[According to the Law of Flexibility] 70. Three Questions You Must Ask About Shareholder Agreements

*This content was translated by AI.

The timing when entrepreneurs who founded a company through partnership or received external investment and divided equity seek legal counsel is often similar.

For the first few years, nothing happens. Problems erupt all at once when one person wants to leave the company, someone tries to sell their shares, or opinions diverge on the direction of management. What they then pull out is a shareholder agreement hastily signed several years ago.

In unlisted SMEs (small and medium-sized enterprises), a shareholder agreement is not merely a formality. Unlike listed companies where shares can be offered to the market, in a structure where this is impossible, the departure of one shareholder or the entry of an unfamiliar third party immediately leads to changes in corporate governance.

Therefore, this agreement must simultaneously perform three functions: controlling the inflow and outflow of equity, establishing rules for operating corporate governance, and preparing remedial measures in case disputes arise.

The first question to ask is "Does this clause bind the company, or only the parties?" Even if a shareholder agreement stipulates how voting rights are exercised or how the board of directors operates, it does not necessarily carry the same binding force over the company itself.

Courts have held that, based on the principle of separation between ownership and management and the fiduciary duty owed by directors to the company, clauses mandating that a specific shareholder must exercise voting rights according to another party's will cannot be enforced without limit. This aligns with academic criticism that so-called "proxy clauses," which instruct directors to execute business in a specific direction, conflict with mandatory provisions under corporate law and are difficult to recognize as valid. The fact that a clause is written in the contract and the fact that it actually functions are entirely different matters.

The second question is "When is the trigger for this clause pulled?" Taking the right of first refusal as an example, a Seoul High Court ruling interpreted that this right can only be exercised when the other party has actually expressed an intention to sell.

A Seoul Central District Court ruling also determined that a right of first refusal clause operates only when the other party genuinely intends to sell. It is difficult to accept requests for share delivery from someone who wants to buy before the seller has any intention to sell. If the method of notifying the intent to sell, the criteria for price determination, and whether conditions match those presented by third parties are not specifically written in the contract, the right exists only on paper.

The third question is "Is a path for recovery left open?" While transfer restrictions are necessary devices in closed companies like banks, if taken to an extreme, they may be deemed invalid. In the Seoul Western District Court 2024 Ga Dan 254977 ruling, the court directly questioned whether an agreement that imposed a five-year prohibition on disposal and required unanimous consent—making recovery practically impossible—completely negated the possibility of shareholders recovering their invested capital.

In contrast, the aforementioned Seoul Central District Court ruling held that a call option clause combined with breach-of-contract circumstances such as resignation cannot be deemed invalid if it serves a reasonable purpose, such as ensuring stable company operations and incentivizing long-term employment, and does not completely negate the freedom to dispose of shares. Ultimately, the crossroads lie not in "whether it is bound," but in "whether conditions for release are also specified."

One additional point: breach of contract does not automatically constitute a tort. The aforementioned Seoul High Court ruling stated that establishing a breach of contract does not immediately make it a tort; rather, it must reach the level where it is evaluated as illegal under general behavioral norms. If one wishes to practically suppress violations, it is more realistic to design internal sanctions such as predetermined damages or activation of rights of first refusal within the contract in advance.

A shareholder agreement is not evidence used to fight for victory or defeat after a dispute erupts; it is a tool designed to filter out disputes at the planning stage. This is why procedures are needed to review the validity and operating conditions of each clause before signing, and let us remember that this principle applies regardless of the company's size.

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*This content was translated by AI.