As blastar wrote, the sprite height in SCB3 really specifies a vertical window.
The height is specified in tiles (16 pixels increments) and is used by the video chip to know if the sprite falls in the raster line being rendered, along with the Y position.

This can be a problem with vertical shrinking if the sprite's tilemap contains garbage after the used zone.
With 0 shrink, the sprite graphics should match the height you specified so no problem.
With shrinking, the video chip will continue rendering forward in the tilemap until it reaches the sprite's height. So if there's garbage in the tilemap, it'll end up being displayed.

The solution in that case is to clear the sprite's unused tiles to a completly transparent tile.

Also, this can cause problems with the 96 sprites per line limit because even if the tiles are transparent, they still count as sprite pixels and count in the limit.
So you can also automatically adjust the sprite's height by computing the value from the real graphics height and the shrink value.

That being said, it's weird that the glitch only occurs on some systems. I thought SNK stuck to the same logic for all video chips.

The MV-1FZ, NEO-AEC and MV1-ACH all have LSPC2. The MV-1C has NEO-GRZ and the MV-2F has the PRO chipset. So anything not based on LSPC2 shows the glitch ?