In September 2021, Hwaum Law Office was engaged by Venture Company A, which was in the process of raising investment, to provide legal services for the preparation of an investment agreement. Hwaum successfully completed the engagement.
An investment agreement generally sets out the terms of the new shares to be issued, the obligations of the company and its interested parties*, mechanisms for the investor’s participation in management, restrictions on the transfer of shares by interested parties, and other special provisions. The specific terms may vary depending on the key investment terms set out in the Term Sheet, the size of the investment, and other circumstances.
* An “interested party” refers to a person who becomes a party to the investment agreement and undertakes obligations intended to ensure the performance of the agreement. In practice, founders, CEOs, or major shareholders who are actively involved in the management of the company commonly participate in investment agreements as interested parties.
Certain provisions concerning the issuance of class shares (preferred shares) included in an investment agreement become effective only upon registration of the relevant terms of the class shares. Because the issuance of such shares generally accompanies a capital increase, the corresponding capital increase must also be registered.
Hwaum Law Office operates Cello (corp.cello.bz), a specialized corporate registration service, and is therefore able to ensure that the terms of the investment agreement are properly reflected in the corporate registry and that the related registration procedures are carried out in an integrated and legally compliant manner.
In this particular engagement, the client requested that the agreement accurately and legally reflect the terms negotiated with the investor regarding preferential rights to dividends and distributions of residual assets upon liquidation.
With respect to dividend rights, the amount or rate of dividends generally needs to be determinable or foreseeable at the time of issuance, typically expressed as a certain percentage of the par value (or issue price) per share. Provisions that deviate from this conventional structure may be deemed invalid and can create potential grounds for future disputes.
Hwaum carefully reviewed the proposed terms of the non-standard preferred shares to identify and mitigate potential legal risks. We advised the client on the relevant legal issues and successfully incorporated the client’s requirements into the investment agreement in a legally compliant manner.
Author: Attorney Soon-kyo Kwon
Reviewed by: Attorney Jeong Jae-kwon