Terms Regarding Prior Consent Rights and the Principle of Shareholder Equality
Article posted in 2024-11-06 09:34:50 | VEAT
Today, Law firm Veat will explain the ‘prior consent right of shareholders’ that commonly appears in the investment attraction process for startups and venture companies.
Law firm Veat provides criteria for judging whether a shareholder’s prior consent right can be legally permitted, helping companies to proceed with investment attraction stably. Law firm Veat startup lawyer will explain in detail what a prior consent right is.
What is a shareholder’s prior consent right?
‘Prior consent right’ refers to the right to grant a company the right to obtain prior consent for major decision-making matters when entering into a new share subscription contract with a specific shareholder in order to raise funds. Generally, it is used to protect investors, but it is fundamentally not allowed to grant special rights to some shareholders according to the ‘principle of shareholder equality’ that all shareholders should be treated equally. However, such rights may be granted as an exception if certain conditions are met by law.
Criteria for judging the validity of a prior consent right
The Supreme Court judges that a contractual clause granting a prior consent right to a specific shareholder is valid if the following four requirements are met.
1) Payment of essential funds: The investment money paid by the shareholder must be essential funds for the survival and development of the company.
2) Necessity: It must be unavoidable to grant the company’s decision-making consent right to that shareholder for investment attraction.
3) Absence of harm to other shareholders: Even if a prior consent right is granted, other shareholders must not suffer substantial and direct damage or disadvantage.
4) Provision of benefits: It must be a case where providing the opportunity to monitor company management to some shareholders benefits the other shareholders and the company.
Only when all four requirements are met can granting a prior consent right to a specific shareholder be considered consistent with the principle of shareholder equality.
Principle of shareholder equality and permission of exceptions
According to the principle of shareholder equality, the Supreme Court has ruled that shareholders must be treated equally based on the number of shares they own. However, exceptional permission can be granted for differentiated treatment, such as granting a prior consent right to some shareholders, when the above four special circumstances are met.
The principle of shareholder equality is a principle that all shareholders must be treated equally based on the number of shares they have. However, when a company inevitably needs to grant a prior consent right for investment attraction, differential treatment such as this may be allowed as an exception if the four requirements explained above are met.
That is, if the requirement for essential funds for investment attraction is met or if it does not cause substantial harm to other shareholders, differentiated rights can be granted. This is because by providing such conditions, it can provide investors with control over the company’s major decision-making process while also positively affecting the company and other shareholders.
Legal consultation services of Law firm Veat
Law firm Veat provides professional and in-depth consultation to minimize the various legal risks that customers may experience regarding issues related to the shareholder’s prior consent right. In particular, Veat has extensive experience in the IT and startup fields and excels in resolving legal issues that startups may face during the fundraising process.
Law firm Veat has successfully provided advice on numerous investors and startups on new share subscription and shareholder contracts, and provides rapid and accurate legal services tailored to the specific characteristics and goals of its clients.
If you need investment-related legal advice such as shareholder contracts, please contact investment-specialized Law firm Veat.
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Law firm Veat