Startup CEOs should know about legal safety nets, detailed clauses in shareholder agreements.

This year, conflicts between HYBE’s leading producer and representative Min Hee-jin and HYBE were reported in the media. At the center of this was a shareholder agreement.

The shareholder agreement between Representative Min Hee-jin and HYBE contained important provisions. It is known to include clauses restricting the disposal of shares held by the representative, an obligation to refrain from engaging in competing businesses (non-compete), and the right to sell shares under certain conditions (put option).

So, what meaning do these clauses hold for the company, founder, and investors? Let’s examine how stock disposal restrictions, non-compete, and put option clauses, which are the core of a shareholder agreement, are designed and utilized, and what role these clauses play in corporate growth and risk management.

What is a Shareholder’s Agreement (SHA)?

A shareholder agreement is a contract entered into by a company’s shareholders to define their rights and obligations. Shareholder agreements are typically entered into between joint founders, the company’s shareholders, or investors and related parties. They are most often entered into when a company receives investment, involving the investor, the company, and the company’s representative director. A shareholder agreement may include various items such as stock disposal restrictions, non-compete, put options, director nomination rights, consent rights for management matters, audit rights, and more.

Stock Disposal Restriction: A Safety Net to Prevent Departure of Key Personnel

• Why is this provision necessary?

The stock disposal restriction provision prevents the company’s specific shareholders (particularly the representative director, who is the core of the business) from disposing of their shares in the company, leaving the company, or losing management control without the consent of other shareholders or investors. Companies in a growth phase often have a structure where a few key personnel, such as the representative director or co-founder, hold a significant portion of the company's shares, aligning their interests with the company’s. Therefore, if a key shareholder sells their shares, it can increase the possibility that the value of shares held by other investors will decrease.

For example, the stock disposal restriction provision may also include provisions such as granting other shareholders or investors the right of first refusal (Right of First Refusal) and tag-along rights.

When a stock disposal restriction clause is included in a shareholder agreement, it is important to clearly understand what stock disposal conditions one is constrained by or imposes on others, depending on one’s position (whether one is a representative director managing the company or an investor), and to sufficiently discuss the necessity with all parties involved to prevent disputes.

Non-Compete: A Safety Net to Prevent Leakage of Technology and Business Know-How

• Why is non-compete necessary?

(1) This clause prohibits managers, such as the representative director, from working for or acquiring shares in competing companies, and (2) it includes a clause requiring a certain period of service. From the investor’s perspective, they expect the representative director to continuously operate the company and increase its corporate value, so they want them to promise a non-compete.

The non-compete clause aims to prevent technological leaks or managerial losses that the existing company may suffer by restricting the representative director or other key personnel from joining a competitor or establishing a similar business.

Particularly when non-compete and service obligations are included, the representative director must continue to work for the existing company for a certain period of time and cannot be involved in a similar industry even after leaving. Therefore, when entering into a shareholder agreement, it is important to carefully review the potential impact of these obligations on the founder and specify the specific conditions.

Put Option: A Safety Net for Investor Protection

Finally, a put option allows any shareholder to request that the company or another shareholder (e.g., the representative director) obligatorily purchase their shares if certain conditions are met, such as the company or representative director violating the shareholder agreement. From the investor’s perspective, it is often set to protect their investment and ensure the faithful performance of the investment contract.

In a shareholder agreement, a put option is not a penalty for the representative director but can be used as a tool to reward performance.

A put option is a mandatory clause that requires shares to be purchased by another shareholder, involving a substantial financial consideration for stock transactions and obligatorily fulfilling obligations related to the disposition of shares, and is evaluated as one of the strongest obligation clauses in the contract. However, if the purchase price, conditions, or purchase procedures are not clearly defined in the shareholder agreement containing this provision, the possibility of misunderstandings or disputes between the parties is very high.

In particular, a put option requires consideration of various factors such as corporate valuation at the time of exercise, the purchasing entity’s ability to raise funds, and procedures for fulfilling contractual obligations, so it is essential to discuss these fully and clearly define them before entering into the contract.

Therefore, when entering into a shareholder agreement, it is important to carefully review the details of the put option, such as the exercise conditions, purchase price, and procedures, with a legal professional to prevent unnecessary disputes and protect the interests of each stakeholder.

We have examined what stock disposal restrictions, service obligations, and put options are and how they affect the rights and obligations of the parties. In addition to the clauses examined above, a shareholder agreement may also include various investor rights, company and representative director obligations, and more. All parties entering into a shareholder agreement should bear in mind that the rights and obligations of the shareholder agreement will continue to exist even after the company has grown and developed, and should carefully draft the shareholder agreement.

Law firm Veat has grown alongside hundreds of companies, from startups to unicorns and decacorns, and has provided various legal advice, including drafting and reviewing shareholder agreements. Based on Veat's rich experience and practical expertise, we will resolve the various legal issues you may face and pave the way for stable growth.

If you need legal advice regarding a shareholder agreement, please contact Law firm Veat.

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Law firm Veat