HYBE, the biggest shareholder of SM Entertainment, blamed SM Entertainment and Kakao for forming what it called an unfair contract that favors Kakao over other shareholders.
An agreement signed between SM and Kakao gives the latter priority in purchasing new shares or equity-linked securities issued by SM, HYBE claimed.
“There is a separate contract on convertible bonds formed between SM and Kakao apart from their business partnership contract,” said HYBE in a statement Friday. “There is a clause which states that Kakao Entertainment will be given the priority to receive new shares or equity-linked securities.”
HYBE added that by using the clause, “Kakao Entertainment can use the priority to continuously increase its shares of SM by issuing new shares through a third-party allotment,” calling the scenario “unfair to other shareholders as the value of their shares can be diluted.”
The clause can be used as a maneuver to take control of SM’s management, HYBE said.
HYBE also pointed out that SM and Kakao are in an unequal partnership, saying that Kakao Entertainment will have “exclusive rights over SM’s global music distribution without a limit on the time period.”
“Management of SM artists in the Americas will be effectively controlled by Kakao Entertainment as well as ticket circulation of concerts and fan meet-and-greets. The latter will limit artists’ negotiation capabilities.”
HYBE also asked SM shareholders to vote for its candidates for the new board for the sake of SM’s future, saying that “the current SM board cannot be trusted.”
SM refuted HYBE’s claims is a statement issued the same day. It said it has no plans to draw investment through allotment by a third party — hence, Kakao cannot ask SM to issue new shares and use them to further increase its stake.
“SM’s limit on issuing new shares are almost up,” SM said, saying that it only has capacity to issue 20,000 new shares, which is 0.08 percent of the total share. “So it’s legally impossible to issue new shares.”
SM also emphasized that SM and Kakao are in an equal, strategic partnership, denying HYBE’s claims that it turned over the music distribution rights of its artists indefinitely.
“It’s nonsense to claim that we’ve turned over the rights indefinitely when we haven’t even smoothed out the details yet,” said SM. “Specifics will be discussed later through a separate contract.
“HYBE knows that it’s more profitable to hand over the distribution to a company which can do its job well — HYBE’s been entrusting music distribution to YG through a five-year contract,” SM pointed out.
“Also, Kakao Entertainment will not be solely managing SM artists in North and South America. We are planning to establish a joint venture in the Americas and cooperate together.”
HYBE, the K-pop agency that created BTS, is the largest shareholder of SM with 14.8 percent of the company it bought from founder Lee Soo-man for 422.8 billion won ($323.8 million) in a transaction that concluded Wednesday.
Lee still has 3.65 percent of the company.
HYBE didn’t pull the brakes there and ultimately aims for a 40 percent total stake, with the additional shares being purchased in the open market via a tender offer at 120,000 won per share. The offer will be valid until March 1.
Kakao is set to buy 9.05 percent of SM Entertainment via stock and convertible bonds for 217.2 billion won, with the deal closing March 6.
Lee challenged the deal as illegal and filed for an injunction from a court.
The first hearing was held on Wednesday, and more information was requested from both sides.
No date was set for the ruling.
SM continues to view HYBE’s takeover as hostile.
“We cannot hide our surprise that HYBE is attempting to create a K-pop industry ‘of, by and for HYBE’ by ridding itself of a powerful competitor instead of contributing to the growth of domestic K-pop industry through competition in good faith.,” said SM.
“If HYBE’s hostile takeover succeeds, it will damage not only SM employees, shareholders, fans and artists, but also the entire K-pop industry and ecosystem.”
BY LEE JAE-LIM [email@example.com]