Kakao founder Kim Beom-su enters the Seoul Southern District Court in Yangcheon District, Seoul, Monday, to attend a court review on an arrest warrant against him. The court issued the warrant early Tuesday. Yonhap

Kakao, Korea's leading messaging app operator, faces a troubling outlook following a court's decision to arrest its founder, Kim Beom-su, on allegations of stock price rigging. The escalating prospect of his conviction threatens to disrupt the company's future investment strategies and business restructuring efforts.

At around 1:30 a.m., Tuesday, the Seoul Southern District Court issued an arrest warrant against Kim. He is currently facing charges of breaching financial regulations in the course of Kakao's acquisition of a stake in K-pop management agency SM Entertainment last year.

Prosecutors suspect Kim of being part of an alleged scheme in which leaders of Kakao-affiliated companies manipulated SM Entertainment's stock price to sway the outcome of a bidding race against HYBE, the parent company of BigHit, which manages the globally popular K-pop group BTS.

Kim has consistently denied any involvement in the allegations. During a meeting with Kakao affiliate leaders on July 18, he stated that the charges against him are "not true," and underscored the need for Kakao to reform its governance to fulfill public expectations.

In a text message to reporters, Kakao said, "We regret the current situation, but will do our best to fill the management gap under the leadership of Chung Shin-a, co-chair of the Corporate Alignment (CA) Council." Chung is the CEO of Kakao.

Kakao founder Kim Beom-su attends a meeting with the CEOs of Kakao affiliates at the company's office in Pangyo, Gyeonggi Province, July 18. Courtesy of Kakao

Kim's arrest raises serious concerns about the future of Korea's largest messaging app operator and the stability of its extensive network of affiliates.

Since late last year, Kakao has been working to regain the trust of the market, investors, the general public, and the government by overhauling its business practices.

Kakao launched a Compliance and Trust Committee and replaced the CEOs of key subsidiaries to initiate management reforms. To spearhead governance restructuring and lead Kakao's belated entry into the AI competition, Kim, who had stepped down as chairman of the board in 2022, returned to the company's management by establishing the CA Council and assuming its chairmanship.

Kim's influence across Kakao affiliates is backed by his ownership of Kakao stakes.

He is the largest shareholder of Kakao with a 13.32 percent stake. In addition, K Cube Holdings, the second-largest shareholder with a 10.43 percent stake, is wholly owned by Kim, giving him control over a combined 23.75 percent of Kakao's shares.

Being the largest shareholder of Kakao allows Kim to exert effective control across a vast network of Kakao companies, which hold full or controlling interests in dozens of affiliates and extend to more than a hundred subsidiaries. According to the Fair Trade Commission, Kakao was Korea's 15th-largest conglomerate as of May and the second-largest in terms of the number of subsidiaries and affiliates, which stands at 128.

Considering his influence over Kakao's overall business activities, Kim's arrest is expected to pause mergers and acquisitions, investments, and initial public offerings of Kakao's affiliates, since these actions require approval from the top decision-maker.

Kakao companies have already suffered setbacks in their investment bids stemming from Kim's legal risks. In December, Kakao's fintech subsidiary, Kakao Pay, failed to complete its acquisition of a controlling stake in Siebert, a U.S. brokerage, apparently due to the stock rigging allegation. Similarly, in the same month, Kakao Mobility's attempt to acquire FreeNow, Europe's largest taxi-hailing platform, also ran into a deadlock.

Teh logo of KakaoBank / Courtesy of Kakao Bank

Kim's arrest also threatens Kakao's status as the largest stakeholder in KakaoBank.

Korea's laws stipulate that a non-financial company can retain its largest stakeholder status in an internet-only bank only when it has no history of facing fines or stiffer punishments for financial crimes for the past five years.

Kakao now holds a controlling 27.17 percent stake in KakaoBank. If Kakao loses its status, it has to reduce its stake to 10 percent.

"The arrest warrant implies a greater likelihood of Kim facing a guilty verdict," Samsung Securities analyst Oh Dong-hwan said. "Although it will take a long time before the final court ruling, the fact that Kakao's management has to divert its resources to address legal risks will adversely affect the company's ability to discover new growth engines."

Upon Kim's arrest, Kakao companies' shares closed lower on Tuesday. Kakao ended at 38,850 won, down 5.36 percent from a day earlier. Its affiliates, Kakao Games and Kakao Pay, closed down 5.38 percent and 7.81 percent, respectively. KakaoBank suffered a sharp fluctuation due to mixed interpretations over Kakao possibly unloading its stake and closed at 20,300 won, down 3.79 percent from a day earlier.