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A common misconception companies make when introducing stock options is that "a well-drafted contract is enough." In practice, however, most disputes arise not from the contract itself, but from earlier steps such as articles of incorporation and screening of grantees, and from later exercise stages. This article summarizes three checkpoints that should be reviewed before granting stock options.

[Table of Contents]

1. Why You Must Inspect the Articles of Incorporation Before the Contract

2. Who Cannot Receive Stock Options Matters More Than Who Can

3. Where Real Disputes Happen — Post-Resignation Exercise, Exercise Period, Cancellation Grounds

4. Why Articles, Resolutions, and Contracts Must Work as One Set

Why You Must Inspect the Articles of Incorporation Before the Contract

To grant stock options (share purchase options), the legal basis must be expressly stated in the company's articles of incorporation. The Korean Commercial Act requires certain matters to be specified in the articles; if the basis for grant, the scope of grantees, the cap on grants, or the method for determining the exercise price is missing, then even a subsequent shareholders' meeting or board resolution may leave the validity of the grant itself open to challenge.

In practice, companies often spend most of their time polishing the contract while neglecting the articles of incorporation. But if the articles are defective, the company may later argue that the grant is void at the exercise stage, leading to employees losing their rights and the company's incentive design collapsing.

Therefore, when reviewing whether to introduce stock options, the very first step should be to open the articles of incorporation and confirm whether the grant clauses are in place, and whether the cap and scope are flexible enough. If amendments are required, the timeline for a special resolution at the shareholders' meeting must be calculated in advance.

Who Cannot Receive Stock Options Matters More Than Who Can

Companies often ask, "Can we grant options to this person?" In practice, however, asking "who must we exclude?" first is far more effective for preventing disputes, because eligibility restrictions vary by company type.

For privately held (non-listed) companies, the Commercial Act restricts grants to shareholders holding 10% or more of issued shares, persons exercising de facto influence over management, and their spouses or lineal ascendants and descendants. Listed companies and venture companies must additionally consider restrictions on the largest shareholder, major shareholders, and specially related persons under the Capital Markets Act and the Venture Business Act.

In real cases, companies often place internally identified "core talent" on the grant list only to discover later that the recipient falls within a restricted category, voiding the grant or fueling litigation. Confirming the status of specially related persons and the overall grant cap — including share structures and family relationships — before finalizing the list is the safer approach.

Where Real Disputes Happen — Post-Resignation Exercise, Exercise Period, Cancellation Grounds

Even after the articles and grantees are settled, the work is not done. Most stock option disputes arise not at the granting stage but at the exercise stage. The most frequently contested issues are:

• Post-resignation exercise: Whether an employee may exercise already-granted options after resignation is the most common flashpoint. Whether the contract requires "continued employment," whether that clause aligns with the articles and resolutions, and how to treat resignation due to the company's fault — all must be defined clearly to avoid drawn-out disputes.

• Exercise period: Setting how many years after grant and within what window the option can be exercised affects both incentive value and litigation risk. Vague exercise periods invite disputes over expiration and accelerated vesting.

• Cancellation grounds: The contract must specify which events — misconduct, non-compete violations, trade secret breaches — allow the company to cancel the option. Vague cancellation grounds invite disputes that the company unilaterally stripped exercise rights.

These three clauses are not a matter of "polishing the wording" but of designing what cards the company will hold in future HR and legal disputes.

Why Articles, Resolutions, and Contracts Must Work as One Set

For all three checkpoints to be meaningful, the articles of incorporation, the shareholders' meeting (or board) resolution, and the grant contract must not contradict each other. The most painful cases involve articles requiring board resolution but no shareholders' meeting being held, or a resolution stating a 5-year exercise period while the contract states 7 years.

Such inconsistencies rarely surface at the grant stage and instead erupt all at once when employees resign or the company is sold or merged. Designing the articles, resolution, and contract on the same timeline, and re-checking all three together whenever changes occur, is essential to reducing the seeds of disputes.

Stock options must be designed precisely so that problems do not arise at the actual exercise stage, not just at the moment of grant. Pre-simulation of dispute scenarios matters far more than the outward appearance of the incentive design.

Cheongchul Law Firm's Stock Option Advisory

Cheongchul Law Firm provides end-to-end advisory for startups, venture firms, and listed companies — covering amendments to articles of incorporation, drafting of shareholders' meeting and board resolutions, review of grant contracts, and disputes over exercisability or cancellation. If you are designing a key-talent incentive program or anticipating disputes at the exercise stage of options already granted, please contact us anytime for a consultation.

Book a Consultation | TEL +82-2-6959-9936 | E-MAIL cheongchul@cheongchul.com

This article is general legal information and does not constitute legal advice on a specific matter. Individual cases must be reviewed in consultation with an attorney.