A court has ruled that the Korea Exchange's rule delisting companies for falling short of minimum market capitalization is invalid, leaving regulators' drive to clear out troubled listed firms effectively back at square one. The ruling faulted not only the provision used to delist one company but also the decision to move up the rule's effective date, and the fallout is expected to be wide. Other marginal firms facing delisting under the same standard are mounting legal challenges of their own, making investor confusion unavoidable.
According to financial investment industry and legal sources on the 2nd, the court took issue with the structure of the "formal delisting" system, which removes a company from the market without separate review once it falls below a set threshold, regardless of its financial condition or share price. In effect, the decision rejects the premise of the regulators' plan to weed out marginal companies. The 51st civil division of the Seoul Southern District Court, presided over by Senior Chief Judge Kwon Seong-soo, noted in its decision that market capitalization is shaped not only by corporate value but also by factors largely beyond a company's control, such as economic shocks and shifts in investment flows. Unlike cases of final default or complete erosion of capital, the court held, companies falling short on market value must be given a chance to explain their prospects for recovery through an appeal or a review by the exchange's corporate screening committee. The interpretation runs counter to cases in which companies already targeted for delisting have used litigation to stretch the process past a year before shares were finally liquidated, leaving investors stranded.
The court held that because the market-cap threshold had been raised sharply, companies must also be guaranteed a chance to make their case. The point was that a KOSDAQ threshold of 4 billion won cannot be treated the same as one raised to the range of 20 billion to 30 billion won. The exchange's own analysis found that as many as 94 KOSDAQ-listed companies could fall into the delisting pool because of the higher bar. KOSDAQ, in particular, operates a special listing track that admits companies based on their technology and growth potential. Removing companies that entered the market on those terms, without a chance to make their case and solely on the basis of short-term share price weakness, could impose excessive harm even on firms worthy of remaining listed, the court said.
The requirements for avoiding delisting and the timing of their application also drew criticism. The exchange had tightened the market-cap recovery requirement for companies placed under administrative watch, from maintaining the threshold for a cumulative 30 days out of 90 trading days, including 10 consecutive days, to 45 consecutive trading days. But the court found insufficient empirical evidence to justify the tougher standard, given that designation as an administrative-watch issue itself weighs on a share price. The court also held that applying the 30 billion won threshold for KOSPI and 20 billion won for KOSDAQ from July 2026, following a May 2026 rule revision, when they had originally been announced for January 2027, undermined corporate trust and predictability.
Companies contesting delisting decisions in court are indeed lining up. After Eutilex and Daejin Advanced Materials in July, Kmpharmaceutical, Gold & S, Jeil M&S, Samyoung E&C and Jooyontech filed in September for injunctions suspending the effect of their delisting decisions. Busan Casting & Engineering appealed the rejection of its injunction request, and on the 1st of this month Medicox and Fintel also filed for injunctions. With the court now faulting the rule itself, responses from companies facing removal on the same grounds are expected to spread further.
A legal industry official said that because revisions to the Commercial Act have strengthened directors' fiduciary duty to shareholders, failing to respond to a delisting decision could expose a company to shareholder lawsuits. "Directors are also likely to file for injunctions to avoid disputes over their own liability," the official said.
Financial regulators and the exchange have been unable to hide their dismay. Last month, citing the market downturn, authorities delayed the 30 billion won threshold by six months to July next year and introduced a measure allowing companies that meet certain financial requirements to move to the KONEX market without going through share liquidation. But analysts say companies whose delistings have been suspended by injunction are now more likely to stay in their existing market and await a legal ruling rather than transfer to KONEX.
Financial regulators held a meeting on the 2nd to discuss their response, according to sources. Because the court faulted the market-cap-centered exit standard and the lack of a process for companies to make their case, observers say the system could be reworked to weigh a company's underlying value and recovery prospects as well and to guarantee the right to appeal. On that trajectory, the removal of penny stocks trading below 1,000 won is also likely to stall.
The court's brake is expected to disrupt the broader overhaul of KOSDAQ itself. There are also concerns that a planned restructuring of KOSDAQ into separate market segments could be pushed back indefinitely. The plan, which would carve out high-quality innovative companies into a distinct segment, has been slowed by pushback over the classification criteria and the selection of eligible companies.
The KOSDAQ business community views the decision favorably. "The court concluded that delisting a company on market capitalization alone is unreasonable," a KOSDAQ industry official said. "Substantive requirements, not just formal ones, are enough to screen out weak companies."
Some in the market argue that the focus on speeding up removals came at the expense of procedural fairness and market conditions. The recent correction has dragged on and investment money has shifted to overseas markets and safe assets, sharply shrinking trading volume on domestic exchanges. Investors worry that market confusion will persist until regulators come forward with further remedies.
