This article is a contribution by Attorney Jaesik Moon of Choi & Lee Law Firm. If you would like to share quality content for startups in the form of a contribution, please contact the Venture Square editorial team at editor@venturesquare.net.
There's one clause that's always included in any investment contract: the "IPO obligation." These clauses typically stipulate the IPO obligation, stating, "The company shall endeavor to list its shares on a public market" or "The company shall complete the IPO and list its shares on the Korea Exchange (or KOSDAQ) by 00/00/0000 in accordance with relevant laws and regulations and the exchange's listing regulations in order to list (IPO) its common stock on the Korea Exchange (or KOSDAQ)." Furthermore, these clauses often include a clause requiring the company to immediately pursue or prepare for an IPO if an investor requests one.
From the investor's perspective, this may be a crucial clause for exit, or the recovery of investment, but for the investee, it can inevitably be a burden. Even with a company's growth, going public is not something you can do on your own if the external investment environment deteriorates. Furthermore, if the company fails to go public by the deadline, it can be even more fraught with anxiety, fearing various penalties for breach of contract. Below, we will explain how this obligation to go public in investment contracts is interpreted and applied.
1. The meaning and legal binding force of 'must make efforts'
A common phrase in investment contracts requiring the company to go public is "Must endeavor to go public." The general public may find it difficult to grasp the specific meaning of this phrase: whether it means a mandatory listing, or whether it's something they can afford, but not necessarily required. Our courts typically interpret the phrase "will endeavor" in contracts as follows:
“If the text that states that a party must make an obligation includes the phrase “I will make my utmost effort,” it is reasonable to interpret that, unless there are special circumstances, the objective meaning of the party writing such a phrase as meaning that, although the text itself indicates that the party cannot legally assume such obligation, they will actually perform it as far as circumstances permit.” (Refer to Supreme Court Decision 93da32668, March 25, 1994). In other words, the legal obligation was not recognized for the matter that is the object of the “I will make my utmost effort.”
The reason is explained as follows. “Because if there was an intention to legally assume such an obligation, there would have been no need to use the phrase “I will make my utmost effort.” Therefore, if such a phrase had been inserted, it cannot be viewed as meaningless, and therefore, the objective intention that the party intended to express through such an act of expression should be interpreted based on the entire wording including the phrase.” In other words, it was deemed that there was a good reason for adding the phrase “I will make my utmost effort” rather than the phrase imposing an obligation of “must do” or “has an obligation to do.” In other words, it was deemed reasonable to view that there was an intention to impose only a weaker binding force rather than imposing an obligation (of course, if the intention to impose a legal obligation is clear through other provisions or circumstances, this would not be the case).
Therefore, if there is a clause in the investment contract requiring disclosure of corporate information that states, "Must make efforts," you can rest assured for the time being.
2. If the goal of "listing" is not achieved, must a penalty be imposed?
So, if the phrase “will try” is not in the listing obligation clause and it says “must be listed,” then listing must be achieved unconditionally, and if listing is not achieved, will it be considered a breach of contract under the investment contract and will penalties such as a penalty and the investor’s right to demand stock purchase (put option) be borne?
This isn't necessarily the case. Courts generally view an investee's obligation to disclose corporate information as an "instrumental obligation" rather than a "result obligation." A "result obligation" is an obligation to achieve a goal by completing a certain outcome, whereas an "instrumental obligation" refers to an obligation to do one's best to achieve a certain outcome, even if the outcome isn't achieved. For example, construction contracts and manufacturing supply contracts involve the contractor as the result obligation, while a lawyer's legal representation and a doctor's medical treatment obligation are typical examples of "instrumental obligations."
Our court has considered that the result of an IPO, or listing, cannot be achieved solely through the company's performance and efforts, that a breach of the IPO obligation is a breach of the investment contract, which would result in significant penalties for the investee or interested party, and that it runs counter to the essence of venture investment and the policy of fostering startups. Therefore, we view the IPO obligation in a venture investment contract as an obligation (=instrumental obligation) that requires the exercise of due care as a prudent manager, rather than a consequential obligation that must be achieved through IPO (see Seoul Central District Court Decision 2022GaHap536943, July 11, 2024, Seoul Central District Court Decision 2023GaHap95494, January 17, 2025, and Seoul High Court Decision 2023Na2038760, May 9, 2024).
Accordingly, even if a company fails to achieve a listing, if it at least selected an underwriter for the IPO, prepared for the listing review, or engaged in financial and accounting activities necessary to meet the listing requirements, it will not be considered a breach of the investment agreement. In other words, only when the company or its stakeholders "intentionally" fail to go public or there is a material breach of contract related to this failure will a breach of contract be deemed, and a penalty obligation will be recognized.
Therefore, even if you don't achieve the goal of going public, there's no need to fret. However, if your company has grown to a certain extent, it's safe to at least prepare for listing.
With the investment industry currently in a state of flux, the VC industry appears to be focusing more on recovering investment than before. Consequently, it's only natural to pressure investees to go public, and the resulting disputes seem to be on the rise. As previously explained, even if the IPO itself fails, it's not a breach of the investment contract obligations. However, since not all cases can be defended, depending on the specific wording of the investment contract or the company's circumstances, it's advisable to seek expert advice if you're concerned about a breach of the IPO obligations.
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