Kakao Shaken by Judicial Risks... What Is the Fate of KakaoBank?

Kim Beom-su, former chairman of Kakao, is appearing at the Financial Supervisory Service on the 23rd to be investigated regarding allegations of stock price manipulation related to the acquisition of SM Entertainment. Photo by Kang Jin-hyung aymsdream@

The Financial Supervisory Service (FSS) has referred Kakao executives to the prosecution over allegations of market manipulation involving SM Entertainment, casting a shadow over the future of KakaoBank. This is because if Kakao, the largest shareholder of KakaoBank, is confirmed to have committed a violation of the Capital Markets Act resulting in a fine or heavier penalty, it could lose its status as the major shareholder.

The FSS's Capital Markets Special Judicial Police on the 26th referred three individuals?Bae Jae-hyun, Kakao's Chief Investment Officer; Kang Ho-jung, Head of Kakao's Investment Strategy Office; and Lee Jun-ho, Head of Strategic Investment at Kakao Entertainment?as well as Kakao and Kakao Entertainment to the prosecution for violating the Capital Markets Act. Bae and others are accused of conspiring with the private equity firm One Asia Partners to inject 240 billion KRW to drive up SM Entertainment's stock price above the tender offer price made by HYBE, their competitor in the SM Entertainment management rights acquisition battle, with the intent to obstruct HYBE's public tender offer.

Kakao holds a 27.17% stake in KakaoBank, making it the largest shareholder. According to the Special Act on the Establishment and Operation of Internet-Only Banks, major shareholders must not have been fined or penalized with heavier punishments under laws such as the Tax Offenses Punishment Act, the Act on the Aggravated Punishment of Specific Economic Crimes, or the Fair Trade Act within the past five years. Financial authorities conduct regular eligibility reviews of bank major shareholders every six months to determine whether to maintain their approval.

If the prosecution sends Kakao to trial over the market manipulation allegations and a fine or heavier penalty is confirmed, Kakao's eligibility as a major shareholder will be compromised. If the issue is not resolved, it will be deemed ineligible as a major shareholder and must dispose of any shares exceeding 10% of its holdings within six months. This means the major shareholder could change. Currently, Korea Investment & Securities, holding 27.17%?just one share less than Kakao?is the second-largest shareholder, followed by the National Pension Service (5.30%), KB Kookmin Bank (4.88%), and Seoul Guarantee Insurance (3.20%).

The situation is also complicated for the second-largest shareholder, Korea Investment & Securities. If KakaoBank becomes a subsidiary of Korea Investment & Securities, Korea Financial Group would become a bank holding company, which would trigger stricter financial regulations. From Korea Financial Group’s perspective, it must either bear the regulatory risks or sell its stake in KakaoBank.

However, considering future litigation procedures, it is expected to take more than three years for the sale of KakaoBank to materialize. First, a fine or heavier penalty must be finally confirmed by the court, and if Kakao files an administrative lawsuit afterward, a lengthy legal battle could ensue, consuming considerable time.

In this regard, KakaoBank reportedly shows no immediate signs of unusual activity such as mass deposit withdrawals, and there is no significant disruption. Nevertheless, the fallout is affecting KakaoBank as well. KakaoBank’s stock price has been declining this week. As of the 27th, KakaoBank’s stock closed at 18,780 KRW, down 3.74% from the previous day.