K-pop pioneer SM engulfed in management dispute

Kakao Corp., South Korea’s mobile platform giant and operator of the country’s top messenger app Kakao Talk, is set to become the second-largest shareholder in K-pop pioneer SM Entertainment Co. with its Feb. 7 announcement that it will buy new shares and convertible bonds (CBs).

Lee Soo-man, SM’s largest shareholder, founder and former chief producer, said via a major Korean law firm on the same day that he will take legal action against Kakao’s move.

The mobile platform company will buy 1.2 million new shares and 1.1 million CBs in SM, the agency behind K-pop stars such as Girls' Generation, Super Junior, EXO, NCT and aespa, for a combined 217.1 billion won ($172.5 million). The deal will be completed by March 6, Kakao said.

BOARD DECISIONS WITHOUT FOUNDER LEE

If it converts the bonds into equities, Kakao will hold a 9.05% stake and become the second-largest shareholder in SM. Lee owns an 18.46% stake in the music label.

Kakao has also signed a partnership agreement with its subsidiary Kakao Entertainment Corp. and SM. The mobile platform giant said it will create synergy through Kakao Entertainment’s intellectual property value chain, which includes content business, media operation and artist management, and SM’s power in the K-pop industry.

Kakao was in talks with SM to acquire a controlling stake in SM last year, in a deal estimated at 1 trillion won. The deal has been postponed due to a disagreement on share price and other details between the two parties.

The deal comes around two and a half weeks after SM’s board and local activist fund Align Partners Capital Management announced that it would join forces to enhance corporate governance. 

On Jan. 20, SM said it tapped Align Partners CEO Lee Chang-hwan as a board member and will encourage more professionals to be listed on its music production credits, reducing dependence on the direction of founder Lee. Lee, who doesn’t sit on the board, was excluded from discussions for such decisions.

LEE FIGHTS BACK

Seoul-based Yoon & Yang LLC, a major law firm and founder Lee’s legal agent, said on Tuesday it will apply for a preliminary injunction against Kakao’s deal.

“SM’s issuance of new shares and CBs clearly violates Korea’s commercial act and the company’s articles of association during the company’s feud over management rights. The board has made unilateral decisions to expand shareholder support of them,” the law firm stated.

“According to SM’s articles of association, issuance of new shares and CBs is allowed only when the company urgently needs finance for management. SM, which owns a significant amount of cash and cashable assets, doesn’t need to raise capital through such deals,” the law firm added.

Write to Jun-Ho Cha at chacha@hankyung.com

Jihyun Kim edited this article.