Examining the 'Option' Contract at the Core of Min Hee-jin's Management Rights Takeover [Business & Issues]

Changing to stock options and call options caused trouble
Only 20% stake but controls the board
Legal dispute will decide... could become a long-term negative factor

[Image source=Yonhap News]

The management dispute between HYBE and its subsidiary ADORE's CEO Min Hee-jin has escalated into a legal battle, raising concerns that the internal conflict may be prolonged. HYBE initially provided ADORE shares as stock options but later converted them into call options (rights to demand sale), offering a low-price purchase opportunity. Additionally, they allowed for cashing out through put options (rights to demand purchase), which analysts suggest has ironically become the root cause of the dispute. If CEO Min and ADORE's management, who have control over the board of directors, engage in prolonged legal litigation, this management dispute could act as a long-term negative factor for HYBE and increase stock price volatility.

HYBE Converts Min Hee-jin's Stock Options into Call Options... Consideration Becomes Seed of Dispute

On the 25th, HYBE announced the interim audit results for ADOR and revealed the group chat messages of ADOR's management team. [Image source=HYBE]

On the 25th, HYBE announced that it had filed a complaint with the Yongsan Police Station in Seoul against CEO Min and ADORE's management on charges of breach of duty. CEO Min held a press conference claiming she did not plan to seize management rights and expressed her grievances, but HYBE strongly refuted her claims, accusing her of muddying the issue and misleading public opinion.

Earlier, HYBE exercised its audit rights over ADORE and announced interim audit results. The audit revealed that HYBE found concrete plans to seize management rights in a group chat among CEO Min and ADORE's management. The plan involved CEO Min exercising put options on her shares to cash out, effectively turning ADORE into an empty shell, then finding friendly investors to repurchase ADORE shares from HYBE at a low price.

This plan was possible due to the option contracts, including call and put options, given to CEO Min instead of stock options (stock purchase rights). When ADORE was established as a HYBE subsidiary in 2021, HYBE granted CEO Min stock options for 15% of ADORE shares. The following year, additional stock options for about 5% of shares were granted, but considering the high tax rate (45%) incurred upon conversion to shares, the stock options were canceled and converted into call options instead.

A call option is the right to buy shares at a predetermined price. In early 2023, CEO Min used this right to purchase 18% of ADORE shares for 1.1 billion KRW. Since ADORE was a loss-making company with a net loss of 3.2 billion KRW until 2022, the low-price purchase was possible. Subsequently, last year, ADORE rapidly grew into a high-performing company with sales of 110.3 billion KRW and net profit of 26.5 billion KRW, fueled by NewJeans' success. Considering Hana Financial Investment's forecast of ADORE's future share value around 2 trillion KRW for 2025-2026, CEO Min acquired 18% of ADORE shares with a future value of approximately 360 billion KRW for just 1.1 billion KRW.

Additionally, CEO Min was granted the right to exercise put options on these shares. A put option is the right to sell shares at an agreed price within a certain future period or on a specific date. HYBE and CEO Min disclosed that the put option scale on ADORE shares amounts to 100 billion KRW. HYBE believes that if CEO Min had used the approximately 100 billion KRW obtained from exercising the put option, as planned in the group chat with ADORE management, to organize external investors and repurchase ADORE shares, seizing management rights would have been entirely possible.

Control of 3-Person Board in Unlisted Company... Increasing Risk of Management Dispute

[Image source=Yonhap News]

Along with the option contracts, a decisive factor influencing this management dispute is the composition of ADORE's three-member board of directors. According to industry sources, at the end of April last year, ADORE's board was entirely replaced with individuals close to CEO Min, all former SM Entertainment personnel. Before that, two inside directors besides CEO Min were concurrently serving as HYBE executives.

In an unlisted company like ADORE with a three-person board, the authority of the CEO and inside directors is very significant. Even though HYBE holds 80% of shares and CEO Min and management hold 20%, if the board passes a resolution to issue new shares and bring in friendly external investors, the parent company HYBE would find it difficult to resolve this outside of legal disputes.

Generally, if a subsidiary's board issues a third-party allotment capital increase without the parent company's consent to seize management rights, the parent company can file a provisional injunction to prohibit new share issuance before issuance and a lawsuit to cancel the issuance afterward. Of course, third-party allotment capital increases are restricted under the Commercial Act to purposes such as introducing new technology or improving financial structure, and issuance for management disputes is prohibited. However, to invalidate this, the parent company must present evidence and circumstances proving the issuance was for management dispute purposes and win the lawsuit.

Even if the parent company wins the lawsuit, if the opposing party appeals up to the third trial, the dispute could act as a negative factor for years until the final judgment, significantly impacting the parent company's stock price.

Stock Price Volatility Amid Exposures and Counterattacks... "Limited Impact on Performance"

As the legal dispute intensifies, HYBE's stock price has also become more volatile. Around the 22nd, when HYBE exercised audit rights over ADORE, HYBE's stock price fluctuated by more than 8%, and its market capitalization decreased by over 800 billion KRW, showing unstable trends.

However, despite the dispute between HYBE and ADORE, NewJeans' comeback schedule is proceeding as planned, so the impact on HYBE's sales is expected to be limited. On the 25th, HYBE announced on the fan community platform Weverse that NewJeans' comeback schedule would continue as planned. HYBE stated, "NewJeans will continue various activities, including the release of a new music video scheduled for the 27th and double single releases in May and June," and emphasized, "We will provide full support both materially and emotionally for the artists' psychological healing and emotional stability."

In the securities industry, the performance decline HYBE might suffer due to this dispute is viewed as limited, and the mid-to-long-term growth trend is not expected to be damaged. Lee Hwa-jung, a researcher at NH Investment & Securities, explained in a report, "ADORE's contribution to HYBE's operating profit is estimated at 14%, and considering BTS's full-group activities resuming next year, the contribution is expected to decrease further," adding, "Even in the worst-case scenario, the performance impact on HYBE will be limited."