1. Case Overview
a. Parties Represented by Barun Law
We represented defendants who were the founder and former major shareholders of IraeCS Co., Ltd. The plaintiffs, Baruch LLC and Kenan LLC, were financial investors in IraeCS, established as special purpose vehicles by a private equity fund.
b. Case Background
In or around 2022, the plaintiffs exercised their put options and, in order to recover the exercise price, enforced a pledge on the defendants’ shares and thereby acquired those shares. In 2023, the plaintiffs obtained a preliminary injunction confirming their shareholder status and consequently took control of IraeCS’s management. The defendants, however, sought to reclaim management control of IraeCS by settling the put option exercise price based on a fair valuation of their shares.
2. Litigation Details
- The plaintiffs argued that, at the time of enforcing the pledge, the value of the defendants' shares amounted to only KRW 1,863 per share, as calculated under the Inheritance and Gift Tax Act (the "IGTA"). Based on this valuation, the plaintiffs claimed that even after acquiring all of the defendants' shares, there remained an outstanding balance of KRW 62.8 billion under the put option exercise price, and they sought payment of KRW 9.4 billion as part of that amount.
- We countered that the plaintiffs' valuation of the shares was unreasonable and argued that the put option exercise price must instead be settled on the basis of the share value assessed under the Discounted Cash Flow (DCF) method.
- In particular, we emphasized:
① IraeCS's net income had plummeted due to the COVID-19 pandemic at the time of the pledge enforcement;
② The valuation methods under the IGTA are primarily intended to determine tax bases rather than to assess the fair value of shares; and
③ The IGTA valuation method fails to properly reflect the value of going concerns with substantial business value.
On these grounds, we strongly argued that the DCF method must be applied in valuing the shares.
- The court accepted our arguments, ruling that the fair value of the defendants' shares at the time of pledge enforcement should be assessed using the DCF method, at KRW 10,345 per share. As a result, the outstanding put option exercise price was determined to be only KRW 1.4 billion, rather than the KRW 62.8 billion claimed by the plaintiffs. The court issued a reciprocal performance judgment ordering the defendants to pay the remaining balance and the plaintiffs to transfer the put option subject shares.
3. Significance of the Judgment
This case is highly significant as the court accepted the DCF method as the appropriate valuation method for shares of a non-listed company's major shareholders, resulting in a dramatic reduction of the remaining put option exercise price from approximately KRW 62.8 billion to KRW 1.4 billion. The judgment represents a meaningful precedent, laying the groundwork for reclaiming management control in disputes between founders and financial investors.
