Co-founders Ousted Amid IPO Turmoil... Court: "Dismissal Valid, But Compensation Required" [Invest&Law]

"Are there such trash people?"... Co-founder conflict intensifies after failed IPO

First-instance court: "Not employees but executives... No just cause, so compensation required"

The court has recognized the company's liability for damages to co-founders who were ousted from the company after conflicts with the CEO during the initial public offering (IPO) process. The court ruled that while the dismissal itself was valid, there was no just cause for it, and therefore the company must compensate the dismissed executives for the remainder of their terms.

"Only making a mess and never cleaning up"... Dismissed via shareholders' meeting after verbal abuse

According to the legal community on March 18, the 11th Civil Division of the Seoul Southern District Court (Presiding Judge Ju Jinam) recently ruled partially in favor of the plaintiffs in a lawsuit filed by Mr. Lee, the Chief Technology Officer (CTO), and Mr. Kim, the Chief Financial Officer (CFO), who were co-founders of biotech startup Company A, against the company for confirmation of invalid dismissal and damages. The court ordered the company to pay approximately 102 million won to Lee and about 186 million won to Kim.

Company A is an unlisted company engaged in research and development of bio-materials. It was co-founded in 2017 by CEO Mr. Cho, Mr. Lee, Mr. Kim, and others. However, conflicts among the co-founders intensified during the course of company operations.

It was found that Mr. Cho demanded that the co-founders submit work logs and issued work instructions around the clock. There were more than 200 group chat rooms for work purposes alone. Through Telegram and email, he reportedly made statements such as, "Are there such trash people?" and "All you do is create crises and messes for the company, and you have never once properly stepped up to clean them."

Court: "Co-founders are not employees, but executives"

The conflicts escalated further during the IPO process. The company attempted to go public in 2020, but failed to clear technology evaluation and other hurdles the following year. Afterwards, Mr. Cho placed blame on CTO Lee and dismissed him through a shareholders' meeting. Kim was also excluded from work, with his company email and access rights revoked, and was subsequently dismissed via a shareholders' meeting.

The co-founders filed a lawsuit, arguing, "We worked under the direction and supervision of the CEO, so we are employees," and claimed the dismissal was invalid. They additionally sought damages as an alternative claim.

The first-instance court did not recognize the co-founders as employees. The court stated, "At the time of incorporation, the co-founders acquired shares and were registered as inside directors, performing tasks delegated by the company as executives," and "Given that they were in a position to receive economic rewards depending on the company's business performance or listing status, they are distinguished from ordinary employees as members of management." Accordingly, the case was judged as a matter of executive dismissal under commercial law, not an employee dismissal under labor law, and thus only the liability for damages was considered.

"No objective reason for dismissal... Used failed listing as an opportunity to exclude co-founders"

However, the court did not acknowledge the legitimacy of dismissal during the term. According to the Commercial Act, a director can be dismissed at any time by resolution of a shareholders' meeting, but if the director is dismissed without just cause during a fixed term, the company is liable for damages.

The court found, "Each dismissal in this case appears to have resulted from a breakdown of trust due to conflicts between the CEO and the co-founders," and "It is difficult to see that there were objective grounds for dismissal, such as violations of laws or the articles of incorporation." The court added, "The CEO continued to use abusive and coercive language, and when conflicts arose, proceeded to dismiss the co-founder plaintiffs to exclude them from the company."

The court also rejected the company's various arguments for dismissal. The court stated, "It is difficult to definitively attribute the failure to list to a specific individual," and "If we must identify the cause, it is the fault of all company employees, including the CEO. The failed listing was used as an opportunity to exclude Mr. Lee, who was both a co-founder and shareholder, from the company." The court further noted, "It is difficult to conclude that attracting investment was originally Kim's role," and "The alleged leakage of trade secrets merely occurred during an external technical evaluation conducted on the CEO's instructions."

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