50 Billion Won Compensation Lawsuit Against Startup for 'IPO Failure'... HB Investment Loses First Trial [Invest&Law]

Invested 5 Billion KRW in a Craft Beer Company in 2016
Contract Required Damages and Interest If IPO Was Not Achieved in 6 Years
First Trial: "External Factors Like Market Downturn Must Be Considered"

Venture capital (VC) firm HB Investment filed a lawsuit against a startup that failed to go public (IPO) within the promised period but lost in the first trial. Although the contract clearly stated the startup's responsibility for the failed IPO, the court ruled that the demand for compensation without considering the contract's intent, management efforts, and market conditions was against the essence of venture investment and the purpose of startup nurturing policies.

According to sources from the investment banking (IB) industry and legal circles on the 5th, the Seoul Central District Court Civil Division 17 (Presiding Judge Lee Seung-won) ruled against HB Investment in a 5 billion KRW damages claim lawsuit filed against Korea Craft Beer and its CEO. HB Investment was also ordered to bear all litigation costs.

Previously, HB Investment signed a new share subscription agreement with Korea Craft Beer in October 2016 through the 'HB Growth Support M&A (Mergers and Acquisitions) Fund.' As the fund’s general partner (GP), HB Investment invested approximately 5 billion KRW in Korea Craft Beer by adding some of the capital contributed by limited partners (LPs). According to the contract, Korea Craft Beer was required to complete its IPO by December 31, 2022. The contract also stipulated that if the deadline was not met, the startup would pay the investment amount plus damages at an annual compound interest rate of 20%.

However, Korea Craft Beer failed to go public by the promised deadline, and HB Investment filed the damages claim in January 2023. As the selected party (representing the plaintiffs in the civil joint lawsuit), HB Investment demanded that Korea Craft Beer pay damages ranging from 162.5 million KRW to 2.114 billion KRW plus interest according to each LP’s fund contribution ratio.

The first trial dismissed HB Investment’s claim. The court judged that granting a damages claim solely based on the contract would cause significant disadvantage to Korea Craft Beer, and that mere failure to meet the IPO deadline could not automatically impose liability for damages.

First, the court pointed out that the IPO obligation should be considered a 'best-efforts obligation' rather than a 'result obligation.' A result obligation requires achieving a specific outcome, and failure to do so is considered a breach. In contrast, a best-efforts obligation requires sincere efforts to achieve the result, and if the efforts were made in good faith but the result was not achieved, the obligation is deemed fulfilled.

Furthermore, the court emphasized, "An IPO cannot be achieved solely by the company’s efforts but is influenced by various factors such as market conditions and external environment," adding, "The reason Korea Craft Beer failed to go public was due to external factors like the downturn in the craft beer market. There is no evidence that the company intentionally avoided the IPO or neglected related duties."

In fact, Korea Craft Beer met some listing requirements as of the end of 2021, but it was understood that it struggled to meet the 'qualitative requirements' due to the overall sales decline in the craft beer industry the following year.

Additionally, the court pointed out that "Granting an unconditional damages claim with high interest solely based on the violation of the IPO obligation is an unfair contract that is unilaterally advantageous to HB Investment," and stated that this goes against the intent of the contract, which aimed to pursue mutual benefits for both the fund partnership and Korea Craft Beer through successful IPO cooperation, as well as the nature of venture capital investment and the policy aspect of nurturing startups.

HB Investment has appealed the first trial ruling.

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