[Stock Options] 5 Things to Watch Out For When Granting/Exercising Stock Purchase Options

Stock options (stock purchase options, stock option) explained? 
A stock option (stock purchase option, stock option) is a system in which company executives are granted the right, at the time determined at the time of granting the stock option, to purchase the company’s own shares or newly issued shares at a price decided at the time of granting the stock option.

When executives are granted stock options, they have an economic incentive to work hard for the company. Because the value of the company’s shares increases, the value of the shares they will receive also increases. Ultimately, the company can use stock options to secure the long-term commitment of key personnel while providing them with future growth potential. In particular, in smaller companies, because the company’s performance is closely linked to the overall performance of the company, stock options can be a powerful motivator.

Regarding non-listed companies and venture companies, please note the 5 key points to consider when granting or exercising stock options as described above!

1. The number of stock options and the recipients are determined by law.

Korean stock option laws specifically detail the requirements for stock options. Stock options are essentially a system for creating future shareholders. Because they can be misused, they can undermine the interests of existing shareholders and destabilize the company’s corporate governance. According to the current Commercial Act, the company must first meet the following requirements under the Commercial Act before issuing stock options.

① The company must specify in its articles of association that it can issue stock options.
② The stock options should only be granted to executives of the company who have contributed to or can contribute to the company’s establishment, management, and technological innovation.
③ When the granted stock options are exercised, the newly issued shares or own shares issued by the company should not exceed 10% of the company’s total issued shares.
④ The exercise price, which determines the economic benefits gained from exercising stock options, should be the higher of the actual value of the shares at the time the stock options were granted and the face value.

2. Venture companies can issue more stock options and grant them to a wider range of people.

If the company qualifies for the Special Act on Venture Companies (hereinafter referred to as the “Venture Companies Act”), it can use stock options more flexibly.

Because companies need to use stock options to manage their business, the Venture Companies Act stipulates that companies can issue up to 50% of the total issued shares as stock options, and can also grant stock options to non-employee technical and management experts.

In particular, if the company meets certain requirements stipulated in the Venture Companies Act, it can grant stock options at a strike price lower than the market price at the time of granting the stock options. This has allowed companies to offer employees greater economic compensation through stock options, which has, in turn, increased the effectiveness of stock options.

3. Generally, the stock option issuance must be resolved by a shareholder meeting.

Just because the number of stock options and the recipients have been determined in accordance with legal requirements and the decision of the shareholder meeting, the company cannot immediately issue stock options. Before issuing stock options, the company must pass a special resolution at a shareholder meeting to determine the recipients of the stock options, the method of granting them, the exercise price, and the exercise period.

A special resolution at a shareholder meeting refers to a resolution in which at least 3/2 of the shareholders present at the shareholder meeting vote in favor of the proposal, and at least 1/3 of the total issued shares also vote in favor.

However, in the case of venture companies, if certain requirements are met, they can decide on the issuance of stock options through a board of directors instead of a shareholder meeting. When deciding to issue stock options through the board of directors, the company must carefully review the Venture Companies Act and the Commercial Act.

4. The exercise period of stock options is also regulated by law.

Although the company grants stock options and the shareholder meeting resolves them, the executive cannot immediately exercise the stock options after a few months to buy the company’s shares at a low price. Under the Commercial Act, executives can only actually exercise stock options after they have been employed by the company for a period of at least 2 years.

The purpose of stock options is to motivate executives to work hard to increase the value of the company’s shares. If executives can exercise stock options too early, this purpose cannot be fully achieved.

Furthermore, the 2-year employment requirement is the minimum required period of employment stipulated by law. If a company stipulates that executives can exercise stock options three or five years after the granting of stock options, the stock options can only be exercised after that stipulated exercise period has elapsed.

5. The effect of early termination or resignation of stock option employees.

What happens if an executive who was granted a 2-year stock option to A Company resigns at B Company after 1 year? As seen above, only those who have been employed by the company for a period of at least 2 years can exercise stock options.

Therefore, the executive who resigns at B Company can no longer exercise the stock option. However, what if the resignation is voluntary instead of a layoff?

In the case of venture companies, if the company grants stock options to an employee and the employee dies or retires within 2 years after the grant of the stock option, or due to the employee’s own responsibility, the employee can still exercise the stock option. However, in the case of non-venture companies, if the employee retires or resigns due to a reason not attributable to the employee within 2 years after the stock option is granted, the employee cannot exercise the stock option.

Therefore, when an executive receives a stock option and is laid off within 2 years, the executive will not be able to exercise the stock option and will lose the expected profit.

If you need legal advice regarding stock options and stock purchase options, please contact Law Firm Veat.

Thank you.

Law Firm Veat