[Edaily Marketin Reporter Song Seung-Hyeon ] Ahead of the second round of litigation regarding its 100 billion won initial public offering (IPO), Smilegate has switched its legal counsel from Hwawoo Law Firm to Pacific Law Firm. The move is intended to overturn a ruling that recognized the binding nature of the IPO provision in the investment agreement.

According to investment banks (IBs) and legal circles on the 24th, Smilegate—which was ordered to pay 100 billion won in damages in the first-instance trial for breaching its obligation to pursue an initial public offering (IPO)—recently switched its legal counsel for the appeal from Hwawoo Law Firm to Pacific Law Firm. The first hearing date for the appeal has not yet been set.

Previously, on April 2, the Civil Agreement Division 31 of the Seoul Central District Court (Presiding Judge Nam In-su), acting as the court of first instance, ruled in favor of the plaintiff. While the plaintiff is Mirae Asset Securities, a fund trustee, the actual party to the dispute is Rhinos Asset Management.

The dispute stems from a contract signed in December 2017. Smilegate RPG issued convertible bonds (CBs) with a face value of 20 billion won, including a clause stating that it would pursue a public offering if the formal requirements for listing were met and net income for the immediately preceding fiscal year exceeded 12 billion won. However, the company restricted the exercise of conversion rights to only after passing the preliminary listing review and submitting the securities registration statement. For investors, this meant they could only recoup their investment once the company went public.

These conditions were met in 2021. Driven by the success of *Lost Ark*, the company recorded a net income of 228.9 billion won and met the listing requirements on March 22, 2022, when the audit report was disclosed. Rhinos Asset Management sent an official letter on June 2 of that year instructing the company to proceed with the listing. Under the contract, the company was required to file for a preliminary listing review by the end of June the following year.

However, while preparing its 2022 financial statements, Smilegate classified the conversion rights of its convertible bonds (CBs) as liabilities. This resulted in an accounting loss of 535.7 billion won from the valuation of derivatives. Combined with 19.3 billion won in stock-based compensation expenses, 105.3 billion won in special bonuses, and 29.0 billion won in donations, the company recorded a net loss of 142.6 billion won for the period. In April 2023, the company notified the authorities that “since the requirement for a net income of 12 billion won was not met, the listing application is deemed withdrawn,” and did not file for a preliminary listing review by the deadline at the end of June of that year.

Consequently, Rhinos Asset Management filed a lawsuit in November of that year. There were two main points of contention: whether the clause regarding the pursuit of a listing constituted a legally binding obligation, and how to interpret the fact that the listing requirements had been undermined by accounting treatments.

The court of first instance ruled in favor of the investors on both counts. The court noted that the contract language stated “shall pursue” and contained no qualifying provisions such as a “best efforts” clause. Furthermore, the court recognized the binding nature of the obligation, noting that restricting the exercise of conversion rights to after the listing was intended to benefit the company by reducing corporate income tax through the consolidated tax system, and that the obligation to pursue a listing was the consideration for that benefit. The court also pointed out that if the company were allowed to simply file for a preliminary listing review and then halt subsequent procedures, the decision to exercise conversion rights would be left entirely to the company’s discretion.

Regarding accounting issues, the court acknowledged that classifying this conversion right—which includes a refixing clause—as a liability was in accordance with accounting standards, as it conflicts with the “certain-for-certain” requirement under Korean Adopted International Financial Reporting Standards (K-IFRS) No. 1032. A “refixing” clause is a contractual provision that allows the price at which bonds are converted into shares (conversion price or exercise price) to be adjusted downward if the stock price falls after issuance.

However, the court also explicitly noted that the Financial Supervisory Service (FSS) still permits classification as equity. The court concluded that, regardless of the classification, the company had a contractual obligation to either proceed with the listing by classifying the conversion rights as equity in its dealings with investors, or to continue pursuing the listing even if classified as a liability. The court reasoned that failing to do so would create a vicious cycle in which, as earnings improved and the obligation to list arose, the valuation loss on the conversion rights would increase, thereby eliminating the obligation once again—rendering the clause useless.

The court ruled that, excluding the disputed expenses, net income for the period was 546.7 billion won, stating that “this created the appearance that the requirements were met.” Smilegate argued that it had merely followed the advice of accounting firms, but this defense was rejected. Furthermore, regarding the claim that postponing the IPO due to a shrinking market constituted “business judgment,” the court drew a clear line, stating that the business judgment rule pertains solely to a director’s liability to the company and does not exempt them from liability to the contracting party.

This ruling is drawing market attention because it confirms that IPO clauses—which were routinely included in unlisted investment agreements—are not merely declaratory statements but can lead to actual compensation. If this ruling becomes final, IPO clauses are expected to carry even greater legal weight in the future.