[Invest&Law] Shinhan Capital Wins Second Trial in 'Put Option Dispute' Against Urbanbase CEO

Shinhan Capital Wins Both Trials... "Entitled to Over 1.2 Billion Won"
"Balance of Mutual Interests and Risks... Contract Clause Deemed Reasonable"

Shinhan Capital has won the second trial in its "put option (stock purchase right)" dispute with the founder of the construction platform startup Urbanbase. The case centered on a contract clause stating that "if the company enters rehabilitation proceedings, the CEO, as a stakeholder, must repay the principal and interest." Both the first and second trials ruled that "regardless of personal fault, the CEO must bear the responsibility simply due to the commencement of rehabilitation proceedings."

According to the legal community on December 31, the Seoul High Court's Civil Division 16 (Presiding Judge Kim Inkyum) dismissed the appeal filed by former Urbanbase CEO Ha Jinwoo in the second trial of the claim for agreed payment brought by Shinhan Capital. The court also ordered Ha to bear the litigation costs.

'Clause on Repayment of Investment Principal and Interest During Corporate Rehabilitation' at Issue

Previously, in November 2017, Shinhan Capital entered into an investment agreement to acquire 1,586 redeemable convertible preferred shares (RCPS) of Urbanbase, worth approximately 499.8 million won. RCPS are preferred shares with both a repayment right (bond-like characteristics) and a conversion right to common shares (equity characteristics), allowing investors to either convert them into common shares or recover the principal under certain conditions.

At the time, the contract included a clause stating that "if procedures such as dissolution, liquidation, bankruptcy, rehabilitation, or workout are initiated for Urbanbase, the investor may exercise the stock purchase right against the stakeholder (CEO)." The contract also stipulated that, upon exercising the put option, additional interest calculated at an annual compound rate of 15% must be paid.

However, at the end of 2023, Urbanbase filed for rehabilitation proceedings with the Seoul Bankruptcy Court and received a decision to commence rehabilitation. Subsequently, Shinhan Capital exercised its put option against former CEO Ha based on the contract, but after being refused, filed this lawsuit demanding a total of over 1.2 billion won, including both the purchase price and interest.

During the trial, Ha's side argued that the contract clause itself was unfair. They claimed, "There was no reason to enter into an investment agreement that included a clause assigning responsibility for a sound business failure," and "the put option should not be recognized solely because rehabilitation proceedings have commenced, especially when there is no personal fault." They further argued, "Shinhan Capital is, in effect, guaranteed a substantial investment return including both principal and interest," and that "this contradicts the very nature of venture investment agreements."

Court: "Although Disadvantageous to Defendant... Risk Mitigation Should Have Been Included in the Contract"

The first trial ruled in favor of Shinhan Capital. The court held that if the founder signed as a "stakeholder" even without a separate joint guarantee clause, the full investment amount must be repaid according to the contract. The first-instance court noted, "Granting the stock purchase right solely upon commencement of rehabilitation proceedings may be disadvantageous to the defendant," but emphasized, "If the defendant intended to mitigate such risks, the relevant provisions should have been included in the contract."

The court also rejected the argument of an "unfair contract." The court stated, "'High risk, high return' is merely a typical characteristic of venture investment," and "this alone cannot invalidate a specific agreement." The court further pointed out, "The defendant gained the opportunity for substantial profit if the business succeeded through attracting investment, while the investor was guaranteed recovery under certain circumstances in return," and "this reflects a balance of mutual interests and risks between the parties, and is therefore reasonable."

Although former CEO Ha appealed the first-instance ruling, the second trial also upheld the original decision, stating, "The claim for the stock purchase price under the contract is merely an exercise of the right to recover the investment based on the agreement between the parties."