[SM Management Battle] SM "Legitimate New Share Issuance" vs Lee Soo-man "Illegal Acquisition by Evasion"

SM Shinju·CB Issuance Injunction First Hearing Dispute
Court Likely to Decide by March 6
HYBE Pays Acquisition Price, Becomes Major Shareholder of SM

[Asia Economy Reporter Hwang Yoon-joo] The legal battle between Lee Soo-man and SM Entertainment's (SM) current management has begun over the legality of issuing third-party allotment new shares and convertible bonds (CB) to Kakao. If the court grants Lee Soo-man's injunction to prohibit the issuance of new shares and convertible bonds, the SM management dispute is likely to end abruptly. Conversely, if the injunction is dismissed, SM's current management and Kakao may proceed with a public tender offer, intensifying the conflict.

The Seoul Eastern District Court Civil Division 21 (Chief Judge Kim Yoo-sung) held the first hearing on the injunction filed by Lee Soo-man against SM on the morning of the 22nd to prohibit the issuance of new shares and convertible bonds. This dispute arose after SM's current management held an emergency board meeting earlier this month and resolved to issue third-party allotment new shares worth 111.9 billion KRW and convertible bonds worth 115.2 billion KRW to Kakao. According to this decision, Lee Soo-man's stake in SM (18.46%) would be diluted. Kakao would secure a 9.05% stake, becoming the second-largest shareholder.

The issue of improving SM's governance, initiated by a shareholder proposal from Align Partners, suddenly escalated into a management dispute between Lee Soo-man and the current management. In response, Lee Soo-man filed an injunction and sold his shares to HYBE. HYBE is conducting a public tender offer at 120,000 KRW per share targeting SM shareholders. If successful, HYBE will secure a 40% stake in SM, stabilizing its control over management.

On the morning of the 22nd, at the Seoul Eastern District Court in Songpa-gu, Seoul, Ahn Sang-hyun, a lawyer from the law firm Hwawoo representing Lee Soo-man, former Chief Producer of SM, and the legal team are heading to the courtroom for the hearing on the provisional injunction application filed by Lee against the issuance of new shares and convertible bonds by SM. Photo by Yonhap News

Both sides launched fierce attacks during the first hearing. Lee Soo-man's legal representative argued, "According to Article 418 of the Commercial Act, the issuance of new shares should primarily be allocated to existing shareholders, and third-party allotment is only exceptionally recognized," adding, "Third-party allotment aimed at ousting the largest shareholder or weakening control is illegal."

They also criticized SM's emphasis on Lee Soo-man's past management mistakes. Lee Soo-man's legal representative stated, "They are framing this case as a battle between good and evil, which is a misleading narrative," and added, "They are trying to obscure the issues of Article 418 of the Commercial Act by labeling Lee Soo-man as a bad person." They also mentioned Kakao's precedent of acquiring management rights of other companies through additional share acquisitions following third-party capital increases.

Article 418, Paragraph 1 of the Commercial Act stipulates that existing shareholders have the right to be allocated new shares. Particularly, precedents have judged third-party allotment aimed at securing management rights amid an actual management dispute as illegal. However, Paragraph 2 allows limited third-party allotment according to the company's articles of incorporation to achieve business purposes such as introducing new technology or improving financial structure. SM's articles of incorporation also specify exceptions such as ▲urgent fundraising and business expansion ▲strategic alliances ▲financial structure improvement ▲need for technology introduction.

SM's current management claims that this issue is not a 'management dispute' but merely a 'difference of opinion on business judgment.' SM's representative said, "Under an abnormal one-person producing system, Lee Soo-man has long earned significant operating profits," and added, "To address this issue, a new strategy for intellectual property (IP) producing was established, announcing SM 3.0."

They further stated, "Lee Soo-man is pushing the current situation into a management dispute through vague suspicions, speculative remarks, and media play," and criticized, "This situation was created and staged as Lee Soo-man signed a stock purchase agreement with a competitor (HYBE)." They emphasized the urgent need for partnerships with platform companies and fundraising to prevent SM's competitiveness from declining in the entertainment industry. Citing that Naver is already cooperating with other entertainment companies, they added, "There is no alternative other than Kakao."

The legal and entertainment industries expect the court's decision by March 6, which is the payment date for the new shares and the issuance date of the convertible bonds. Since injunctions require prompt decisions, courts usually make rulings within one to two weeks after a single hearing. The court requested both parties to submit any additional materials by the 28th but did not specify the timing of the injunction decision.

If the court grants Lee Soo-man's injunction, the management dispute will shift in favor of HYBE. Since it will be difficult for Kakao to secure shares, SM's current management will lose momentum. If the injunction is dismissed, the management dispute will intensify, and stock prices are expected to fluctuate. Kakao may also launch a counter public tender offer at a price higher than HYBE's 120,000 KRW per share as the second-largest shareholder.

Moreover, fierce public opinion battles and vote contests over inside director positions are expected at the regular shareholders' meeting. HYBE has already disclosed seven director candidates. A representative of an asset management firm said, "The management dispute is escalating into a mudslinging fight, so both sides need justification to end it," and predicted, "The court's injunction ruling will determine the outcome."

Meanwhile, HYBE paid 422.8 billion KRW, 12 days ahead of schedule (March 6), for the 14.8% stake acquired from Lee Soo-man. This is interpreted as a determination to firmly establish its position as the largest shareholder and complete the acquisition of SM stably. SM also emphasized in a video posted on its official YouTube channel that day, "Cooperation with Kakao will greatly help realize SM's planned future growth strategy," and added, "It is the best choice for all stakeholders related to SM, not for the benefit of any particular individual."