The first round of legal proceedings has begun over the market capitalization-based delisting standard that Korea Exchange and financial regulators fast-tracked into effect, as three listed companies filed injunction applications against the bourse. Ahead of Friday's first hearing, both sides submitted their written briefs to the court.
The law firm Chambers, representing the three listed companies as creditors in the case, submitted its preparatory brief to the court on Tuesday. Korea Exchange, the respondent, filed its answer through its legal representatives the following day, on Wednesday. At Friday's hearing, the court is expected to verify the facts based on the documents both sides have submitted.
The injunction applications were filed last month by two companies listed on the Kospi market and one on Kosdaq, who argued that the early implementation of the revised market cap listing rules was unlawful and sought to block their designation as issues under administrative watch and any subsequent delisting decisions.
One of the creditor companies — referred to as Company A — has been listed on the Kospi market for more than 20 years. It has posted annual sales in the 120 billion won ($86 million) range for three consecutive years since 2023, yet was recently placed under administrative watch after its market cap fell below the threshold.
The dispute centers on two main issues: the basis for calculating the delisting threshold itself, and the legitimacy of the procedure by which that threshold was accelerated.
Korea Exchange set its minimum market cap requirement at 2.5 billion won when the rule was first introduced in 2005, raised it to 5 billion won in 2008, and kept it there for 17 years. Last year, the exchange announced a tenfold increase to 50 billion won, to be phased in — 20 billion won in 2026, 30 billion won in 2027, and 50 billion won in 2028 for Kospi-listed companies.
The exchange then moved the timeline up again. From July 1, the threshold was raised to 30 billion won for Kospi companies and 20 billion won for Kosdaq companies, with the 50 billion won threshold for Kospi (and 30 billion won for Kosdaq) set to take effect from Jan. 1 next year.
The creditors' legal representative argued that the basis for calculating the threshold "is a decisive factor in assessing the legitimacy of the rule change." If the true purpose of the revision was to weed out insolvent companies, the representative said, "the threshold should have been derived from empirical analysis of what constitutes an insolvent company and at what market cap level such companies are meaningfully concentrated."
The representative added that under the current standard, "a company with a market cap below 50 billion won must be uniformly expelled from the market, while one above 50 billion won is deemed fit to remain listed — yet it is unclear what substantive difference exists between a company worth 49.9 billion won and one worth 50.1 billion won." The argument is that two such companies could be identical in sales, operating profit, total equity and other fundamental measures.
The creditors also argued that Korea Exchange had seriously undermined the principles of predictability and protection of legitimate expectations by unilaterally reversing the phased implementation schedule it had publicly announced. The resulting uncertainty, they said, had driven down share prices at the affected companies.
Korea Exchange rebuffed the challenge, arguing that listing rules carry both a contractual character and a public-interest, regulatory character, and are therefore not void unless they are manifestly contrary to the principles of proportionality and equity. The exchange also maintained that the sharp rise in the average Kospi market cap and the need to bring the threshold to an effective level comparable to major overseas exchanges justified the increase.
Specifically, Korea Exchange argued that the 5 billion won threshold had become effectively meaningless after remaining unchanged for 17 years since 2008, and that the phased increase — from 20 billion won to 30 billion won to 50 billion won — was justified given that the average Kospi market cap had grown 7.8 times over the same period.
The exchange also rebuffed claims that the new standard is excessive compared with overseas exchanges. The New York Stock Exchange requires a market cap of $50 million for companies with equity below $50 million, and a market cap of $15 million for those with equity of $50 million or more as a delisting trigger.
On NASDAQ, a company faces delisting if it simultaneously fails to meet all three thresholds: equity of $10 million, total assets and revenue of $50 million each, and market cap of $50 million.
The creditors pushed back on this comparison, saying the United States evaluates market cap, equity and total assets in combination. They also noted that NYSE does not immediately delist a company that falls below the threshold — instead granting an 18-month remediation period and a substantive review process.
Critics also question whether a direct comparison between NYSE and Kospi, or between NASDAQ and Kosdaq, is appropriate. According to data released by the World Federation of Exchanges in August, NYSE's total market capitalization reached $33.29 trillion and NASDAQ's reached $43.58 trillion. As of Thursday, Kospi stood at 5,652 trillion won and Kosdaq at 460 trillion won — meaning NYSE is roughly eight times larger than Kospi and NASDAQ roughly 132 times larger than Kosdaq.
Korea Exchange further argued that the process satisfies the minimum-infringement standard, pointing to a 30-trading-day observation period followed by a 90-trading-day recovery window as a graduated procedure. The exchange also said that even after delisting, shareholders can continue trading on the over-the-counter K-OTC market, limiting the harm to private interests.
K-OTC is an unlisted share trading platform operated by the Korea Financial Investment Association. To support shareholders of delisted companies, the association established a dedicated section within K-OTC for delisted companies last August, providing trading support for up to six months.
The creditors disputed this, arguing that once a company is placed under administrative watch for falling below the market cap threshold, "it is effectively branded as a pre-delisting company, making any share price recovery practically impossible." They added that K-OTC's liquidity and price-discovery functions "are incomparably inferior to those of the regular market," and that the support is capped at six months.
The fallout from the market cap-based delisting rule is already materializing. As of Friday, 46 listed companies had been placed under administrative watch for falling below the market cap threshold. Ten companies — two on the Kospi market and eight on Kosdaq — were flagged under both the low share price (penny stock) and low market cap criteria simultaneously. Of those, 15 companies fell short of the raised market cap requirement that took effect July 1: seven on the Kospi market and eight on Kosdaq.
Korea Exchange is expected to mount a full-scale defense in the injunction proceedings. If the court rules in favor of the listed companies, other firms affected by the already-implemented higher delisting threshold could file a wave of similar suits. The exchange has retained law firms Bae, Kim & Lee and Hwang Mok Park as its legal representatives.
jiyun@heraldcorp.com
moon@heraldcorp.com
