Court: "Contract guaranteeing absolute capital recovery violates shareholder equality principle"
"Shareholder-company contract invalid, private contracts are separate issues"
Even if all shareholders agree to a contract guaranteeing investment funds to a specific shareholder, the Supreme Court has ruled that it is invalid for violating the 'principle of shareholder equality.' The principle of shareholder equality is a principle under the Commercial Act that shareholders should, in principle, be treated equally in legal relationships as shareholders according to the number of shares they hold.
The Supreme Court's 2nd Division (Presiding Justice Cheon Dae-yeop) announced on the 13th that it partially overturned and remanded the lower court ruling in a lawsuit filed by investor A and two others against Company B, seeking the return of investment funds.
In June 2019, A and others signed a contract to acquire approximately 166,000 shares of Company B, a biotechnology company, for 250 million KRW. The CEO of Company B, who was an interested party, participated in the contract, and C, an existing shareholder and head of research and development, also agreed to jointly guarantee the obligations under the investment contract.
The contract included a clause stipulating that if Company B failed to complete product registration with the Korea Disease Control and Prevention Agency by October 2019 and procurement registration with the Public Procurement Service by December 2019 for the avian influenza disinfectant under development, the entire investment amount would be refunded. However, Company B failed to register the product with the Disease Control and Prevention Agency and the Public Procurement Service within the deadline, and A and others filed a lawsuit demanding the return of the investment funds according to the agreement.
The first trial court ruled that since all shareholders agreed to the investment contract, there was no violation of the principle of shareholder equality, and ordered Company B to return the investment funds to A and the other shareholders. However, the second trial court found the agreement invalid for violating the principle of shareholder equality. The second trial court stated, "It granted an absolute right to recover investment funds to the plaintiffs, which was not recognized for other shareholders, and even if all existing shareholders of Company B agreed, it is invalid."
The Supreme Court also ruled that Company B is not responsible for returning the investment funds to A and others. However, whether A and others can demand the return of investment funds from the CEO of Company B and the head of research and development is a separate issue, and the case was sent back for retrial to examine the connection to the obligation to return the investment funds.
The court stated, "A monetary payment agreement that absolutely guarantees capital recovery to certain shareholders is invalid even if all shareholders agree. However, the contract concluded between A and others and the CEO of Company B and the development manager C is not directly subject to the principle of shareholder equality, so the obligation to return investment funds and other matters must be examined and judged."
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