[SM Management Battle] Series of Twists... Hive and Kakao Face Off in March General Meeting 'Biggest Focus'

Lee Soo-man Chooses HYBE Over Kakao
Attention Grows on Shareholders' Meetings as HYBE and Kakao Face Off

[Asia Economy Reporter Kim Heeyoon] Former SM Chief Producer Lee Soo-man was skilled at making comebacks. In 1989, when SM Planning was newly established, he declared his withdrawal from popular broadcasting programs where he served as MC to focus on SM Planning's work and due to worsening laryngitis. This led to rumors in the broadcasting industry that he had died. Determined to overcome this, he debuted Hyun Jin-young and Wawa the following year, reshaping the landscape of Korean dance music.

On the 7th, after Kakao secured a 9.05% stake in SM Entertainment, Lee, who was staying abroad, hurriedly returned to Korea, expressed his position through legal representatives, and discussed his future course of action while hospitalized with an arm injury. On the 10th, HYBE announced it would acquire 80% of Lee’s SM shares, once again changing the landscape of the K-pop industry. The reversal stories he wrote always surprised the world. The beginning was also the start of K-pop, and the end symbolizes the conclusion of an era.

Photo of Lee Soo-man, SM Chief Producer, featured in the American entertainment media Variety Photo by SM Entertainment

The management dispute surrounding SM unfolded faithfully following the five-stage rule of dramatic structure. If not for the reversal directly involving Lee, the plain narrative of cause-development-conclusion would have ended without crisis and climax, but these elements heightened dramatic expectations.

Beginning - Cracks in the Firm Governance Structure and Activist Fund 'Align'

Lee resigned from SM’s board of directors in 2010, declaring his withdrawal from management, but maintained control through Like Planning. Like Planning is Lee’s personal company established in 1997, and all tasks he handled were subcontracted by SM to Like Planning with royalties paid accordingly. Avoiding management responsibility but remaining the major shareholder and chief producer, Lee earned 11.4 billion KRW through Like Planning in the first half of last year alone. During the same period, SM’s operating profit was 38.6 billion KRW.

The first to raise issues about Like Planning was KB Asset Management, SM’s third-largest shareholder in 2019, demanding governance improvements. However, SM flatly rejected the demand, emphasizing the importance and role of producing. Align Partners, which secured a 1% stake in SM last year, also pointed out the same problem. Align, an activist fund, launched a more aggressive offensive. When SM again remained silent, Align succeeded in appointing an auditor they recommended at the March shareholders’ meeting last year. Although SM showed some movement in response to Align’s actions supported by minority shareholders, the industry predicted it would be difficult to cause a major stir.

Changhwan Lee, CEO of Align Partners Asset Management
[Photo by Align Partners Asset Management]

Development - SM’s Early Termination of Producing Contract with Lee Soo-man

In October last year, SM announced the early termination of the contract with Lee’s personal company Like Planning. From 2000, SM paid Like Planning a total of 148.6 billion KRW over 22 years. This amount corresponded to 35% of SM’s total operating profit of 420.7 billion KRW during the same period. Align Partners welcomed the current board’s willingness, positively evaluating it. Subsequently, on January 15, SM announced governance improvement measures, including composing the majority of the board with outside directors, introducing an outside director candidate recommendation committee, and changing the procedure for appointing the board chair to strengthen board independence.

However, Align pointed out that “the independent composition of the board and the resolution of transactions between founder Lee Soo-man and affiliated companies have not been addressed,” highlighting the persistent links between Lee and SM. Even after the announcement of the contract termination between SM and Lee’s personal company Like Planning, SM did not announce specific producing plans, causing Align to worry about the revival of Like Planning. Inside SM, Lee showed discomfort with Align’s excessive demands, while current CEO Lee Sung-soo took a stance of somewhat accepting shareholders’ opinions, causing signs of conflict. It was the moment when Lee’s long-term rule, once shining with achievements, faded into autocratic overreach.

Co-CEOs Lee Sung-soo and Tak Young-jun of SM Entertainment.

Crisis - ‘Soo-man-less Soo-man Team’: SM 3.0 Vision Announcement and Kakao Becoming Second Largest Shareholder

On the 3rd, SM officially formalized its separation from founder and major shareholder Lee Soo-man by announcing the ‘SM 3.0 Four Core Growth Strategies.’ Breaking away from the single producer system led by Lee from the company’s founding in 1995 until 2020, the plan involved deploying five production centers, establishing and operating in-house and independent labels. SM stated that through this, it would reduce IP debut and album release delays from the existing 25% to below 5%, and shorten the average artist debut period from 3.5 years per team to debuting at least two artist teams per year. The number of albums released annually was also targeted to increase from 31 to over 40. The SM 3.0 strategy indirectly suggested that the external criticism of insufficient artist debut and activity frequency relative to the vast resources was due to Lee’s monopolistic producing system.

SM’s bold moves did not stop there. On the 7th, Kakao announced it had secured a 9.05% stake in SM by acquiring 1.23 million new shares and 1.14 million convertible bonds. The current management reportedly excluded Lee’s affiliates from the board. Ji Chang-hoon, an outside director who voted against Kakao’s stake acquisition at the SM board meeting, criticized, “The directors made decisions about the company’s future without proper discussion or deliberation,” and added, “The previous board meeting, which discussed producing restructuring in response to Align’s demands, was held remotely on the morning of the Lunar New Year holiday with the agenda sent the day before. I have never heard of any company operating its board like this.”

After Kakao quickly became the second-largest shareholder by joining forces with SM’s current management, Lee reportedly became furious. At that time, Lee’s SM stake was 18.46%, and after Kakao’s 9.05% acquisition through a paid-in capital increase, his stake was further diluted, raising concerns about his weakening influence as a major shareholder. On the 8th, through the law firm Hwawoo representing him, he stated, “We will fundamentally block SM’s board’s illegal attempts through an injunction prohibiting illegal issuance of new shares and convertible bonds,” criticizing it as “an illegal decision infringing on existing shareholders’ preemptive rights.”

As public opinion wavered, on the 9th Align disclosed the contract details between SM and Like Planning to solidify its position. According to the contract, Like Planning was to receive a 6% royalty on revenues from previously released albums and music until 2092, and a 3% royalty on management revenues until the end of 2025. The issue of royalty collection for the next 70 years arose, causing public opinion to turn negative toward Lee.

Bang Si-hyuk receives Billboard Power 100 'Clive Davis Visionary' award. Photo by Yonhap News

Climax - Lee Soo-man’s Masterstroke of Transferring 14.8% SM Shares to HYBE

Lee, who reportedly sustained an arm injury abroad, hurriedly returned on the 7th, announced his position on the 8th, and sought countermeasures. Amid various scenarios anticipated in the industry, rumors began circulating on the 9th in securities circles that HYBE would acquire Lee’s shares. The prediction soon became reality.

On the 10th, HYBE announced it had acquired 14.8% of SM shares held by major shareholder Lee Soo-man for 422.8 billion KRW. HYBE also announced a public tender offer for shares held by SM minority shareholders. HYBE did not acquire all of Lee’s shares at once because it would trigger a pre-merger notification requirement. To avoid this, HYBE plans to first purchase 14.8% of Lee’s shares, then buy minority shareholders’ shares, and finally acquire Lee’s remaining shares to proceed with merger approval. HYBE emphasized, “We express respect for Lee Soo-man’s role in cultivating K-pop as an industry and also express our determination to realize the global vision Lee has drawn.” This sparked speculation about Lee’s possible return.

As controversy spread, HYBE released a summary of commitments including non-compete and non-solicitation clauses, voting rights delegation and cooperation obligations, purchase rights on remaining shares, and obligations to resolve transactions with related companies, dismissing rumors of Lee’s return. Ultimately, the current management’s SM 3.0 vision excluding Lee and Kakao’s attempt to exert influence as the second-largest shareholder have been complicated by ‘Lee Soo-man’s choice.’

Group BTS's agency HYBE announced that it will acquire a 14.8% stake held by Lee Soo-man, the major shareholder and former chief producer of SM Entertainment, for 422.8 billion KRW. Originally, Lee Soo-man, the largest shareholder of SM with an 18.46% stake, will be surpassed by HYBE, which will become the largest shareholder through this transaction. The photo was taken on the 10th in front of HYBE in Yongsan-gu, Seoul. Photo by Yonhap News.

Conclusion - HYBE and Kakao Face Off at March Regular Shareholders’ Meeting

HYBE is preparing to secure stable shares by conducting a public tender offer for SM shares at 120,000 KRW per share by March 1. The industry expects Kakao to respond with a public tender offer as well, but internally there is no fixed plan.

As of the third quarter last year, the National Pension Service held 8.96% and KB Asset Management held 5.12% of SM shares. Com2uS, which acquired about 990,000 shares last October securing a 4.2% stake, is also a notable player. Align, which triggered this entire situation, holds 1.1%.

Therefore, the upcoming SM regular shareholders’ meeting scheduled for March, along with the court’s ruling on the injunction application filed earlier by Lee, is expected to bring a conclusion to the SM management dispute.