Legality Review of Stock Option Grant

Law firm Veat received a request from startup Company A (hereinafter referred to as the "Client") to conduct a legal review of the legality of the stock option grant.

The startup advisory team of Law firm Veat thoroughly analyzed the scope of 'a person exercising de facto influence' as defined in the Commercial Code and whether or not they were a special-related party under the Special Measures Act on the Promotion of Venture Businesses (hereinafter "the Venture Business Act") regarding the interpretation of the legal provisions applicable at the time of grant of the stock options, which was the core issue. There were no specific regulations regarding stock options in the Venture Business Act at the time, so a comprehensive analysis was conducted, considering both the Commercial Code and the Venture Business Act.  

​In particular, in this case, it was important to clearly interpret 'a person exercising de facto influence' based on the existing court attitudes. The startup advisory team of Law firm Veat carefully reviewed existing precedents and provided interpretations tailored to the characteristics and circumstances of the company. Also, the concept of a special-related party as defined in the Venture Business Act and whether or not they qualified were also analyzed in detail.

Furthermore, the validity of the shareholder resolution approving the stock options was also reviewed. Because it is an important factor in determining whether the decision to grant stock options is legally valid, a deep legal analysis was also conducted on the possibility of retroactive ratification of an invalid shareholder resolution in the event that the shareholder resolution was invalid.

What is a stock option?

"Article 340-2 (Stock Options) of the Commercial Code stipulates that 'A company may, in accordance with the provisions of its articles of incorporation, resolve by shareholder resolution in accordance with Article 434 of the Commercial Code to grant to directors, executive officers, auditors, or employees who contribute to or may contribute to the establishment, management, and technological innovation of the company, a right to purchase new shares or repurchase its own shares at a predetermined price (hereinafter "the exercise price of the stock option"). However, if the exercise price of the stock option is lower than the fair value of the shares, the company may pay the difference in cash or transfer its own shares equivalent to the difference.' It is stipulated that the fair value of the shares is evaluated as of the date of exercise of the stock options."

A stock option is a right granted to employees to sell shares issued by a company, and is a right to purchase shares at a predetermined price for individuals who have contributed to the establishment, management, and technological innovation of the company.

The Commercial Code specifies the detailed provisions of the articles of incorporation and the method of exercise of stock options. These legal provisions provide important guidance for the process of preparing and interpreting the articles of incorporation, assessing the contribution of members, and setting prices at the time of stock option grant. These provisions should be carefully reviewed because they directly affect the scope of the stock options and the benefits that employees can obtain through the exercise of their rights.

In particular, these legal factors require in-depth analysis of the Commercial Code and the Venture Business Act, including related laws, regarding stock option grants. Also, we recommend that you cautiously conduct a legal review through a startup advisory lawyer with extensive experience, in order to prepare suitable stock option regulations internally and avoid unnecessary legal risks when proceeding with resolutions and other procedures.  

Law firm Veat dealt with complex legal issues surrounding the application of the Venture Business Act and the Commercial Code, and supported the startup to design and operate the stock option system effectively based on the professional legal knowledge and experience of Law firm Veat.

Law firm Veat helps companies and their employees accurately understand and design the system and rights by developing strategies to systematically respond to various legal issues that may arise during the stock option grant process.

Law firm Veat supports the growth and innovation of startups, and Law firm Veat will continue to help you achieve your vision and goals as your trusted legal partner.

Thank you.

Sincerely,

Law firm Veat