Kakao Entertainment "Regret over Hive Collaboration Reversal... Comprehensive Strategy Revision Inevitable"

Hive infringes on the mid-to-long-term growth directions of Kakao and SM
Unnecessary confusion caused by criticism of cooperation with SM

"Hive's claims that the business cooperation agreement among the three companies damages the interests of existing shareholders are not true. We express regret toward Hive for causing unnecessary confusion by distorting certain phrases in the contract to favor themselves."

Kakao and Kakao Entertainment announced their position on the 27th regarding Hive's criticism of SM Entertainment's business cooperation agreement.

On this day, Kakao and Kakao Entertainment stated, "Kakao, Kakao Entertainment, and SM Entertainment have entered into a strategic partnership to create horizontal synergy and a virtuous cycle based on the business competitiveness each company holds. In the rapidly changing global corporate environment, we judged that combining technology and global IP to build competitiveness comparable to major global entertainment companies and growing together makes us the optimal partners for each other. This conclusion was reached after extensive discussions based on each company's growth vision and business direction over a long period."

They continued, "This business cooperation agreement comprehensively includes the future vision and direction that the three companies will pursue together. The detailed provisions will be derived through consultations for each business to create a win-win structure for each company, and based on this, a contract with fair conditions will be signed. The right of first negotiation stated in the convertible bond subscription contract is merely an anti-dilution clause generally held by minority shareholders. Hive's claims that the business cooperation agreement among the three companies harms the interests of existing shareholders are not true, and we express regret toward Hive for causing unnecessary confusion by distorting certain phrases in the contract to favor themselves."

Kakao commented on Hive, saying, "On the 21st, Hive expressed that collaboration with Kakao was possible regarding the business cooperation agreement among the three companies, but on the 24th, they suddenly reversed their position and instructed SM Entertainment's management to halt all detailed decision-making related to this contract. Furthermore, Hive recommended board members composed solely of Hive personnel, denying both the existing management and the direction they had established. As a result, we can no longer stand by as this threatens the very existence of the partnership with SM Entertainment and fundamentally infringes on the mid- to long-term growth direction of the three companies. We judge that a complete revision of the existing strategy is inevitable, and Kakao Entertainment will actively explore all necessary measures in close consultation with Kakao."

Kakao and Kakao Entertainment also directly addressed the controversy over the right of first negotiation on the convertible bonds.

Regarding the right of first negotiation, Kakao Entertainment explained, "The right of first negotiation included in the convertible bond subscription contract is generally granted to protect rights by defending against dilution when investing in minority shares, and it aims to further solidify the horizontal partnership between Kakao and SM Entertainment. Typically, when concluding an investment contract based on a strategic partnership, investors include a clause granting the right of first negotiation if new shares or equity-linked securities are additionally issued to prevent dilution against their will. This is to protect the investor's equity rights premised on business cooperation. New strategic investments that can benefit SM Entertainment are always possible, but they must not harm the rights and interests of existing shareholders."

They added, "A company's third-party paid-in capital increase can only be issued after appropriate approval procedures such as the company's board of directors. As the second-largest shareholder and an external party, it is a basic principle of corporate operation that Kakao cannot arbitrarily issue third-party paid-in capital increases. Therefore, Hive's claim that Kakao securing SM's shares continuously harms shareholders' interests is not true," they rebutted.

Regarding Hive's claim that the business cooperation among Kakao, Kakao Entertainment, and SM is unbalanced, they emphasized, "Kakao Entertainment and SM Entertainment will cooperate to promote the global growth of each company's music business through joint global K-pop group launches via global auditions, establishing a joint global management company, and collaborating on music distribution and ticket distribution businesses. SM Entertainment will utilize Kakao's various technologies and infrastructure for secondary IP businesses such as Seoul Arena, webtoons/web novels, AI, metaverse, and blockchain, continuing diverse cooperation."

Regarding the establishment of the joint venture, they stated, "Rather than Kakao Entertainment solely managing artists in regions like North and South America, Kakao Entertainment and SM will establish a joint venture to cooperate in strengthening artists and IP competitiveness. Kakao Entertainment is promoting domestic and international IP businesses based on the IP value chain not only in music but also in story and media sectors, securing networks and know-how through global businesses such as Tapas Entertainment in North America and Kakao Piccoma in Japan and Europe. Kakao will combine SM's accumulated global music business know-how with Kakao's community platforms and IP business expertise to pursue multifaceted cooperation for stronger global synergy."

Kakao explained about Jang Yoon-jung, Kakao Entertainment's Global Strategy Officer (GSO), who was recommended as a candidate for SM's non-executive director, saying, "Until 2021, he served as the head of Sony Music Entertainment Korea, playing a hub role in the globalization of K-pop. Based on these activities, he was named one of Billboard's 'International Power Players' leading the global music market in 2022. This recommendation for non-executive director is a decision to expand SM's global influence through collaboration with Kakao Entertainment, which has competitiveness in K-pop music distribution, leveraging Jang Yoon-jung GSO's network and business capabilities in the global music industry."

They also pointed out, "If this is called control over SM's business, then the recommendation of three Hive executives as SM inside directors, outside directors, non-executive directors, and non-standing auditors proposed by Hive should be seen as Hive's attempt to control all of SM. This contradicts Hive's statement that they respect SM's autonomy."