[Korean Law Insights] Key Provisions in Investment Agreements

[Published on August 5, 2025 edition of the "Korean Law Insights" column in the Korea Daily’s Economic Expert Section]

• Validity depends on specific content

• Understand case law and similar examples to prevent disputes

When investing in a Korean company, an investment agreement and, if necessary, a shareholders’ agreement are executed. A recent cross-border M&A transaction I handled was completed by coordinating the interests of more than ten investors and existing shareholders.

Meanwhile, the Korean Supreme Court recently issued a decision on a provision that is often included in M&A agreements. Based on this, I have summarized Supreme Court cases regarding key provisions below.

First is a case on investment repayment provisions. An investment repayment provision refers to a clause in which an investor who has acquired new shares can recover the investment from the company or other shareholders if certain conditions are met. Similarly, there are cases where a profit guarantee provision is included. Regarding this, the Supreme Court ruled that if a company guarantees investment returns or absolutely guarantees the recovery of investment, it is invalid as it violates the principle of shareholder equality. However, it is valid among shareholders where the principle of shareholder equality does not apply.

Therefore, such investment repayment provisions are preferably included not in investment agreements between the company and the investor, but in shareholders’ agreements with existing shareholders.

Next is a Supreme Court case regarding consent rights over major business matters of the company. According to Supreme Court precedent, as a rule, agreements in which a company grants superior rights or benefits to certain shareholders are invalid unless there are special circumstances.

For example, in share subscription agreements, investment agreements, and shareholders’ agreements, if the company guarantees director nomination rights only to certain investors and shareholders, it is invalid, and the shareholders’ consent or veto rights over major business matters are also invalid. However, the Supreme Court recently took a slightly more flexible position, stating that although such provisions are generally invalid, they may be allowed in cases with special circumstances. Specifically, if attracting investment is unavoidable, and the provision does not cause substantial or direct harm or disadvantage to other shareholders, and rather benefits the company and shareholders by providing an opportunity for oversight, then the Court recognizes the existence of special circumstances in which the provision may be valid.

Lastly, there is a case regarding voting agreements, which are often included in shareholders’ agreements. This refers to an agreement among shareholders in advance on how to exercise voting rights at a shareholders' meeting, such as for the appointment of executives. The Supreme Court holds that such agreements are generally valid.

However, since such an agreement cannot control the validity of the company’s internal decision-making itself, even if a resolution at a shareholders’ meeting is made in violation of the agreement, the resolution itself is not invalid or subject to cancellation, according to the Supreme Court. Instead, the Supreme Court stated that a party may file a lawsuit against the violating party or other shareholders to demand that voting rights be exercised in accordance with the agreement, and that it is also possible to claim an indirect enforcement through penalty payments until the voting rights are exercised accordingly.

Originally, M&A transactions were led in practice through negotiation, but case law is beginning to accumulate as more disputes are resolved through the courts. As more cases that were previously resolved through negotiation are now going straight to litigation, precedents on key issues have continued to accumulate. As a result, it has become increasingly important to understand relevant case law and similar examples to prevent disputes regarding investment agreements and shareholders’ agreements.

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Jin Hee Lee/K-Law Consulting Korean Attorney

[Reference link in original Korean] 

https://www.koreadaily.com/article/20250805180245481