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[Asia Economy Reporter Kwangho Lee] Activist fund Align Partners Asset Management (Align) is expanding its efforts to normalize the management of SM Entertainment (SM Enter). Following the audit, it appears to be increasing pressure on SM Enter by aiming for inside director positions as well.

According to the investment banking (IB) industry on the 27th, Align has begun behind-the-scenes work to secure white knights who will take three inside director seats at SM Enter. It is focusing on securing friendly shares mainly among investment firms. Align currently holds about 1.1% of SM Enter shares but needs around 5% of friendly shares. Acquiring SM Enter shares will grant the right to nominate inside directors.

An IB industry insider said, “Currently, SM Enter’s inside directors are figures aligned with Lee Soo-man, SM Enter’s Chief Producer,” adding, “Their terms expire in March next year, so a standoff is ongoing between SM Enter and Align.” He continued, “Align is sending SOS signals mainly to investment companies such as new technology business finance companies,” and “some investors are seriously reviewing Align’s proposals.”

Key SM Enter Board Members: Chief Producer Lee Soo-man’s ‘Family, Alumni, and Close Associates’

The current SM Enter board consists of co-CEOs Lee Sung-soo and Tak Young-joon, inside director Park Young-joon, and outside director Ji Chang-hoon. This structure was established in March 2020. Since then, Lee has served as CEO and Tak as CMO (Chief Marketing Officer). All have been reappointed twice, with their terms ending on March 26 next year.

Notably, CEO Lee’s background is significant. He is the nephew-in-law of Chief Producer Lee Soo-man. This is not a mere close associate but a blood relation. Lee joined SM’s producing organization as head of the A&R (Artist & Repertoire) team and head of the producing division, becoming a board member in 2017 as the head of music production. He has overseen decisions on songs and concepts for affiliated artists.

CEO Tak started his career as a junior manager at SM Enter and rose to the CEO position. Inside director Park Jun-young has also been with SM Enter since its early days alongside Chief Producer Lee. Outside director Ji Chang-hoon is an alumnus of Gyeongbok High School alongside Chief Producer Lee. Since all are family or longtime close associates, the industry views this as inevitably uncomfortable for Align.

Earlier, at the shareholders’ meeting in March, SM Enter attempted to newly appoint two inside directors but failed due to shareholder opposition. Conversely, Kwak Jun-ho, former CFO of KCF Technologies (now SK Nexilis), proposed by Align, was appointed as auditor. At that time, 16 institutional investors, including the National Pension Service holding 6.3% of voting shares, supported Align’s auditor appointment, achieving an approval rate of 81.3%.

Who Will Be the White Knight? Interest Grows as Align Expands Influence

Thus, Align blocked SM Enter’s inside director appointments and secured an auditor. Subsequently, Align sent open shareholder letters to SM Enter in March and August demanding termination of the contract with Chief Producer Lee’s personal company, ‘Like Planning.’ On the 14th, it succeeded in having the contract between the two companies terminated early as of December 31. This quelled controversies over owner-related preferential treatment.

Having resolved issues regarding the auditor’s independence and preferential treatment controversies at SM Enter, Align has gained some momentum. If it manages to control inside director positions through a white knight, Align is expected to further expand its presence by producing meaningful results as an activist fund.

In a shareholder letter to SM Enter’s board, Align emphasized, “All registered directors’ terms at SM Enter expire in March next year,” and “The board must transform from one serving only the largest shareholder to one serving the company and all shareholders.”