"Responsibility Remains Despite Share Sale and Position Change"... Why the Court Upheld Joint Liability for Venture CEO [Invest&Law]

Joint Responsibility Clause in Contract Remains Valid Despite Changes in Position
Court: "Continued Involvement in Management... Must Pay 1 Billion Won and Delayed Interest"

A court ruling has been finalized, confirming that a venture company CEO remains liable for repayment obligations under a "joint responsibility" clause in a past convertible bond (CB) investment contract, even after selling his shares and experiencing a change in management position. The court recognized the validity of the clause agreed upon at the time of the contract, determining that changes in position or share sales alone do not exempt one from responsibility.

30 Billion Won Convertible Bond Investment... CEO Explicitly Stated as 'Jointly Responsible' in Contract

According to the legal community on September 30, the 16th Civil Division of the Seoul High Court (Presiding Judge Kim Inkyum) recently dismissed the appeal of former CEO Jeong in a CB repayment claim lawsuit filed by a domestic venture capital (VC) firm, representing an investment association, against company A's former CEO Jeong. The court upheld the first-instance ruling, which ordered Jeong to pay 1 billion won and delayed interest to the investment association.

Previously, in 2018, the investment association acquired 3 billion won worth of CBs issued by company A. The contract included a clause stating, "If company A fails to fulfill its repayment obligations, Jeong, as a stakeholder, will be jointly liable for repayment with the company." It also stipulated that the bondholder, the investment association, could request early redemption (put option) starting two years after issuance.

In 2020, Jeong sold his shares in company A to company B, losing his status as the largest shareholder. In July 2022, the investment association requested early CB redemption from company A, and last year, citing "company A's failure to fulfill its repayment obligations," demanded 1 billion won from Jeong based on the joint responsibility clause.

During the lawsuit, Jeong argued that "he had already resigned as CEO in 2021 and sold his shares, severing any interest in the company," and thus had no contractual responsibility. However, the court rejected this argument, citing the timing of the put option agreement, Jeong's status within the company at the time of the claim, and the content of the contract clause.

Court: "No Succession Procedure or Exemption Agreement"... Change of Circumstances Claim Also Rejected

Earlier this year, the first-instance court recognized Jeong's repayment responsibility. In particular, the put option agreement was included in the contract while Jeong was serving as CEO and the largest shareholder, and at the time of the actual early redemption claim in 2022, Jeong was still deeply involved in management as an inside director and shareholder. The absence of a restriction in the contract limiting responsibility to only the largest shareholder was also cited as a reason.

The appellate court agreed with this assessment. In the appeal, Jeong argued that his "stakeholder" status had been succeeded by company B, but the court found that "no succession confirmation document specified in the contract was submitted, nor did the investment association consent to the succession or exemption." Simply selling shares does not automatically transfer stakeholder status.

The court further stated, "Even if the investment association procedurally consented to the share sale and sent a certified notice to company B, this was merely a measure to recover the repayment, and cannot be regarded as an expression of intent to exempt Jeong from responsibility or to refrain from making a claim." This ruling was finalized last month without a separate appeal to the Supreme Court.