Attorney Taejin Kim successfully represented the former majority shareholder in a South Korean non-compete injunction proceeding arising from a share transfer, securing dismissal of the application. Drawing on the Supreme Court of Korea’s landmark ruling in 98Da45546 (1999) and a decision of the Incheon District Court, this post explains the critical legal distinction between a share transfer and a business transfer — and why getting the contract right at signing is the only reliable protection.
(The matter described below is based on an actual case and has been adapted to protect client confidentiality.)
Case Overview
Mr. A paid KRW 700 million to acquire a 70% stake in a web design company and became its CEO. Six months after the former majority shareholder sold his shares and departed, a directly competing web design firm opened one kilometer away. Mr. A applied for a non-compete injunction on the basis that the former shareholder owed a statutory non-compete obligation under Article 41 of the Korean Commercial Act. The court dismissed the application. No separate non-compete clause had been included in the share purchase agreement.
Share Transfer vs. Business Transfer: The Decisive Legal Distinction
Article 41 of the Korean Commercial Act imposes a non-compete obligation solely on a business transferor — it does not apply to the transferor of shares. In a business transfer, the company itself is the transferor, conveying its operating assets, employees, customer relationships, and goodwill as a going concern. In a share transfer, the shareholder — not the company — is the transferor, and the company’s operations remain entirely unchanged. The Supreme Court of Korea confirmed this distinction: “A share transfer is a transfer of the equity interest in the company that operates the business, not a transfer of the business itself; accordingly, it is the individual shareholder, not the company, who is the transferor.” (Supreme Court of Korea, April 23, 1999, 98Da45546; August 25, 1995, 95Da20904.) A share transfer also requires no special shareholders’ resolution, unlike a business transfer governed by Article 374(1) of the Commercial Act.
Scope of the Statutory Non-Compete Under Article 41
Where a genuine business transfer has occurred, Article 41(1) of the Korean Commercial Act prohibits the transferor — absent a contrary agreement — from engaging in the same type of business for ten years in the same special city, metropolitan city, city, or county, and in any adjacent municipality. By contractual agreement, the parties may extend this period to a maximum of twenty years within the same geographic scope (Article 41(2)). A business transferred in Incheon Metropolitan City, for example, would trigger a ten-year restriction covering Bucheon, Gimpo, Siheung, and Seoul as adjacent municipalities. This automatic statutory protection does not arise from a share transfer under any circumstances.
Non-Compete Injunction Dismissed — Incheon District Court
The Incheon District Court dismissed the non-compete injunction application, holding that a share transferor owes no non-compete obligation under Article 41, and that no contractual non-compete had been established on the evidence. The court further noted that a non-compete injunction constitutes a satisfactory, non-reversible provisional disposition — one that produces the practical equivalent of a final judgment — and therefore requires strong substantiation of both the right to be protected and the urgency of interim relief. The applicant was also ordered to bear the litigation costs. Attorney Taejin Kim represented the former shareholder throughout these proceedings.
Five Essential Elements of a Non-Compete Clause in a Share Purchase Agreement
The only reliable way to secure non-compete protection in a share acquisition in South Korea is to include an explicit clause in the share purchase agreement. An enforceable clause must specify: (1) a defined period — typically three to five years from closing; (2) a clearly identified geographic area, such as Incheon Metropolitan City and its adjacent municipalities; (3) the full scope of prohibited activities, covering not only direct operation of a competing business but also equity ownership, officer or director roles, and advisory engagement; (4) a liquidated damages or penalty provision, noting that Korean courts may reduce a grossly disproportionate amount under Article 398(2) of the Civil Act (Supreme Court, 98Da45546, 1999); and (5) express reference to the right to seek injunctive relief in addition to damages.
Legal Expertise at Atlas Legal
Atlas Legal’s team of corporate advisory, disputes, and white-collar defense attorneys has advised on numerous share purchase agreements and M&A transactions in South Korea, ensuring that non-compete, confidentiality, and key-employee retention provisions are properly structured and enforceable. Confirming the precise legal nature of a transaction — and drafting the agreement accordingly — is the most cost-effective way to protect a substantial acquisition investment.