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Startups and unlisted companies often design stock option plans to secure key talent. However, even though they are all called stock options, if you grant them without knowing that the applicable laws and procedures differ depending on the company type (unlisted, listed, venture), the grant itself may be illegal.

[Table of Contents]

1. Starting point of stock option design: distinguishing company types

2. Unlisted company - articles of incorporation + special resolution of the shareholders' meeting + 10% limit

3. Listed company - disclosure and reporting obligations + grant limit regulations

4. Risks arising from improper design

5. Pre-design check - assistance from Law Firm Chungchul

Starting point of stock option design: distinguishing company types

A stock option is an employee compensation system that grants officers and employees the right to purchase company shares at a certain price. However, even if the name is the same, the applicable laws and regulations differ depending on whether the company is an unlisted company, listed company, or venture company (the Commercial Act, the Capital Markets and Financial Investment Services Act, the Act on Special Measures for the Promotion of Venture Businesses, etc.).

If you misclassify the company type, problems may arise regarding eligible recipients, limits, and exercise price standards. Therefore, accurately confirming the company type first is the starting point before designing stock options.

Unlisted company - articles of incorporation + special resolution of the shareholders' meeting + 10% limit

Under the Commercial Act, an unlisted company can grant stock options only if it meets the following requirements.

• Basis in the articles of incorporation: Matters concerning the grant of stock options must be specified in the articles of incorporation

• Special resolution of the shareholders' meeting: The recipients, limits, exercise price, etc. must be determined by a special resolution of the shareholders' meeting

• 10% limit: Grants and transfers are allowed only within 10% of the total number of issued shares

It is not a structure where the representative or management can decide internally and simply issue them; the company must establish the articles of incorporation and shareholders' meeting procedures. If this basic structure is overlooked, the validity of the stock options themselves may later be challenged.

Listed company - disclosure and reporting obligations + grant limit regulations

For listed companies, disclosure and reporting obligations under the Capital Markets Act are added on top of the requirements for unlisted companies. In addition, separate regulations apply to recipients and limits (such as strengthened board resolution requirements and rules for protecting general shareholders), making the process more stringent than for unlisted companies.

Because listed companies must explain matters to investors and the market, stock options are an area where not only employee compensation but also disclosure risk must be managed together.

Risks arising from improper design

If stock options are designed in a way that does not fit the company type, the following problems may arise.

• Dispute over the validity of the grant itself — employees may have their rights denied at the time of exercise

• If the shareholders' meeting resolution is omitted, the company and directors may be liable for damages

• If the limit is exceeded, the granted portion may be void or partially void

• For listed companies, fines and sanctions for disclosure violations

If the initial design is wrong, it can later lead to talent loss, disputes, and even a downgrade in corporate valuation.

Pre-design check - assistance from Law Firm Chungchul

Stock options are not a matter of "giving them," but a matter of "designing them to fit the company type". Law Firm Chungchul provides integrated support for stock option design advice for unlisted, listed, and venture companies, amendments to the articles of incorporation, review of shareholders' meeting procedures, and management of disclosure risks.

You can operate without disputes later only if the design is done correctly from the beginning. If you need stock option design assistance, please consult Law Firm Chungchul.

This post is intended to provide legal information, and different outcomes may arise depending on the specific circumstances. Please consult a professional for accurate legal advice.