[202505] Monthly Veat May issue_ Court Perspectives on the “Obligation to Public Offering” Clause in Investment Contracts

An initial public offering (IPO) serves as a critical exit mechanism for investors in venture investments and is therefore a highly sensitive issue for both investors and companies. Accordingly, investment contracts in venture capital transactions commonly include provisions addressing IPO obligations, albeit with varying degrees of specificity. Recently, Korean courts have rendered notable decisions concerning these IPO-related clauses. This newsletter reviews the Seoul Central District Court decision (Case No. 2022Gahap536943), where the alleged breach of an IPO obligation under an investment agreement was at issue.

1. Background of the Case

The plaintiff, an investment management company, entered into a common stock investment agreement with the defendant through a fund managed by the plaintiff. The key provisions of the agreement were as follows:

Article 8 (Company’s Obligation to Public Offering)
To facilitate the investor’s early exit, the company shall proceed with an IPO as follows:

The company shall list its shares on the KONEX market by December 31, 2019, and subsequently list on KOSDAQ within two years after the KONEX listing. However, if the company proceeds directly to list on KOSDAQ, the obligation shall be deemed fulfilled.

If an acquisition or merger proposal is made by another listed or unlisted company, the company shall consult with the investor and participate in good faith in such discussions.

If the company is deemed to have reached maturity for IPO but delays it without valid reason, the investor may formally request the IPO in writing. The company shall then provide the investor with a written schedule and plan for the IPO.

The company and its major shareholders understand that the investor may sell its shares if an IPO is not completed within two years and shall make their best efforts to fulfill the obligations herein.

Article 15 (Liability of the Company and Major Shareholders)
The investor may claim damages from the company and its major shareholders in the following cases:

False representations or breach of obligations under this agreement that remain unremedied within 60 days of written notice;

Insolvency events such as bankruptcy, composition, or suspension of bank transactions;

Business suspension due to legal changes, judgments, or government orders.

Furthermore, if the company or major shareholders violate Articles 6 through 8, they shall compensate the investor for the greater of:
① the investment amount,
② proceeds from the sale of shares in violation of Articles 6–7, or
③ the amount specified in Paragraph 3, as the minimum damages amount.

After the investment was made, the plaintiff urged the defendant to fulfill its IPO obligation and to present a concrete plan. About eight months later, the plaintiff demanded the return of its investment on the ground of non-performance of the IPO obligation. When the defendant failed to comply, the plaintiff filed a lawsuit seeking repayment of the investment and accrued interest pursuant to Article 15(2).

2. Court’s Decision

The court dismissed the plaintiff’s claim, holding that the company had not violated its IPO obligation for the following reasons:

Article 8(1) used the expression “shall proceed to list (상장하도록 하여야 한다)” for KONEX listing but “shall list (상장하여야 한다)” for KOSDAQ listing. The former was interpreted as an obligation to endeavor to list, rather than a definitive obligation to achieve listing.

Article 8(3) imposed a duty to propose an IPO schedule but did not set a fixed date.

Article 8(4) required the company to “make its best efforts,” which indicates a duty of effort rather than a duty to achieve a result.

Therefore, the defendant’s obligation was characterized as an obligation of means, not an obligation of result, and it could not be concluded that the company failed to perform its IPO obligation.

Additionally, even if the company had breached its IPO obligation, the court held that Article 15(2)—which allowed the investor to claim damages for such breach—was void as contrary to the principle of shareholder equality, since it granted preferential rights or benefits to certain shareholders.

3. Commentary and Analysis

While the court’s conclusion may be acceptable, the reasoning leaves room for discussion. Specifically, interpreting “shall proceed to list” merely as a best-effort clause seems debatable, since the expression “shall” inherently implies a binding obligation. Furthermore, in contrast to Article 8(2), which uses the phrase “shall act in good faith,” Article 8(1) could be understood as imposing a more definite obligation.

Nevertheless, the court placed significant weight on the procedural safeguard under Article 8(3)—which requires a written IPO request and response—as well as the “best efforts” clause in Article 8(4), concluding that the mere failure to complete listing within the stated timeline did not constitute a breach of the IPO obligation.

Similarly, in a more recent decision (Seoul Central District Court, Jan. 17, 2025, Case No. 2023Gahap95494), the court dismissed an investor’s claim for damages under a comparable IPO clause. It reasoned that the clause could not be interpreted as granting the investor an unconditional right to damages merely because the company failed to complete an IPO, but only where the company had willfully delayed or breached key contractual obligations that made listing otherwise feasible.

4. Practical Implications

These decisions suggest that Korean courts tend to interpret IPO obligation clauses in investment agreements strictly and conservatively. However, they do not deny the validity of such clauses outright; rather, they assess their meaning on a case-by-case basis, in accordance with the general principles of contract interpretation established by the Supreme Court (Decision 2019Da226395, Mar. 31, 2022).

Under these principles, when the literal meaning of a clause is ambiguous, courts must interpret it in light of its wording, the purpose and background of the agreement, the parties’ intent, and prevailing commercial practices, to reach a reasonable interpretation consistent with justice and fairness.

Accordingly, both investors and investee companies should exercise great care when negotiating and drafting IPO-related provisions to ensure that the wording accurately reflects their intended level of obligation—whether it be a binding commitment or a best-effort undertaking.

5. VEAT Law Firm’s Insight

Disputes like the present case underscore the importance of precise contract drafting. At VEAT Law Firm, we have extensive experience in investment contracts, mergers and acquisitions, and corporate finance matters. Our capabilities have been recognized globally—Bloomberg’s 2024 M&A League Table ranked VEAT 7th in Korea by number of transactions—demonstrating our trusted expertise in complex investment advisory work.

For tailored legal advice regarding investment agreements, IPO obligations, or dispute prevention strategies, please feel free to contact VEAT Law Firm.

Sincerely,
VEAT Law Firm