Activist fund wins over K-pop pioneer at SM Entertainment annual meeting

South Korea’s entertainment behemoth SM Entertainment Co. is poised to have a new outside auditor – a measure expected to bring a much-anticipated shift in the company’s governance. 

Local activist fund named Align Partners Capital Management had been pushing for the change for months, in a bid to raise the K-pop label’s stock value that is currently underperforming compared to its competitors. The newly established operator is founded by Lee Chang-hwan, an alumnus of US global investment company KKR & Co. 

SM Entertainment held its regular shareholder meeting Thursday at D Tower Seoul Forest in the country's capital. The meeting was pushed back by two hours, ahead of a vote that was widely expected to be contentious.

The voting was not a tight race as three candidates backed by SM Entertainment's board of directors dropped out.

As such, Align Partners’ choice became the new auditor by default. The incoming auditor Kwak Jun-ho is the former CFO at KCF Technologies and currently the treasurer at Oriental Brewery.

SM Entertainment shares finished Thursday's trade 2.51% higher at 81,600 won ($67) per share. The stock price started surging shortly after the shareholder meeting wrapped up around 11:30 am local time. 

The SM shares rose as much as 7% in intraday trade to reach a record-high 85,600 won per share.

BETTER GOVERNANCE

Experts view the latest vote to be a David and Goliath style win for minority shareholders of SM Entertainment.

The smaller players believe the company’s governance has been compromised by its founder and Chief Producer Lee Soo-man. Lee has an 18.5% stake in SM Entertainment. 

The 69-year-old wholly owns the boutique firm Like Production, through which he received 24 billion won ($20 million) in royalties from SM Entertainment last year. To put the figure into perspective, that amounts to 36% of SM Entertainment's 67.5 billion won revenue last year. 

The shareholders are of the view that such funneling of commissions is not in line with best practices. The entertainment juggernaut, for its part, argues it is in the best interest of its shareholders to respect Lee’s creativity and originality. 

The Norges Bank Investment Management (NBIM), which manages the Norwegian government's pension fund, had recently vetoed every candidate backed by SM's board of directors; from the auditor to upper level managers. The world's biggest sovereign wealth fund explained they view that the company's decisions infringe upon the rights of minority shareholders.

NBIM has a 3.42% stake in the South Korean entertainment giant.

FALTERING NEGOTIATIONS

The insistence on protecting the founder’s creativity, however, could be the reason behind the continued faltering of its acquisition deals. 

On Monday, industry insiders revealed that Kakao Entertainment Corp. has hit a snag in its talks to buy a controlling stake in SM Entertainment.

The entertainment unit of Kakao Corp. was scheduled to wrap up the deal estimated at 1 trillion won ($815 million) last week; and the news of the possible takeover first made headlines earlier this month.

Under the agreement, Kakao was to purchase the entirety of Lee’s stake in the company, as well as the shares to be issued by the entertainment giant to increase its ownership. 

SM's Lee was expected to put the proceeds from the stake sale back into unlisted Kakao Entertainment to buy its shares. 

Those familiar with the negotiations told The Korea Economic Daily that the latest delay is due to Lee's request to maintain the current level of management rights to the company he founded, in addition to a hefty hike in his salary.

Last October, SM entered into similar negotiations with CJ ENM  Co.

The talks fizzled out around the end of last year, however, after CJ failed to narrow the difference between SM's new business plans in the metaverse and non-fungible digital token (NFT) realms, among other reasons.

Prior to launching what many consider the pioneer K-pop label, Lee was a well-known artist in South Korea’s music scene. Lee established SM Entertainment in 1995 and produced a string of globally popular groups such as H.O.T, Girls' Generation, and Aespa.

(Updated with share price and backgrounder)

Write to Jee Abbey Lee, Seul-gi Lee at jal@hankyung.com
Jee Abbey Lee edited this article.