K-pop giant SM up against Align Partner's shareholder activism

South Korea’s Align Partners Capital Management is intensifying its shareholder activism against K-pop music label giant SM Entertainment Co., in which the activist fund owns a 1.1% stake. 

Align Partners said on Oct. 4 that it has called on SM to allow it to inspect and copy the K-pop label’s board meetings minutes and account books related to transactions with Like Production, a boutique firm wholly owned by SM founder and Chief Producer Lee Soo-man. Lee holds an 18.5% stake in SM.

SM pays a considerable amount of capital every year to Like in royalties, which Align Partners says undermines the entertainment behemoth’s shareholder value.

The entertainment giant paid 11.4 billion won ($8 million) in royalties to Like in the first half of 2022, equivalent to 30% of SM’s consolidated operating profit during the same period.    

The activist fund also asked for SM to release data on transactions between SM’s largest shareholder Lee and other firms in which he owns a 30% stake or more. Align Partners has set the deadline for SM’s response to the demands as Oct. 18.      

In August, Align sent an activist shareholder letter to SM’s board of directors, requesting that the K-pop label end its entertainment production business contracts with Like.

If SM fails to disclose its termination of contracts with Like by Sept. 30, Align will pursue a shareholder’s lawsuit, the activist fund stated in the letter.

SM announced on Sept. 15 that it will review an early termination of contracts with Like, scheduled for end-2022, and disclose the termination plans as soon as the resolution passes at a board meeting.

On Sept. 16, the day after the announcement, SM’s stocks jumped 18.6% with 448 billion won in transactions, the largest amount of daily trade since it was listed in April 2000.

However, the entertainment giant failed to disclose any contract termination with Like by Sept. 30, the date Align Partner threatened to begin legal action if no such disclosure was made.

SM said on Oct. 3 that it is deeply considering a number of factors with stakeholders on the contract termination and disclosure and will announce the result of its review, according to Align.     

Align believes that SM will sign an agreement on the early termination of business contracts with Like, the activist fund said.

The right to inspect and copy the board meetings’ minutes and account books is legally guaranteed for shareholders, and shareholders should check relevant facts and take necessary actions to protect their rights, Align added.

Write to Jun-Ho Cha at chacha@hankyung.com
Jihyun Kim edited this article.