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Accommodating Venture Capital Investors’ Contractual Rights in the Korean Corporate Law

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아시아태평양법연구소 (Asia Pacific Law Institute)|2024.02|Journal of Korean Law|제23권 제1호|pp. 1-50|DOI 10.23110/jkl.2024.23.1.001

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키워드

VC investmentStartups in KoreaConsent rightsInvestors’ rightsThe principle of equal treatment of shareholdersPreferred shares

초록

With the remarkable growth of the Korean startup ecosystem, VC investors, one of the key players in startup fundraising, have used contractual protections to mitigate the risks associated with the high risks and uncertainties of startup investments. Although VC investors have typically acquired consent rights for essential decisions regarding startups through contracts, the effects of these contractual rights have been controversial in Korea, mainly due to conflicts with the principle of equal treatment of shareholders. Recently, the Korean Supreme Court clarified some of the uncertainties by allowing for exceptions to the principle when three requirements are met. However, ambiguities remain when it comes to applying the court’s standards to practices because they are context-specific. This article finds the root causes of the complexities concerning investors’ contractual rights from the discrepancies between the Korean corporate law framework and the VC investment schemes from Silicon Valley. In response to the need to diversify funding options for startups, this article proposes that Korean corporate law allows startups to structure flexible governance to accommodate VC investors’ control rights over startups through the articles of incorporation. Alternatively, startups can be authorized to arrange VC investors’ control rights at the board level by requiring the prior consent of VC-nominated directors for the board’s approval on major corporate decisions. The extensive private ordering of startups should be controlled and monitored by ex post review through the enhanced application of fiduciary duties of VC-nominated directors and VC investors as controlling shareholders.

Abstract

With the remarkable growth of the Korean startup ecosystem, VC investors, one of the key players in startup fundraising, have used contractual protections to mitigate the risks associated with the high risks and uncertainties of startup investments. Although VC investors have typically acquired consent rights for essential decisions regarding startups through contracts, the effects of these contractual rights have been controversial in Korea, mainly due to conflicts with the principle of equal treatment of shareholders. Recently, the Korean Supreme Court clarified some of the uncertainties by allowing for exceptions to the principle when three requirements are met. However, ambiguities remain when it comes to applying the court’s standards to practices because they are context-specific. This article finds the root causes of the complexities concerning investors’ contractual rights from the discrepancies between the Korean corporate law framework and the VC investment schemes from Silicon Valley. In response to the need to diversify funding options for startups, this article proposes that Korean corporate law allows startups to structure flexible governance to accommodate VC investors’ control rights over startups through the articles of incorporation. Alternatively, startups can be authorized to arrange VC investors’ control rights at the board level by requiring the prior consent of VC-nominated directors for the board’s approval on major corporate decisions. The extensive private ordering of startups should be controlled and monitored by ex post review through the enhanced application of fiduciary duties of VC-nominated directors and VC investors as controlling shareholders.

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