[Invest&Law] Aftermath of the Star Instructor Recruitment War... The Outcome of the Breach of Duty Lawsuit

Large-Scale Put Option Settlement to Retain Instructors
Court Rules: "A Management Decision to Prevent Instructor Departures... Not a Breach of Duty"

A court has ruled that it was not a breach of fiduciary duty when the CEO of a major domestic private education company used company funds to settle stock purchase warrants (put options) estimated at around 15 billion KRW while renewing contracts with star instructors. The decision was based on the view that this was a management decision aimed at preventing instructors from leaving, amid fierce competition among education companies to recruit star instructors.

According to the legal community on November 12, the Seoul Central District Court's Civil Division 22 (Presiding Judge Choi Ukjin) recently partially accepted the claims of Company A, a private education firm, in a lawsuit seeking approximately 12 billion KRW in damages against its former CEO and founder, Mr. B. The court ordered Mr. B to pay 866 million KRW and interest.

'CEO Should Bear Put Option Burden' as a Condition... Actual Settlement Was Made with Company Funds

The court recently ruled that the act of a domestic major private education company’s CEO settling the burden of stock purchase warrants (put options) estimated at about 15 billion won using company funds while renewing contracts with star instructors is "not a breach of fiduciary duty."

This lawsuit originated in 2018 during the process of refinancing an existing loan. At the time, Company A, which was preparing for an initial public offering (IPO), borrowed 64 billion KRW from a financial institution. The lender imposed a special precondition: the instructors held put options that would allow them to sell their shares back to the company if the IPO failed. Under the new condition, the final obligation to purchase these shares shifted from the company to Mr. B personally.

The issue arose in 2020, when a new major shareholder joined. The new shareholder demanded that the put option not remain as a company liability. In response, Company A renegotiated contracts with the instructors, requiring them to forgo the put options and instead paid a total of 17.1 billion KRW in contract fees.

In 2023, Company A filed a lawsuit against Mr. B, claiming that he had used company funds to enter into excessively expensive contracts with the instructors in order to eliminate approximately 15 billion KRW of personal debt, which the company argued was a clear act of breach of fiduciary duty.

However, the court of first instance did not view these actions as a breach of fiduciary duty. The court explained that the contractual transfer of the put option burden to Mr. B, as required by the lender during the refinancing process, was merely a formal measure for managing loan risk; in substance, the company remained the true party responsible for the put option obligation.

Burden Shifted by Loan Conditions... The Court: "The Actual Payment Obligation Still Rests with the Company"

The court first addressed the nature of the put option, stating, "From the instructors' perspective, the payment for new shares was part of the exclusive contract fee that Company A was obligated to pay, and the put option was a means to guarantee the full amount of the contract fee." In other words, the put option was not a personal debt of Mr. B, but rather an obligation originally belonging to the company. The court also noted the intense competition among education companies to secure star instructors at the time.

The court also took into account the competitive landscape in the education industry at the time. A consulting firm's report cited by the court stated, "The key competitive advantage in the relevant market is a lineup of top instructors across multiple subjects. While successful contract renewals ensured stability for several years, ongoing efforts to retain potential departing customers through active promotion and to develop successor instructors are necessary." In fact, there had been a precedent where a famous top Korean history instructor terminated an exclusive contract due to issues related to the exercise of a put option.

The court noted, "If Mr. B had paid an excessive amount solely for his own benefit to extend the contracts, he would not have gone through formal internal approval procedures."

However, the court did recognize partial liability for damages on other issues. Regarding the special redemption payment for RCPS (redeemable convertible preferred shares) made by Mr. B to an investment association, the court pointed out, "The payment was made without meeting the necessary conditions, and there was no proper resolution by the board of directors or general shareholders' meeting." The court also found Mr. B liable for damages for listing family members as ghost employees and for personal use of the company credit card. Both Company A and Mr. B have appealed the first-instance ruling.

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