[Edaily Marketin Song Seung-Hyeon Reporter] The appeal trial for Smilegate, which was ordered to pay damages in the 100 billion won range for violating its obligation to pursue an initial public offering (IPO), will begin on the 20th of next month. Smilegate, which has switched its legal representation to Pacific Law Firm, plans to focus on overturning the first-instance ruling that recognized the binding nature of the IPO provision in the investment agreement. The key issue in the appeal is expected to be how to account for the conversion rights of convertible bonds (CBs).

According to investment banks (IBs) and legal circles on the 12th, the first hearing date for the appeal in the lawsuit against Smilegate RPG for breach of its IPO obligation has been set for November 20 at 2:50 p.m. This comes about seven months after the Seoul Central District Court’s Civil Division 31 (Presiding Judge Nam In-su) ruled in favor of the plaintiff on April 2. The plaintiff is Mirae Asset Securities, a fund trustee, but the actual party to the dispute is Rhinos Asset Management.

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

These conditions were met in 2021, when *Lost Ark* became a hit. Net income for that year was 228.9 billion won, and Rhinos Asset Management sent an official letter in June 2022 demanding that the company proceed with the IPO. However, in its 2022 financial statements, Smilegate classified the convertible bond conversion rights as liabilities, resulting in a derivative valuation loss of 535.7 billion won; when combined with stock-based compensation expenses, special bonuses, and donations, the company reported a net loss of 142.6 billion won for the period. The company notified the relevant authorities in April of the following year that the listing request had been withdrawn due to failure to meet the requirements and did not apply for a preliminary listing review. In effect, the listing obligation was lifted in the very year its financial performance improved.

The court of first instance recognized the binding nature of the clause, noting that the contract text stated “must be pursued” and contained no qualifying provisions such as a “best efforts” clause. The court ruled that restricting the exercise of conversion rights to after the listing was intended to benefit the company by reducing corporate income tax through consolidated taxation, and that the obligation to pursue the listing was the consideration for that benefit.

Smilegate filed an appeal and appointed Pacific Law Firm to replace Hwawoo Law Firm, which had represented it in the first-instance trial. Furthermore, it included former Presiding Judge Hong Seung-myeon, who handles major cases in Seocho-dong, among its legal representatives. Former Presiding Judge Hong is a highly regarded legal figure in Seocho-dong, having joined the legal team representing SK Group Chairman Choi Tae-won in his divorce case appeal (Supreme Court).

The focus of the appellate proceedings is likely to shift to accounting issues. The trial court held that classifying the conversion rights—which included a refixing clause—as liabilities because they violated the “fixed-for-fixed” requirement under Korean International Financial Reporting Standards (K-IFRS) No. 1032 was, in itself, consistent with the standards. Refixing is a condition that allows the conversion price to be adjusted downward if the stock price falls.

However, the court noted that the Financial Supervisory Service still permits classification as equity. The conclusion is that, if either classification were permissible, the company had an obligation to either pursue a listing by classifying the rights as equity in its dealings with investors or to continue pursuing the listing even if classified as a liability. The reasoning is that failing to do so would lead to a vicious cycle in which the valuation loss on the conversion rights increases as performance improves, causing the obligation to disappear again. The court determined that, excluding the disputed expenses, net income for the period was 546.7 billion won, creating the appearance that the requirements were not met.

Smilegate argued in the first-instance trial that it had merely followed the advice of the accounting firm, but this defense was rejected. Since the first-instance court acknowledged the legality of classifying the item as a liability, the appeal is expected to center on whether treating it in accordance with accounting standards constitutes a breach of contractual obligations. The outcome could be affected if the determination changes regarding whether classifying it as equity was actually a viable option.

This ruling drew attention because it demonstrated that IPO promotion clauses—which had become standard practice in unlisted investments—are not merely declaratory language but can lead to actual compensation. If the first-instance ruling is upheld on appeal, IPO promotion clauses in investment agreements are expected to carry even greater legal weight.