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Advisory on a Share Subscription Agreement for a Third-Party Allotment: Articles of Incorporation Requirements and Penalty Clause Restructuring

Advisory on a Share Subscription Agreement for a Third-Party Allotment: Articles of Incorporation Requirements and Penalty Clause Restructuring

Client Information
Corporate / Business Entity

 
Case Details

The client, an individual investor, engaged Decent Law Firm to review a share subscription agreement for a third-party allotment capital increase in a Korean startup. Under the agreement, the investor was to acquire newly issued shares while also being appointed as the company's representative director (CEO).

Beyond the terms of the share issuance, the agreement included a minimum-tenure obligation for the representative director role, a vesting-style condition requiring the investor to sell back shares at par value if departing before the vesting period ended, and a penalty clause designed to enforce that obligation.

Two core legal issues emerged during the review: the procedural validity of the third-party allotment, and how the penalty clause should be structured.

Decent's Strategy
Decent Law Firm's corporate advisory team focused the review on the following areas:

▪️Verifying the basis in the articles of incorporation
Confirmed whether the company's articles included the provision required under Article 418(2) of the Korean Commercial Act for third-party share allotments. Where this basis was insufficient, the team advised amending the articles of incorporation before the board resolution authorizing the issuance.

▪️Refining the business-purpose requirement
Advised the client to document a clear link between the stated purpose of the capital raise and the grounds recognized under the articles of incorporation, such as improving the company's financial structure.

▪️Reviewing the nature of the penalty clause
Explained the legal distinction between structuring the penalty as liquidated damages (Article 398 of the Korean Civil Act) versus a penalty for breach (as opposed to compensatory damages), and presented the practical advantages and risks of each approach.

▪️Checking procedural consistency
Advised on the correct sequencing of the board resolution, the amendment of the articles of incorporation, and the notice/public announcement procedures owed to existing shareholders.
Outcome
"Contract Review Report Delivered"

Based on Decent Law Firm's advice, the client's process was restructured so that the amendment of the articles of incorporation would precede the board resolution, and the penalty clause was redesigned after comparing the risks of the liquidated-damages approach against those of a breach-penalty approach.

As a result, the client was able to reduce, in advance, both the risk of the share issuance being challenged as invalid and the risk of a future dispute over the enforceability of the penalty clause.
#third-party share allotment Korea # share subscription agreement review # Korean startup investment contract # liquidated damages vs penalty clause Korea # foreign investor Korea startup CEO

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