Precautions to Take When Drafting a Share Transfer Agreement

Legal Matters for StartUP

While reviewing numerous contracts this year, there were many cases where startups' investors invested through common shares. Generally, investors invest via Redeemable Convertible Preferred Shares (RCPS), but sometimes, after negotiation with the company, they invest through common shares. When a company conducts a paid-in capital increase, a subscription agreement must be signed, and there are more practical matters to review than expected.

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According to the subscription agreement, common shareholders often hold minority stakes, making it difficult to reflect their opinions through general meetings of shareholders. To address this, the subscription agreement stipulates various rights of investors and obligations of the company. This subscription agreement includes content generally applicable to common share investments and can be customized according to the company's circumstances.

Contracts are drafted to prevent disputes, and discussing potential disputes with the contracting parties is more important than the contract's length. The subscription agreement involves the subscriber, the company, and stakeholders as parties.

It is important to accurately calculate and state the total number of shares to be subscribed and the subscription price per share, and to confirm that the subscription amount has been agreed upon with the investor. Typically, as a condition precedent to closing, conditions that the company and stakeholders must fulfill before the investor deposits the subscription funds are set. From the investor's perspective, they want assurance that the company and stakeholders are truthful about the current status. Therefore, the contract includes representations and warranties clauses by the company and stakeholders to confirm the current status, and if violations are found, the company and stakeholders bear liability for damages.

Of course, the subscriber as the investor also provides representations and warranties to assure that the legal conditions to fulfill contractual obligations are met. The contract also includes pre-closing obligations and covenants to ensure the company completes all related procedures. For startups, these obligations of the company and stakeholders before the investment funds are deposited are usually composed of simple clauses.

Provisions regarding contract termination are also important. Reasons for contract termination before the investment funds are deposited after the subscription agreement is signed are stipulated. Since the period between contract signing and fund deposit is very short at the startup stage, there is usually little issue.

From the investor's perspective, restrictions on the use of investment funds by the company can be set, typically allowing use for other purposes only with written consent. Additionally, investors may include contractual provisions requiring written notice or approval from them before the company makes important decisions. Important matters here include amendments to the articles of incorporation, issuance of new shares, and disposal of treasury stock.

Investors expect capital gains from their investment, and the Tag Along Right facilitates this. The Tag Along Right is a clause that forces stakeholders to sell their shares together with the investor’s shares when selling to a third party, allowing the investor to share in the market gains. It is an important clause as it guarantees the investor’s benefits.

For startup investors, it is very important to establish clauses that guarantee various rights, so it is necessary to consult experts and conduct thorough reviews. Likewise, companies should review the rights and obligations with investors to prevent future disputes and establish a secure relationship.

Attorney and CPA Sangbin Kwak (Baro Accounting Corporation)

※This article is based on content supplied by Law Times.

This content was produced with the assistance of AI translation services.