Will startup investment clauses have effect?_Attorney An Il-un Outstanding Interview ('Delisting' startup lawsuit case)

Recently, a lawsuit involving IPO non-performance has garnered attention in the venture investment industry. Law firm Veat’s An Il-woon Partner Attorney explained the court’s rulings on the case, the perspectives of VCs and startups regarding investment contracts, and the IPO obligation clause viewed by larger investors such as PEFs.

​[What if You Can’t IPO? The Court’s Ruling Was Different.]

“If it’s stipulated in the contract, that clause is valid, but in cases where results like IPOs are difficult to guarantee, the court bases its judgment on the company's efforts.”

“It is difficult to be held responsible simply because the result doesn’s exist.”

An Il-woon Partner Attorney_ Outstanding ‘Are Startup Investment Clauses Effective?’ Interview Excerpt

HB Investments filed a lawsuit for damages because Cockbee failed to fulfill the “Failure to IPO within 6 years will result in compensation of investment plus 20% compound interest” clause in its investment contract and because Cockbee failed to comply with it. However, the district court interpreted the clause not as a ‘result obligation’ but as a ‘means obligation.’ That is, Cockbee didn’t have an obligation to necessarily succeed in an IPO, but only an obligation to make diligent efforts to achieve an IPO. The court ruled that there was no evidence that Cockbee intentionally avoided an IPO or did not make efforts, and that the failure to IPO was due to external factors such as market stagnation.

[VCs and Startups: Different Perspectives on Contract Interpretation]

“As GPs (trustees), VCs have an obligation to recover investment from LPs (trustees), so they must take legal action or exercise due diligence if recovery is difficult.”

An Il-woon Partner Attorney_ Outstanding ‘Are Startup Investment Clauses Effective?’ Interview Excerpt

This case is a typical example that shows the difference in perspective on contract interpretation between startups and venture capital (VC). While VCs expect an IPO within a certain period of time, there is a reality in which startups cannot definitively guarantee the success of an IPO. If the IPO clause is interpreted as a means obligation, it restricts the VC’s investment recovery, and conversely, if it is interpreted as a result obligation, it can impose excessive burden on the startup.

[How Do PEFs and Other Large Investors Approach It?]

“PEFs are regulated as private collective investment schemes under the Capital Markets Act and have a more conservative recovery structure. They specify concrete recovery requirements such as IPO timing, public offering price criteria, and stock sale conditions, and manage risk thoroughly at the contract stage.”

An Il-woon Partner Attorney_ Outstanding ‘Are Startup Investment Clauses Effective?’ Interview Excerpt

Larger investors such as PEFs (private equity funds) and institutional investors prepare more sophisticated and complex contract structures for these IPO clauses. For example, they set call or put options if an IPO fails within a certain period, or secure the possibility of investment recovery in multiple layers through devices such as pre-emptive purchase rights and liquidation preference. It has been confirmed through this case that simple IPO obligation clauses are not sufficient to guarantee effectiveness in the event of a legal dispute.

This case reminds us that when startups and investors conclude contracts, they must consider not only the wording but also legal interpretation and risk. It once again explicitly demonstrated the need for professional legal advice regarding the actual legal effect of clauses included in investment contracts.

If you are interested in an interview with An Il-woon, Partner Attorney of Law firm Veat, please refer to the link below.

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Law firm Veat has experience representing numerous startups and venture capital companies, providing investment contract advice and dispute response services based on a wealth of experience. We provide professional legal services, from designing the structure of investment contracts to legally interpreting IPO-related clauses and devising recovery strategies. Especially, we design sophisticated wording to ensure that clauses related to IPO obligations have not only a declared promise but also practical legal effect, and provide strategic responses that align with the court's interpretation criteria in the event of a dispute. We provide practical advice that minimizes client risk through in-depth analysis of complex investment structures and situations involving multiple stakeholders.

An Il-woon Partner Attorney has experience advising startups, venture capital, and private equity funds on drafting investment contracts, designing equity structures, underwriting new shares, issuing convertible bonds, preferred stock contracts, and other IPO-related matters. He provides in-depth interpretation and practical alternatives for frequently occurring conflicts in startup investment, such as conflicts of interest, compliance with investment conditions, and recovery strategy, and provides comprehensive legal advice from preventing disputes at the contract stage. He demonstrates exceptional ability in establishing negotiation strategies based on mutual understanding between investors and investees, and is a trusted legal partner in the startup ecosystem. Please contact Law firm Veat if you need investment-related legal advice.

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