Smilegate lost a first-instance damages lawsuit worth about 100 billion won over the failed initial public offering of Smilegate RPG.

The Seoul Central District Court's Civil Division 31, chaired by Presiding Judge In-su Nam (남인수), ruled on Wednesday in favor of Mirae Asset Securities in a lawsuit seeking damages and payment of a purchase price against Smilegate RPG. It ordered the defendant to pay 100 billion won and delayed-payment interest at an annual rate of 12 percent from Dec. 8, 2023 until the day of full repayment. It also ordered the defendant to bear litigation costs.

The case stems from Rhinos Asset Management's purchase in 2017 of 20 billion won worth of Smilegate RPG convertible bonds. The contract included a clause requiring the company to pursue a listing if it met a condition of at least 12 billion won in net profit for the previous year. Mirae Asset Securities brokered the transaction and became the plaintiff in form.

The key issue was Smilegate RPG's 2022 accounting treatment. The company classified conversion rights as equity through 2021, then changed them to liabilities in 2022 and reflected valuation losses of about 530 billion won. The investor side argued the losses were accounting losses without actual cash outflows, but the change resulted in a net loss of about 140 billion won in 2022. Smilegate argued that this meant its listing obligation had lapsed.

The court did not accept that. It said the liability classification of the conversion rights could conform to current accounting standards, but found that asserting the listing obligation had lapsed on that basis ran counter to the principle of good faith when considering financial regulators' responses to inquiries, practice at the time and the contract structure. It said changing the classification from equity in 2021 to liabilities in 2022 created a circular structure under which contractual obligations were effectively left as an empty shell, and found the company did not comply with a contractual clause requiring the plaintiff's consent in the event of major capital structure changes.

The court calculated damages at about 362.7 billion won by valuing Smilegate RPG at about 8.08 trillion won and applying the plaintiff's 6.414 percent stake and a 70 percent cap on liability. It recognized the full amount because the plaintiff sought only 100 billion won.

Smilegate RPG was merged into Smilegate Holdings in January this year, and the integrated company has since taken over the lawsuit and responded.

Smilegate said it would closely review the written judgment on its specific contents and legal reasoning and planned to appeal. It said it would speak cautiously about details in consideration of future procedures.