Investment at the Incorporation Stage and Drafting of a Shareholders’ Agreement

The client was a prospective CEO preparing to establish a new corporation and secured an investment of KRW 100 million from an acquaintance.

While the investment itself was welcome, the client was concerned that the investor—by virtue of becoming a shareholder—might later interfere excessively in management or slow down decision-making processes.

Accordingly, the Corporate Practice Team of Decent Law Firm was engaged to advise on the preparation of a Shareholders’ Agreement and a Subscription Agreement designed to protect management control and prevent future disputes.

Decent prioritized the establishment of a stable management structure led by the client and structured the agreements as follows:

Exclusion of Investor’s Management Rights

It was expressly stipulated that the investor would not be deemed an executive or co-operator of the company solely by entering into the agreement. The investor was granted no approval rights or veto rights over key corporate matters, including fund disbursement, personnel decisions, or marketing activities.

Installment Payment of Investment and Adjustment of Rights

The total investment of KRW 100 million was divided into two tranches. If any installment was not paid, no rights would accrue in respect of the unpaid portion, and termination of the agreement would be permitted, thereby mitigating risk.

Prevention of Liability Shifting

While the investor would not bear responsibility for the company’s operational outcomes, the agreement also provided that the CEO could not be held liable merely because the investor’s opinions were not reflected or responses were delayed.

CEO-Led Exit Structure

To ensure strategic flexibility in the future, a Drag-Along right was granted to allow the CEO to lead a share sale upon enhancement of corporate value. The investor’s Tag-Along right was expressly excluded.

Enhanced Confidentiality Protection

All non-public information—including financial data and client lists—was defined as confidential information. In the event of a breach, a contractual penalty of KRW 100 million would be payable irrespective of actual damages, ensuring strong and ongoing protection.

The attorneys of Decent’s Corporate Practice Team translated the client’s concerns into precise legal language and finalized a Shareholders’ Agreement reflecting the principle of sole operational authority by the CEO.

As a result, the client was able to maintain an amicable relationship with the acquaintance while legally securing independent management control, thereby proceeding confidently with both incorporation and investment.

Distinguishing Partnership from Investment

If the agreement does not clearly state that it is neither a partnership agreement nor an employment agreement, the investor may later claim participation in management or operational authority. Clear drafting is essential.

Careful Drafting of Contractual Language

Ambiguous provisions may lead to unfavorable interpretations. It is important to specify how provisions should be interpreted and to structure clauses strategically. Decent’s Corporate Team carefully designs each clause to protect the client’s position.

Inclusion of Contractual Penalty Clauses

To ensure enforceability, it is critical to specify a fixed contractual penalty amount in cases of breach—such as violations of share transfer restrictions or confidentiality obligations.

An investment agreement is not a document written based on trust in a “good relationship.” It is a legal structure designed to endure even if that relationship changes.

From investments by acquaintances to institutional funding rounds, if you wish to protect your management control, Decent Law Firm is ready to assist.