Many companies, in the process of consulting and receiving advice have been found to make contracts with investors that include provisions for the company to repurchase the investor's shares under certain conditions.
A significant number of these contracts are in violation of the Commercial Act and are considered void. However, both companies and investors often proceed with such contracts, unaware of their invalidity.
(Please note that the content below is different from the redemption of shares under Article 345 of the Commercial Act. Redemption of shares will be explained in a separate post.)
Case Premise:
- X is a wealthy investor.
- Y, the CEO of Company A, got to know X and decided to invest in Company A, as they had a positive outlook on the company's future.
- Y suggested that Company A issue new shares to X, making X a 10% shareholder, with a share price of 1 billion KRW.
- X liked Y's proposal but did not intend to invest in Company A long-term and wanted to recover the 1 billion KRW after 5 years to use elsewhere.
- Recognizing X's intentions, Y proposed to X, "If you wish, Company A will repurchase your shares for 2 billion KRW after 5 years."
- An investment contract with this content was drafted between Company A and X.
- After 5 years, X claimed that remaining as a shareholder of Company A had no practical effect and demanded Company A to repurchase their shares for 2 billion KRW, as stated in the investment contract.
- Company A, despite not having sufficient funds, tried to secure the necessary funds by taking out loans to fulfill their promise.
- Company A attempted to repurchase X's shares and pay X 2 billion KRW, but other shareholders opposed this move.
The contract stating "We will repurchase the investor's shares in the future." is invalid
Company A's repurchase of shares from Y is considered acquiring its own shares.
For a non-listed joint-stock company to acquire its own shares, it must:
1) acquire them within the scope of distributable profits,
2) in principle, have a resolution from the general shareholders' meeting, and
3) acquire shares equally from shareholders according to their respective stakes (Article 341 of the Commercial Act).
Y did not inform about the existence of such an investment contract while receiving investments from X and was unaware that a resolution from the general shareholders' meeting was required for the company to acquire its own shares.
Moreover, the investment contract between Company A and X violates the principle of shareholder equality, as it grants preferential treatment only to X compared to other shareholders.
The Supreme Court's stance:
The Supreme Court ruled, "If a company agrees with the person acquiring new shares and obtaining shareholder status to fully protect the money paid as new share subscription price or to pay separate earnings not distributed to other shareholders under the provisions of Article 462 of the Commercial Act, it is considered invalid as it violates the principle of shareholder equality by granting an exclusive right not recognized by other shareholders." (Supreme Court ruling on August 13, 2020, Case No. 2018다236241)
Measures to protect investors:
We advise on various investment methods, such as convertible bonds and redeemable convertible preferred shares.
However, if investors or companies wish to receive investments in a manner similar to the case mentioned above, K&P suggests that the CEO of the company buy shares from the investor to protect them, and in practice, many investment contracts are drafted with such provisions.
In the case mentioned above, it is proposed that Y, rather than Company A, acquires X's shares.
It is true that such a contract imposes a significant burden on Y, and it is not a common type of contract.
However, if Y wants to guarantee X's investment principal, this method is recommended.
| 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. Act On Implementation Of Commercial Act Article 9 (Incorporation of Stock Company) Where the promoters have subscribed for the total number of shares or have commenced to offer such shares for subscription prior to the enforcement of the Commercial Act, the previous Act shall apply as to such incorporation even after the enforcement of the Commercial Act: Provided, That where registration of incorporation is effected after the enforcement of the Commercial Act, the same shall not apply to such matters registered. Article 10 (Articles of Incorporation of Stock Company) (1) In regard to a stock company incorporated prior to the enforcement of the Commercial Act, the total number of shares issued prior to the enforcement of the Commercial Act, and in regard to a stock company incorporated in accordance with the previous Acts after the enforcement of the Commercial Act, the number of shares which are issued at the time of incorporation shall be deemed to have been fixed in articles of incorporation as the total number of shares authorized to be issued. (2) The particulars determined in the articles of incorporation in accordance with Article 168 (1) 2 of the former Commercial Act shall be deemed to have been determined in accordance with Article 344 (2) of the Commercial Act. Article 11 (Registration of Stock Company) 조문단위 인쇄 (1) A stock company incorporated prior to the enforcement of the Commercial Act shall register the particulars, which are to be registered newly in accordance with the Commercial Act, within six months from the enforcement date of the Commercial Act. (2) If any other registration is effected before the registration mentioned in the preceding paragraph the registration mentioned in the preceding paragraph shall be effected simultaneously with such other registration. (3) If any alteration of the particulars which are to be registered newly in accordance with paragraph (1) has occurred before such registration under paragraph (1) is effected, registration shall be effected, without delay, as to the particulars which have not been altered. (4) If the provisions mentioned in the preceding three paragraphs have been violated, the representative directors of the company shall be liable to pay a fine for negligence of not more than 50,000 Won. |
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