[BizHanKook] To grow a company, you usually have to give up equity. It is the familiar price of growth for founders of startups receiving investment. As they secure development funds, hire staff, and expand overseas, the number of investors increases. Even if the enterprise value grows tenfold, the founder's stake can drop to less than half. This is even more true when the company enters the stock market after reaching that level of growth.
The game company Smilegate was different. It became a giant game developer after hitting it big with "Crossfire" and "Lost Ark," yet 100% of the company's shares are owned by a single person: founder Kwon Hyuk-bin. This unconventional ownership structure is drawing attention once again. It is the decisive reason why an astronomical property division of 2.55 trillion won was ordered in Kwon’s divorce lawsuit.
On the 9th, the Seoul Family Court accepted the divorce petition from the spouse, identified as Ms. Lee, and ordered Chief Vision Officer (CVO) Kwon Hyuk-bin to pay 35% of Smilegate’s shares and 65 billion won in cash. This is the largest amount in any domestic divorce and property division case disclosed to date. Although this is still a first-instance ruling, if it is confirmed as is, the single-shareholder system of Smilegate that has been in place since 2012 is expected to see changes.
Court values Smilegate at 7.1049 trillion won
Looking at the 100% ownership today, it appears as though the founder owned the company entirely from start to finish. That was not the case at the beginning. The two married in 2001, and Smilegate was established the following year. At the time of founding, the equity split was 70% for Kwon and 30% for Ms. Lee. At one point, Ms. Lee was even listed as a CEO and registered director.
The equity composition changed during the company's growth process. As the company expanded, Ms. Lee's stake decreased due to factors such as new share issuances, and in 2010, she sold her remaining stake to Tencent. Later, through share repurchases and restructuring via a holding company in 2012, the 100% ownership structure of the founder was established.
The game that changed the company's fate during that process was the first-person shooter "Crossfire." Released in 2007 and serviced through Tencent starting in 2008, the game achieved massive success in the Chinese market. With the subsequent addition of "Lost Ark," Smilegate established itself as a game company with major hit titles.
Revenue from hits becomes the resource for follow-up development and investment. However, one cannot conclude based on this that Smilegate expanded all its business solely with internal funds. The key is not the entirety of the fundraising method, but the final ownership structure. Even while remaining unlisted to this day, the founder held all the shares, and as the company’s stock value grew, his personal wealth increased accordingly.
In reality, the scale of a business group and the personal wealth of its leader are different. A leader can control a group with only a portion of the shares in a holding company or key subsidiaries. Even if the group is massive, not all shares within it are the leader's personal assets. What is reviewed for division during a divorce is not the assets of the entire company, but personal property, such as the shares held by the parties involved.
Smilegate was different. This is because the founder holds all of the shares of the company subject to division. The court valued those shares at 7.1049 trillion won. Out of the 7.3375 trillion won in net assets, company shares account for approximately 96.8%.
However, this is not a market capitalization formed in the stock market or an actual sale price. It is the court's judgment evaluating unlisted shares for property division. Nevertheless, the value calculated for division is astronomical. Applying the 35% recognized by the first instance court to the shares, the evaluated amount for the property division reaches a whopping 2.4867 trillion won.
Spouse removed from shareholder register: Why did she ask for half?
In the trial, Ms. Lee demanded half of the shares held by the founder, citing her stake at the time of founding, her history as an executive, and her long-term burden of housework and child-rearing. However, the founder's side countered that she could not be seen as a co-founder because there was no actual capital contribution or work involved. The fact that she was an early shareholder and registered executive versus how much she contributed in practice were separate points of contention.
The first-instance court recognized Ms. Lee’s early shareholding, her registration as a CEO, and her role in household chores and child-rearing, but valued the founder’s business acumen and management decisions more highly. It also considered the economic support from Ms. Lee’s family early in the marriage. Nevertheless, the demand for half the shares was not fully accepted.
However, the 30% stake Ms. Lee previously held serves as data for assessing contribution, and the current division ratio is interpreted as a separate result. This is because there was insufficient evidence in the disclosed data to conclude that Ms. Lee led the development of specific games or the expansion into China. This is also distinct from alimony. The court dismissed the alimony claim, viewing that both sides were equally responsible for the breakdown of the marriage.
Given that most of the assets are unlisted shares, interest is also focused on the payment method. Even if there are trillions of won in property on paper, it does not mean there is that much cash in a bank account. Even if one tried to raise funds by selling shares, finding a buyer for a trillions-won stake in an unlisted company is not simple.
Considering this reality, the court ordered the direct transfer of 35% of the shares and a cash payment of 65 billion won. Ms. Lee does not immediately receive cash equal to the evaluated amount; she is now in a situation where she will profit if the share value rises and bear losses if it falls. To cash out, she must determine a buyer, price, and transaction terms. Naturally, the valuation in the ruling does not guarantee an actual transaction price.
What is more important is the fact that Ms. Lee gains the status of a shareholder. For the founder, this means a position as another major shareholder co-owning the company. This is a critical issue that leads to company decision-making problems, rather than just simple property division.
The hidden value of 35%, not one-third
At the beginning of this year, Smilegate launched a management system integrating key entities such as Holdings, Entertainment, and RPG. The goal was to consolidate dispersed businesses and resources to increase executive capability. In this situation, if the ruling is confirmed and the share transfer occurs, the structure will be 65% for the founder and 35% for Ms. Lee.
65% is well over half. Even if Ms. Lee receives 35%, it is difficult for her to become the CEO or immediately take control of day-to-day management. However, the situation changes for matters requiring a special resolution, such as changes to the articles of incorporation.
Under commercial law, changing the articles of incorporation requires two-thirds or more of the voting rights of attending shareholders and one-third or more of the total number of issued shares. If both parties exercise all voting rights and Ms. Lee opposes, the founder’s 65% alone cannot pass it. Conversely, the outcome can change depending on Ms. Lee’s attendance and exercise of voting rights. While 35% is not an unconditional veto on all management matters, analysis suggests it can exert significant influence.
However, it has not been confirmed whether Ms. Lee will hold onto the shares long-term, actively exercise shareholder rights, or sell them. Still, if she attempts to sell, the sale value is expected to be even higher, given that it is a stake exceeding one-third, which can block special resolutions, even if it falls short of the half she initially wanted.
It is reported that the founder’s side will decide on follow-up procedures after reviewing the court’s ruling immediately after the verdict.