Investment Agreement Penalties in South Korea
Prior Consent Rights and the Shareholder Equality Principle
Contents
- 1. What is the shareholder equality principle under South Korean law?
- 2. [Company–Investor] When is a prior consent clause valid?
- 3. [Company–Investor] Why does board vs. shareholders-meeting matter?
- 4. [Company–Investor] Is a full investment-refund clause valid?
- 5. [Company–Investor] When have penalties actually been enforced?
- 6. [Interested Party–Investor] Does the principle apply to the CEO personally?
- 7. What does this mean for foreign investors in the IFEZ?
- 8. What should you check in an investment-agreement dispute?
An investor puts capital into a South Korean company and writes in a clause: “Get our prior consent for major management decisions, or pay back the investment plus a penalty.” When a dispute arises, the company often counters that the clause violates the shareholder equality principle and is void.
Between 2022 and 2023, the Supreme Court of Korea settled much of this debate. Two questions recur. First, whether granting only some investors a prior consent right and penalty violates the shareholder equality principle. Second, where the CEO or a controlling shareholder also signs as a party, how that individual’s liability is treated.
This article addresses the same issue along two axes — Company–Investor and Interested Party–Investor — introduces the leading South Korean cases, and closes with practical points for foreign investors in the Incheon Free Economic Zone (IFEZ).
1. What is the shareholder equality principle under South Korean law?
Under South Korean law, the shareholder equality principle means that a shareholder must be treated equally according to the number of shares held; an agreement giving only some shareholders superior rights is void absent special circumstances (Supreme Court of Korea 2021Da293213).
Investors typically sign a share subscription or preferred-share subscription agreement that grants them prior notice and prior consent rights over major management decisions — amending the articles of incorporation, capital increases, change of the representative director, mergers and business transfers, or filing for corporate rehabilitation — and that, on breach, entitles them to early redemption, a put option, a contractual penalty, or damages.
Because such a clause confers a superior right on only some shareholders, it can collide with the shareholder equality principle. That is exactly why companies, when sued for breach, frequently argue the clause is void to escape liability.
2. [Company–Investor] When is a prior consent clause valid?
Not automatically void. The Supreme Court of Korea reversed lower courts that had treated prior consent clauses as void, holding they may be valid where special circumstances justify the differential treatment (2021Da293213, 2023Da210670).
The Court directs that differential treatment is permissible where justified, weighed comprehensively in light of fairness and equity, considering: the content, background, and purpose of the differential treatment; whether it was necessary for the interests of the company and all shareholders; whether it breaches mandatory rules; whether it ultimately infringes other shareholders’ voting rights; the nature and degree of disadvantage to other shareholders and their consent; and the company’s listing status, business purpose, governance, and financial condition.
For a consent right granted in a financing transaction, it may be allowed where (1) the subscription price was capital essential to the company’s survival and growth, (2) granting the consent right was unavoidable to attract the investment, (3) other shareholders suffer no real or direct disadvantage, and (4) it instead gives oversight that benefits the company and other shareholders (2021Da293213).
Case A — Consent right over a capital increase (Supreme Court of Korea 2021Da293213)
An investor subscribed for redeemable convertible preferred shares (about 5.27%) with a prior consent right plus penalty and early-redemption rights, and the company carried out two capital increases without notice or consent. The Court noted that new share issuance and capital increases are, in principle, board-resolution matters that do not directly infringe other shareholders’ voting rights, the controlling shareholder had approved the differential treatment, and the funds aided the company’s liquidity and capital — and reversed the holding that the clause was void (Supreme Court of Korea 2021Da293213, decided July 13, 2023).
Case B — Consent right over a rehabilitation filing (Supreme Court of Korea 2023Da210670)
A public institution as investor subscribed for convertible redeemable preferred shares (about 5%) with a clause requiring written consent before filing for corporate rehabilitation, plus a damages clause. The Court held that a rehabilitation filing is in principle a board-resolution matter not requiring a shareholders’ meeting absent a special provision, so other shareholders’ voting rights were not directly infringed; the damages clause also let the company avoid liability by first explaining and persuading the investor, so it did not absolutely guarantee capital recovery — and reversed the void holding (Supreme Court of Korea 2023Da210670, decided July 13, 2023).
3. [Company–Investor] Why does board vs. shareholders-meeting matter?
The decisive line is whether the consented matter falls within the board’s authority or the shareholders’ meeting. Board-resolution matters do not directly infringe other shareholders’ voting rights; shareholders-meeting matters can.
As Cases A and B show, consent rights over board matters such as a capital increase or a rehabilitation filing survive scrutiny. The problem arises when the consent right reaches shareholders’-meeting matters, because forcing the company to follow a minority shareholder there can override the voting rights of the other shareholders.
Case C — Shareholders-meeting matters and abuse of right (Seoul Central District Court 2023Gadan5041747; 2024Na3403)
A minority-shareholder investor held consent rights over nine items with a penalty of 15% of the investment, and the company resolved amendments to the articles, director election, and a stock-option grant over the investor’s refusal. The appellate court held that amending the articles, electing directors, and granting stock options are shareholders’-meeting matters; giving a minority shareholder a consent right over them and imposing a penalty for breach can compel the company to follow that shareholder and thereby infringe the voting rights of others, so that part of the clause violates the shareholder equality principle and is void (Seoul Central District Court 2025. 2. 13. 2024Na3403; first instance 2023. 12. 14. 2023Gadan5041747).
The court added that where a minority shareholder with such superior rights interferes excessively with the controlling shareholder’s management without reasonable cause, the exercise can be controlled under the principles of good faith and prohibition of abuse of rights. Finding that this investor had exercised the consent right to recover its capital (principal plus a guaranteed yield) rather than to monitor management, the court held the exercise an abuse of right, denied the penalty claim, and dismissed the suit and appeal.
4. [Company–Investor] Is a full investment-refund clause valid?
No. A clause that absolutely guarantees recovery of invested capital — full refund of the principal or a separate guaranteed return — endangers the company’s capital base, violates the shareholder equality principle, and is void even with unanimous shareholder consent (Supreme Court of Korea 2022Da290778).
The Court has consistently held that promising to fully reimburse a subscriber’s payment, or to pay a separate return not given to other shareholders beyond dividends under Article 462 of the Korean Commercial Act, confers a superior right and is void (2021Da293213, 2023Da210670).
Case D — Full refund on failure to register a product (Supreme Court of Korea 2022Da290778)
Investors subscribed for class shares under a clause providing that, if the company failed to complete product and procurement registration of a disinfectant by the deadline, the agreement would be immediately void and the entire investment refunded. The company missed the deadline. The Court held that such a full-refund clause endangers the company’s capital base and harms the company and its shareholders, so it is void under the shareholder equality principle even with unanimous consent of existing shareholders; a money-payment clause that absolutely guarantees capital recovery breaches a mandatory rule and cannot be validated by unanimous consent. The company’s appeal was dismissed (Supreme Court of Korea 2022Da290778, decided July 27, 2023).
So within the same “consent right plus damages” structure, a clause to secure performance and compensate loss (Section 2) and a clause that absolutely guarantees capital recovery (this Section) reach opposite results.
5. [Company–Investor] When have penalties actually been enforced?
Where the prior consent clause is valid, the money payable for its breach is enforceable, and lower courts have in fact awarded penalties and damages — though liquidated damages may be reduced if grossly excessive (Article 398(2) of the Korean Civil Act).
The Supreme Court treats the money payable for breach of a valid consent clause as liquidated damages — valid in principle, but reducible under Article 398(2) of the Korean Civil Act if grossly excessive, and not allowed to function as an absolute guarantee of capital recovery (2021Da293213). Even where a clause is labeled a “penalty,” whether it is unenforceable as contrary to public order and good morals is examined separately.
Case E — Notice breach and a penalty awarded (Seoul Eastern District Court 2022Gadan151874)
An investor who had succeeded to an investor’s position sought a penalty of 20% of the investment after the company carried out a new share issuance, change of lead underwriter, stock-option grant, and a subsidiary setup without notice or consent. The court held that this right arose from the investor’s contractual position rather than mere shareholder status, so it did not violate the shareholder equality principle, and that the notice breach was not trivial — awarding a penalty of KRW 340 million (20% of the KRW 1.7 billion investment) (Seoul Eastern District Court 2022Gadan151874, decided June 28, 2023).
Case F — Written-consent breach and damages awarded (Seoul High Court 2016Na2064211)
An investor held a written prior consent right over the change of representative director, share transfers, and a business transfer; the company proceeded without obtaining it. The court held the damages clause was not an absolute guarantee of capital recovery but liquidated damages on a “difference theory” basis, and so did not violate the shareholder equality principle, the capital-adequacy principle, or Articles 103 and 104 of the Korean Civil Act — ordering payment of the KRW 1.5 billion subscription amount without reducing the liquidated damages (Seoul High Court 2016Na2064211, decided June 29, 2017).
6. [Interested Party–Investor] Does the principle apply to the CEO personally?
No. The shareholder equality principle governs the relationship between a shareholder and the company, so where the CEO or a controlling shareholder also signs as a party, that individual contract is unrelated to the principle and its validity is judged separately from the contract with the company (Supreme Court of Korea 2022Da290778; 2022Da224986).
Investment agreements often add the representative or controlling shareholder as a party who guarantees, or independently assumes, the company’s obligations. The Court held that the shareholder equality principle does not directly apply to the relationship between a shareholder and another shareholder or a director as an individual; under private autonomy a shareholder may contract with such individuals, and the validity of that contract is, absent special circumstances, separate from the contract with the company (Supreme Court of Korea 2022Da224986, decided July 13, 2023).
Case D revisited — Company clause void, individual liability examined separately (Supreme Court of Korea 2022Da290778)
In the full-refund case above, the clause was void as to the company. But the representative-and-controlling shareholder and a research-and-development shareholder had also joined as parties. The Court held that the shareholder equality principle could not be assumed to apply directly to the contract between the investors and those individuals, so the clause’s invalidity as to the company did not automatically make it void as to them; the lower court should have examined whether each individual’s refund obligation was a joint surety obligation accessory to the company’s debt or an independent joint and several obligation — and reversed the part concerning the individuals (Supreme Court of Korea 2022Da290778, decided July 27, 2023).
Practically, even if the corporate clause is void under the shareholder equality principle, liability may still be pursued through the CEO’s or controlling shareholder’s separate joint surety or independent joint-and-several obligation.
7. What does this mean for foreign investors in the IFEZ?
Foreign investors operating in the Incheon Free Economic Zone (IFEZ) — Songdo International Business District, Cheongna International City, and Yeongjong International City — should treat clause design as outcome-determinative under South Korean law.
Atlas Legal is based in Songdo and advises domestic and foreign investors on corporate disputes throughout South Korea. For cross-border investments into IFEZ-based companies, the same Supreme Court of Korea framework applies: structure consent rights around board-resolution matters, avoid any clause that guarantees absolute recovery of capital, characterize breach remedies as liquidated damages rather than an open-ended penalty, and obtain separate joint-surety or joint-and-several obligations from the CEO or controlling shareholder so that protection survives even if the corporate clause is later held void.
8. What should you check in an investment-agreement dispute?
The same consent and penalty wording can be valid or void depending on (1) the nature of the consented matter, (2) the structure of the clause, (3) the purpose of the exercise, and (4) the status of any individual party.
| Checkpoint | Key question |
|---|---|
| Nature of the consented matter | Board-resolution matter (capital increase, etc.) or shareholders’-meeting matter (amending articles, electing directors)? The latter risks being void for infringing voting rights. |
| Structure of the clause | Damages to secure performance and compensate loss, or a structure that absolutely guarantees capital recovery (full refund, separate return)? The latter is void. |
| Penalty vs. liquidated damages | Liquidated damages reducible under Article 398(2) of the Korean Civil Act, or a penalty reviewed for public order and good morals? |
| Purpose of exercise | Management oversight, or capital recovery? The latter may be barred as an abuse of right. |
| Status of an individual party | Did the CEO or controlling shareholder join as joint surety or independent obligor? Liability may survive even if the corporate clause is void. |
Frequently Asked Questions (FAQ)
Q. Are prior consent clauses in South Korean investment agreements automatically void?
A. No. The Supreme Court of Korea held that a prior consent clause may be valid where special circumstances justify the differential treatment, such as where the subscription price was essential to the company, granting the consent right was unavoidable, and other shareholders suffer no real or direct disadvantage (Supreme Court of Korea 2021Da293213, decided July 13, 2023).
Q. Why does it matter whether the consented matter is a board or a shareholders-meeting resolution?
A. If the consent right covers board-resolution matters such as new share issuance or a rehabilitation filing, it does not directly infringe other shareholders’ voting rights and is more likely valid (2021Da293213, 2023Da210670). If it covers shareholders-meeting matters such as amending the articles or electing directors and triggers a penalty, it may infringe other shareholders’ voting rights, and that part has been held void (Seoul Central District Court 2024Na3403).
Q. Is a clause requiring full refund of the investment valid in South Korea?
A. No. A clause that absolutely guarantees recovery of invested capital endangers the company’s capital base and violates the shareholder equality principle, so it is void. Even unanimous consent of existing shareholders cannot validate it because it breaches a mandatory rule (Supreme Court of Korea 2022Da290778, decided July 27, 2023).
Q. How do a contractual penalty and liquidated damages differ under Korean law?
A. Liquidated damages may be reduced by the court under Article 398(2) of the Korean Civil Act if grossly excessive. The Supreme Court treated the money payable for breach of a prior consent clause as liquidated damages, valid in principle but reducible if excessive (2021Da293213). A pure contractual penalty is instead reviewed for violation of public order and good morals.
Q. If the company argues the clause is void, can the CEO or controlling shareholder also escape liability?
A. Not necessarily. The shareholder equality principle applies to the relationship between a shareholder and the company, so even if the clause is void as to the company, it is not automatically void as to a CEO or controlling shareholder who joined as a party. The court must separately examine whether that individual owes a joint surety obligation or an independent joint and several obligation (Supreme Court of Korea 2022Da290778; 2022Da224986).
Q. What should foreign investors in the Incheon Free Economic Zone (IFEZ) keep in mind?
A. Foreign investors active in Songdo International Business District, Cheongna International City, and Yeongjong International City should map each consent item to whether it is a board or shareholders-meeting matter, avoid clauses that guarantee absolute capital recovery, and secure separate joint-surety or joint-and-several obligations from the CEO or controlling shareholder so that liability survives even if the corporate clause is held void under South Korean law.
Prior consent, penalty, and damages clauses in investment agreements can be valid or void depending on the nature of the consented matter, the structure of the clause, the purpose of the exercise, and the status of any individual party. Because the outcome turns on the contract text and the facts, please contact Atlas Legal in Incheon Songdo, South Korea, for advice on a specific matter.
