Communicating with Align SM but No Confirmation on Early Termination of Contract with SM Like Planning
Possibility of Increased Response Level
Source: SM
[Asia Economy Reporter Hwang Junho] Activist fund Align Partners Asset Management is gradually escalating its response to prematurely terminate the contract between SM Entertainment and Like Planning, the personal business of producer Lee Soo-man. However, as SM has yet to provide a definitive answer, attention is focused on whether demands for a board replacement may arise in the future.
On the 7th, Align stated, "Since sending the certified letter, communication with SM is ongoing," adding, "We expect SM to make an official disclosure." They continued, "We are considering various scenarios, but nothing has been finalized yet," and "We will act according to SM's response."
On the 4th, Align sent a certified letter to SM stating, "We believe the SM board will sign an agreement to prematurely terminate the producing contract with Like Planning with a strong sense of responsibility," and "As the first step in phased shareholder rights protection measures, we request access to the board meeting minutes and accounting books." This came after SM conveyed via email on the 3rd that they "plan to disclose the results of further review," prompting Align to raise its level of response.
Earlier, in August, Align sent an open shareholder letter to SM, demanding the termination of the service contract and royalty payments between SM and Like Planning, citing these as actions that damage shareholder value. SM announced on the 15th of last month that it would immediately disclose the early termination of the contract once confirmed by a board resolution. Subsequently, Align requested follow-up discussions and a confirmed disclosure including a board resolution by the 30th of last month, but only received a response on the 3rd stating "still under review."
Industry insiders note that while Align claims behind-the-scenes negotiations with SM are underway, if SM does not provide a definitive answer, the level of response is expected to escalate further. The most significant impact would be the rejection of reappointment proposals for four board members whose terms expire in March next year. Align holds a 0.91% stake together with related parties, and at the March shareholders' meeting, it succeeded in appointing Kwak Junho, recommended by Align, as auditor with support from various institutional shareholders. Currently, SM's board includes figures such as co-CEO Tak Young-joon and inside director Park Jun-young, who have served SM for over 20 years. However, co-CEO Lee Sung-soo (Lee Soo-man PD’s nephew-in-law) and outside director Ji Chang-hoon (former president of Korean Air and a high school classmate of Lee Soo-man PD at Kyungbock High School) are considered to be directly or indirectly connected to Lee Soo-man PD.
Particularly advantageous for Align is the shareholders’ expectation of a stock price increase upon termination of the contract with Like Planning. Following news on the 15th about reviewing early termination with Like Planning, SM’s stock price rose 18.60% on the 16th. Additionally, securities analysts estimate that SM paid 98.3 billion KRW in fees to Like Planning over the past seven years, and considering this, operating profit could increase by 29.7 billion KRW next year.
Align added, "We do not know what internal circumstances prevent SM from giving a definitive answer, but we understand that reversing a disclosure is difficult." The deadline for SM’s response to Align’s request is the 18th.
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