Court: "Installment Payment of Acquisition Amount... Protection Clauses Not Triggered If Balance Remains" [Invest&Law]

Focus on the Timing of Clause Activation, Not the Violation Itself
Counterclaim Also Dismissed... "Unable to Prove Agreed Payment Date"

In a startup investment contract, an investor who paid the acquisition amount in installments demanded the return of their investment, citing a "violation of investor protection clauses." However, the court ruled that, since the contract defined deal closing as "full payment," it would be difficult to apply the relevant clauses before the closing was completed.

'30 Billion Won Investment' Contract... Investor Points Out 'Violation of Investor Protection Clauses' Before Final Payment

According to the legal community on January 14, the Seoul High Court Civil Division 18-1 (Presiding Judges Wang Jeongok, Park Sunjun, and Jin Hyunmin) recently upheld the first-instance ruling and dismissed a lawsuit filed by a domestic venture capital (VC) investment association against a bio startup, Company A, and its CEO for the return of investment funds.

Previously, the VC investment association had signed a contract in September 2021 to invest a total of 3 billion won in Company A through redeemable convertible preferred shares (RCPS). The investment was to be paid in three installments: the first installment of 1.002 billion won was paid on September 7, 2021, and the second installment of 999 million won was paid on September 23, 2021. The total amount actually paid by the plaintiff was 2.001 billion won.

However, before making the third and final payment, the investment association raised issues regarding the CEO of Company A, including violations of the prohibition on holding concurrent positions and engaging in competing businesses, as well as breaches of prior consent and reporting obligations. The investment association filed a lawsuit demanding the return of the already paid investment of over 2 billion won, along with annual compound interest of 15% as delayed damages for each installment. They also argued that, since procedures such as the change of stockholder registration and capital increase registration had already been completed after the first and second installments, the conditions for deal closing had been met. Conversely, Company A filed a counterclaim, demanding payment of the remaining 999 million won as stipulated in the contract.

"Closing Means Full Payment... Clauses Not Triggered Before Deal Completion"

The first-instance court dismissed the investment association's claim in May of last year. The court examined not the breach of obligations itself, but when those obligations would take effect. Notably, the court focused on the contract's explicit provision that "the deal is completed when the full acquisition amount is deposited in a separate account," and ruled that this date would be considered the deal closing date.

The court also stated, "It is difficult to determine that the deal closing date has arrived solely because procedures such as change of stockholder registration and capital increase registration have been completed." Since the disputed clauses were listed under "matters concerning company management after deal closing" in the contract, the court found it difficult to conclude that Company A was obligated to comply with them before deal closing. The court also rejected the investment association's argument regarding the CEO's concurrent position (working as a doctor), stating, "It is difficult to see that the CEO's employment as a doctor at a hospital diminished the effectiveness of the investment."

The court dismissed not only the investment association's claim for the return of the investment but also Company A's counterclaim. According to the contract, the payment date was set only as "the date agreed upon by the investor and the company," and the court found that there was no evidence to prove when such an agreement was reached.

Both parties, dissatisfied with the outcome, appealed the first-instance ruling, but in December of last year, the appellate court also upheld the previous decision. As no further appeal was filed, the ruling was finalized on January 6.