfer application; 4. Where a shareholder files a share transfer application with the company under subparagraph 3, the last day of the filing period for a transfer application shall be the date of formation of the agreement on stock acquisition between the company and the shareholder; and the number of shares calculated by multiplying the number of shares that the shareholder offers to sell in the application filed under subparagraph 3 by the figure obtained by dividing the number of shares that the company intends to acquire under subparagraph 1 (b) by the total number of shares offered to sell in the application (a fraction, if any, shall be cut off) shall be the scope of the agreement formed, if the total number of shares that the shareholder offers to sell in the application exceeds the total number of shares that the company intends to acquire. Commercial Act Article 462 (Dividends) (1) A company may pay dividends within the limit of the value of net assets stated on the balance sheets after deducting the following: 1. The amount of capital; 2. The total amount of the capital reserve and the earned surplus reserve accumulated until the pertinent period for the settlement of accounts of the company; 3. The amount to be accumulated for the pertinent period for the settlement of accounts of the company; 4. Unrealized profits determined by Presidential Decree. (2) Each payment of dividends shall be determined by resolution of a general meeting of shareholders: Provided, That the same shall be determined by resolution of the board of directors in cases where the board of directors approves financial statements pursuant to Article 449-2 (1). (3) In cases where dividends have been paid in violation of paragraph (1), any creditor of the company may claim a refund of such dividends to the company. (4) The provisions of Article 186 shall apply mutatis mutandis to a lawsuit relating to a claim under paragraph (3). |
K&P Law Firm
Attorney Taejin Kim
Incheon Songdo, South Korea
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