Hello. I am Attorney Lee Young-kyung from Cheongchul Law Firm.
Today, I would like to introduce a recent ruling by the Supreme Court regarding stock options, which is often utilized in the recruitment process of startups and small to medium-sized enterprises.
I. Background of the Case
Relationship of the Parties
In April 2009, the defendant established a company engaged in the manufacture and sale of medical devices. At that time, the shareholders of the company were as follows:
Shareholder | Number of Shares Held | Ownership Percentage |
Defendant (CEO) | 488,000 shares | 44.4% |
Anonymous 2 | 300,000 shares | 27.3% |
Anonymous 3 | 200,000 shares | 18.2% |
Anonymous 4 | 100,000 shares | 9.1% |
Anonymous 5 (University) | 12,000 shares | 1.0% |
Total Issued Shares | 1,100,000 shares | 100% |
Process of Signing the Stock Option Contract
The company was desperate to secure excellent talent for growth and offered exceptional stock options to two employees (plaintiffs) who joined in early 2012:
Category | Plaintiff 1 | Plaintiff 2 |
Date of Contract Signing | 2013.2.15 | 2013.2.20 |
Number of Shares Granted | 100,000 shares | 30,000 shares |
Exercise Price | 1,500 Won per share | 1,500 Won per share |
Exercise Period | 2015.10.12~2020.10.11 | Same |
Occurrence of the Dispute
However, there was a fatal flaw in the granting of these stock options. On June 25, 2012, at a temporary shareholders' meeting that decided to add provisions regarding stock options to the company’s articles, the defendant omitted the agenda of adding a stock option clause and falsely recorded the minutes. Furthermore, shareholders holding 54% of the company's shares did not even receive notice of the subsequently held temporary shareholders' meeting.
III. Legal Issues and the Supreme Court’s Ruling
Grounds for the Invalidity of the Stock Option Contract
The Commercial Act requires two key conditions for the granting of stock options: there must be a regulatory provision in the articles of incorporation, and a special resolution of the shareholders' meeting is necessary. In this case, both conditions were lacking, and eventually, the stock option contract was rendered invalid.
Scope of Damages
The plaintiffs made two claims against the defendant. One was for damages due to unauthorized representation, and the other was for damages due to wrongful acts. In particular, regarding the latter, the appellate court and the Supreme Court made conflicting judgments:
Claim Details | Appellate Court Judgment | Supreme Court Judgment |
Liability for Unauthorized Representation | Negative | Negative |
Property Damage | Negative | Negative |
Mental Harm | Negative | Acknowledged |
New Interpretation of Mental Harm
The Supreme Court made a groundbreaking ruling in this case. In contrast to the appellate court's view that there were no circumstances to suggest that mental harm had been inflicted, the Supreme Court deeply examined the essential nature and practical significance of stock options.
The Supreme Court defined stock options as a type of performance compensation system intended to induce employees who contribute or can contribute to the establishment, management, and technological innovation of the company to diligently perform their duties by providing future benefits resulting from the acquisition of shares.
In particular, three elements were decisive in this case. First, the granted shares represented a substantial amount exceeding 10% of the total issued shares of the company, second, the plaintiffs relied on this and decided to join the company, giving up other opportunities, and third, the defendant himself acknowledged that "stock options were the only incentive for recruiting talent."
In this regard, considering the relationship between the plaintiffs and the defendant, the nature of the stock option system, the number of shares allotted, and the circumstances surrounding the contract signing, it could be seen that the defendant's illegal acts infringed on the plaintiffs' reasonable expectations regarding acquiring shares through this contract and their right to make a self-determined choice about their employment, and such interests are worthy of protection as personal interests. Thus, the Supreme Court recognized that the defendant had an obligation to pay compensation for the mental suffering caused by this infringement.
IV. Significance and Implications of the Ruling
This ruling has advanced the legal principles related to stock options. The Supreme Court viewed the damages resulting from the invalidity of the stock option contract not merely as property damage, but as an infringement of the "reasonable expectation of acquiring shares or the self-determination right to choose employment," which is a personal legal interest.
This has significant implications, especially for the startup ecosystem. Stock options are not just simple rewards but a serious decision that affects the life paths of workers, and therefore, legal procedures must be strictly followed in their design and granting process.
Cheongchul Law Firm has extensive experience and expertise in corporate advisory matters, including stock option grants. If you are considering any related issues, please feel free to contact us.
Cheongchul Law Firm will be your reliable legal partner. If you need to consult with a lawyer, please contact us right away.
