MBK avoids immediate fallout with warrant denial, but uncertainty lingers

MBK Partners Chairman Michael ByungJu Kim is surrounded by reporters as he walks toward Seoul Central District Court in Seocho District, Seoul, Tuesday, to attend detention hearings. Joint Press Corps

MBK Partners has avoided the worst-case scenario of a leadership vacuum after the court rejected a prosecution request for warrants to detain Chairman Michael ByungJu Kim and three other executives over allegations of fraudulent corporate rehabilitation at Homeplus, industry officials said Wednesday.

The ruling allows efforts to normalize Homeplus, which is undergoing a court-led rehabilitation process, to continue. However, concerns remain over the normalization of its operations, as legal risks surrounding the private equity firm, the largest shareholder of the country’s second-largest supermarket chain, have not been fully resolved. The charges against Kim and other executives could still be upheld in future court proceedings.

The uncertainty is being compounded by the Financial Supervisory Service’s (FSS) move to pursue “severe” disciplinary measures, including the suspension of duties for MBK executives.

Earlier in the day, Seoul Central District Court dismissed prosecutors’ request to detain Chairman Kim, MBK Vice Chairman and Homeplus CEO Kim Kwang-il, MBK Vice President Kim Jeong-hwan and Homeplus Chief Financial Officer Lee Sung-jin following detention hearings that lasted 13 hours and 40 minutes, the longest on record.

The court cited insufficient evidence to substantiate the charges despite the seriousness of the alleged harm and concluded that the suspects should be allowed to defend themselves without being taken into custody, given the current stage of the investigation.

Prosecutors suspect the four of having issued a substantial amount of asset-backed short-term bonds despite foreseeing a downgrade in Homeplus’ credit rating, before abruptly filing for court-led rehabilitation in March last year, allegedly causing losses to investors.

A Homeplus Express store in Seoul, Dec. 30 / Yonhap

Following the ruling, Homeplus is expected to accelerate its rehabilitation drive while maintaining the executives’ claims of innocence. With liquidity pressures the most urgent concern, the retailer is likely to focus on shoring up cash flow through measures such as the divestment of Homeplus Express, its smaller supermarket division, and the closure or restructuring of loss-making stores.

“If our rehabilitation plan proceeds smoothly, we could return to profitability by 2029, with positive earnings before interest, taxes, depreciation and amortization expected at around 143.6 billion won ($97 million),” a Homeplus official said. “We will push ahead with structural reforms through sincere consultations with all stakeholders.”

While the immediate worst-case outcome has been avoided, the task of restoring liquidity remains uncertain.

Homeplus is seeking about 300 billion won in debtor-in-possession financing, but concerns are mounting that banks may be reluctant to extend fresh funds to a company embroiled in controversy over alleged managerial moral hazard, including claims of deliberately shifting losses. The lingering risk of fraud charges being confirmed through additional investigations and subsequent trials is also seen as a significant burden.

Lee Chan-jin, governor of the Financial Supervisory Service, delivers a New Year’s address at a pan-financial New Year's gathering at Lotte Hotel in Seoul, Jan. 5. Joint Press Corps

The stance of the financial watchdog is another key variable. Regardless of the court’s decision to reject the detention warrants, the FSS is widely expected to proceed with the ongoing heavy sanctions process.

If administrative measures result in the suspension of duties for Chairman Kim or Vice Chairman Kim, their ability to exercise effective control over management would be severely constrained, a setback comparable in impact to detention.

The watchdog failed to reach a conclusion on sanctions at its first review committee meeting on Dec. 18 and is scheduled to hold a second session on Thursday.

Under the Capital Markets Act, sanctions against a general partner of an institutional private equity fund range from institutional caution and institutional warning to suspension of duties for up to six months and a recommendation for dismissal. Sanctions at the level of an institutional warning or above are classified as severe penalties.

MBK’s legal exposure is also expected to have spillover effects on the ongoing management control dispute at Korea Zinc, where MBK has joined forces with Young Poong in a bid to oust incumbent Chairman Choi Yun-beom.

Ahead of Korea Zinc’s shareholder meeting in March, Chairman Choi’s camp is expected to highlight the Homeplus controversy involving MBK, emphasizing that the court’s rejection of the detention warrants does not amount to a declaration of innocence. This could intensify scrutiny of the MBK-Young Poong alliance over ethical issues and place it at a disadvantage in the proxy fight.

The response of both domestic and overseas limited partners is also drawing attention. With the prosecution’s investigation ongoing, pension funds are likely to maintain a cautious, wait-and-see stance and refrain from making new investments in MBK for the time being.