Shareholders’ Agreement: Legal Significance and Strategic Design

1. Definition and Legal Basis of Shareholders’ Agreements

A shareholders’ agreement is a contract entered into between the shareholders of a corporation, stipulating mutual rights and obligations regarding company operations, management participation, profit distribution, and share transfers. This agreement has effect only among the shareholders who are parties to it, separate from the company’s articles of incorporation, and serves to complement and specify corporate law provisions.

1.1 Legal Nature

Shareholders’ agreements are fundamentally private contracts, and therefore, the principles of contract law under the Civil Code of South Korea apply. In particular, based on the principle of contractual freedom, shareholders can freely determine the agreement content within the scope that does not violate mandatory provisions of law. However, mandatory provisions of corporate law or the principle of equal treatment of shareholders must not be violated, so these factors must be sufficiently considered in the design.

1.2 Relationship with Articles of Incorporation

Articles of incorporation are documents that prescribe the basic matters of a company and have effect on shareholders, the company, and third parties. In contrast, shareholders’ agreements have effect only among the shareholders who are parties to the agreement, allowing for detailed provisions that are difficult to include in the articles of incorporation. Particularly, specific provisions regarding share transfer restrictions, division of management responsibilities, and methods of exercising voting rights can be stipulated, serving a complementary function to the articles of incorporation.

2. Situations Requiring Shareholders’ Agreements

2.1 When Attracting Venture Capital Investment

When venture capital firms or angel investors participate, coordination of interests between existing shareholders and new investors is necessary. Particularly, the scope of management participation by new shareholders, priority matters, appointment of management, and exit strategies must be clearly defined.

2.2 When Conducting Joint Ventures

When two or more companies jointly establish a new company, the rights and obligations of each parent company, the authority of dispatched executives, technology transfer conditions, and share transfer procedures must be clearly defined in advance.

2.3 When Preparing for Family Business Succession

When family businesses prepare for generational change, procedures for transferring authority between existing management and successors, methods of handling shares during inheritance, and decision-making authority regarding management should be defined in advance to prevent disputes.

2.4 When Shareholders Have Complex Interests

When multiple shareholders have different shareholding ratios, or when management-participating shareholders and investment-only shareholders coexist, it is necessary to clearly distinguish and define each party’s rights and obligations.

3. Key Contents and Components of Agreements

3.1 Basic Matters

• Identification of agreement parties (shareholders)
• Agreement purpose and basic principles
• Definition of terms
• Effective date and duration of the agreement

3.2 Information Provision Matters

Specific content of information provision obligations, timing, methods, and access rights are specified. In particular, access rights to financial statements, business reports, major contracts, bank account transaction records, and tax documentation should be detailed.

3.3 Decision-Making System

• Method of exercising voting rights in shareholders’ meetings
• Prior consultation procedures for major matters
• Definition of important decision matters and special voting requirements
• Deadlock resolution mechanisms

3.4 Share-Related Rights

• Right of First Refusal
• Tag-along Rights
• Drag-along Rights
• Preemptive Rights
• Share transfer restrictions and exceptions

3.5 Management’s Responsibilities and Obligations

• Appointment methods for directors and auditors
• Confidentiality obligations of management
• Non-compete obligations
• Risk management obligations
• Measures to prevent conflicts of interest

3.6 Financial and Dividend Policy

• Capital policy
• Dividend policy
• Budget approval procedures
• Methods of fund raising
• Financial risk management

4. Major Legal Provisions and Practical Issues

4.1 Relationship with the Principle of Equal Treatment of Shareholders

Article 344 of the Commercial Code of South Korea stipulates the principle of equal treatment of shareholders. When drafting shareholders’ agreements, care must be taken not to violate this principle. Provisions that grant excessive rights to specific shareholders or infringe on the legitimate rights of other shareholders may be invalidated.

4.2 Conflicts with Mandatory Provisions

Agreement content that violates mandatory provisions of the Commercial Code (such as minimum capital requirements, statutory authority of directors) is invalid. Therefore, related laws and regulations must be carefully reviewed when drafting agreements to ensure legal effectiveness.

4.3 Effect on Third Parties

Shareholders’ agreements, in principle, have effect only among the parties, and therefore lack direct binding force on the company itself or third parties. Consequently, separate measures such as amendments to the articles of incorporation or board resolutions may be necessary to actually implement the agreement contents.

5. Information Provision System for Transparent Management

5.1 Regular Information Provision

• Monthly financial statements and business reports
• Quarterly tax documents and tax returns
• Annual audit reports and significant contract status
• Major business partners and customer lists
• Personnel status and payroll records

5.2 Information Provision in Special Circumstances

• When entering into expenditures or contracts above a certain amount
• When making significant business policy changes
• When risk factors arise
• When legal disputes occur
• During fund shortages or financial crises

5.3 Information Access Rights

• Specific methods of exercising inspection rights for books and records
• Access rights to information systems (ERP, accounting programs)
• Bank account inquiry rights
• Access to major contracts and document repositories
• Procedures and restrictions to be observed when accessing information

6. Decision-Making Structure and Balance

6.1 Voting Methods for General Matters

Most general management matters proceed according to existing Commercial Code provisions; however, separate voting requirements can be established in the agreement for specific matters.

6.2 Definition of Major Matters

The agreement must clearly define what constitutes “major matters.” Examples include:

• Borrowing above a certain amount
• Sale of major assets or granting of security interests
• Amendment of articles of incorporation
• Changes in shareholders or directors
• Corporate mergers, splits, or dissolution
• Changes or conversion of major business lines

6.3 Prior Consultation Procedures

For major matters, prior consultation among shareholders can be required before convening shareholders’ meetings or board meetings. Consultation methods, duration, and opinion-gathering procedures should be specifically outlined.

6.4 Deadlock Resolution Mechanisms

When shareholders disagree and decision-making becomes impossible, the following resolution mechanisms can be established:

• Mediation by independent third parties
• Final decision-making authority granted to specific shareholders
• Exercise of share buy-out options
• Initiation of company sale or dissolution procedures

7. Design of Rights Related to Share Transfer

7.1 Right of First Refusal

When a shareholder intends to transfer shares to a third party, other shareholders are granted the right to purchase under the same conditions. The exercise procedures, duration, and price determination methods for the right of first refusal should be detailed.

7.2 Tag-along Rights

When majority shareholders sell their shares, minority shareholders have the right to sell under the same conditions. This is an important mechanism for protecting minority shareholders.

7.3 Drag-along Rights

When majority shareholders sell their shares, they can compel minority shareholders to sell under the same conditions. This is utilized when selling the entire company.

7.4 Preemptive Rights

When the company conducts a capital increase, existing shareholders have the right to preferentially acquire new shares according to their shareholding ratio.

7.5 Share Transfer Restrictions

Share transfers can be restricted or prohibited under certain circumstances:

• Prohibition of share transfers during non-compete period
• When damages occur due to disclosure of business secrets
• Share transfer restrictions upon contract violations
• Prohibition of transfers to companies in specific industries

8. Responsibilities and Obligations of Management

8.1 Appointment and Dismissal Procedures

Clear stipulation of appointment methods, qualification requirements, grounds for dismissal, and procedures for directors and auditors. Particularly, the number of directors nominated by shareholders and appointment methods (such as whether cumulative voting applies) should be defined.

8.2 Legal Obligations of Directors

• Duty of care
• Duty of loyalty
• Duty of loyalty in case of conflicts of interest
• Monitoring duty
• Conditions for limitation of liability

8.3 Confidentiality Obligations

• Definition of scope of confidential information
• Duration of confidentiality obligations
• Restrictions on information use
• Remedies for violations
• Post-resignation confidentiality obligations

8.4 Non-Compete Obligations

• Scope of prohibited competitive activities
• Duration of non-compete restrictions
• Exceptions permitted
• Sanctions and damages for violations

9. Remedies for Breach of Agreement

9.1 Warning and Correction Demands

For minor violations, written warnings and demands for correction within a certain period can be issued first.

9.2 Penalty Clauses

The types and amounts of penalties payable upon breach of contract are predetermined. However, excessive penalties may be reduced under civil law principles, so appropriate levels should be set.

9.3 Share Purchase Options (Call Options)

In cases of serious contract violations, rights to purchase the violator’s shares at a predetermined price can be granted.

9.4 Management Rights Restrictions

Measures such as restricting contract violators’ participation in board meetings or limitations on voting rights can be implemented.

9.5 Damages Claims

Separate claims for actual damages caused by contract violations can be allowed.

Conclusion

Shareholders’ agreements are essential legal mechanisms for stable corporate management and protection of shareholder rights. Effective agreement drafting requires balanced reflection of all parties’ interests and preparation of countermeasures by reviewing various possible future situations in advance.

Law Firm K&P has recently completed drafting shareholders’ agreements related to companies based on advanced technology. These agreements aimed to ensure transparent management and stable governance structures by clearly defining the rights and obligations among shareholders. We also have extensive experience in designing customized agreements for companies with complex shareholder structures in various industries, including venture capital investment attraction, inter-company joint ventures, and family business succession. In particular, we have successfully supported agreement execution in international-scale investment projects involving overseas investors in South Korea.