[Business & Issues] Line Japan-Korea Battle... The Humiliation Triggered by Joint Venture

Joint Venture Triggering Management Dispute
Unequal Number of Directors Also a 'Risk' from Naver's Perspective

SoftBank's Concerns Deepen
Line Yahoo Stock Slump... Burden of Share Purchase Costs
Diplomatic and Economic Friction Concerns... Opposition Even Within Japan

[Image source=Yonhap News]

The issue of readjusting the Line Yahoo shares between Naver and SoftBank, triggered by unusual pressure from the Japanese government, is on the verge of escalating into a conflict between South Korea and Japan. The nationality controversy surrounding Line, which has been raised since the two companies signed a joint venture (JV) agreement in 2019, intertwined with the Japanese government's nationalist tendencies, ultimately caused the problem. After the JV contract was signed, Line and Yahoo Japan were integrated mainly under SoftBank’s subsidiaries, and the fact that Line Yahoo became a consolidated subsidiary of SoftBank by mutual agreement is considered the starting point of the current management dispute.

SoftBank stated that it entered negotiations with Naver to readjust shares following administrative guidance from the Japanese government, but it now faces the burden of having to inject funds to purchase more shares amid poor performance and stock prices of Line Yahoo. Additionally, there are concerns that if the Japanese government enforces unreasonable demands such as share readjustment on companies from other countries that are not adversaries diplomatically or economically, overseas investment could sharply decline.

'Line Yahoo' Born from JV Investment... Risks Starting from Contract Signing

Equity structure at the time of the joint venture (JV) agreement between Naver and SoftBank. [Image source: Line Yahoo homepage]

Naver and SoftBank agreed to integrate and operate Line and Yahoo Japan by signing a JV contract in December 2019. Normally, the process would involve simply merging Line and Yahoo Japan and splitting shares 50:50, but at that time, Line was listed on both the Japanese and U.S. stock exchanges, while Z Holdings, the parent company of Yahoo Japan, was only listed on the Japanese stock exchange, making a simple merger difficult.

Moreover, the complex shareholding structure between SoftBank and Yahoo Japan had to be resolved. According to the final contract disclosed by SoftBank, SoftBank indirectly controlled Yahoo Japan through its wholly owned subsidiary Shiodome Z Holdings. Shiodome Z Holdings was the largest shareholder with 44.6% of Z Holdings shares, and Z Holdings wholly owned Yahoo Japan. In contrast, Naver held 72.6% of Line shares, making its structure simpler.

Ultimately, the two companies agreed to jointly purchase the relatively small minority shareholders’ shares of Line and delist it voluntarily through a squeeze-out method, securing 100% of Line shares. Then, Line was split into A Holdings, the JV entity, and the Line business division. The Line business division and its subsidiaries were reorganized under Z Holdings, the parent company of Yahoo Japan. Consequently, Naver and SoftBank completed a shareholding structure with A Holdings as the holding company with 50:50 voting rights, and Z Holdings as the intermediate holding company controlling Line and Yahoo Japan as wholly owned subsidiaries.

The restructured governance following the merger of Z Holdings, Line, and Yahoo Japan in October last year.

As a result, both Line and Yahoo Japan came under Z Holdings, which was previously a SoftBank subsidiary. The two companies also agreed at the time of the JV contract that A Holdings, the JV entity, would have voting rights split 50:50, and that A Holdings would become a consolidated subsidiary of SoftBank. Additionally, among the five directors of A Holdings, SoftBank would appoint three and Naver two, giving SoftBank an advantage on the board.

Typically, a 50:50 voting right split in a JV contract strengthens cohesion by sharing profits and responsibilities equally. However, if major decisions arise and opinions sharply differ, decision-making ability and speed can significantly decline. Therefore, voting rights are often set at 51:49 or the number of directors is differentiated to avoid deadlock. Naver and SoftBank followed this approach by differing the number of directors, but this differentiation has now become a risk for Naver.

Line Yahoo’s Poor Performance and Stock Price... SoftBank Faces Significant Burden

SoftBank says it is negotiating with Naver to review share readjustment but is reluctant to actually purchase shares. This is because it may have to buy Line Yahoo shares, whose stock price has plummeted, at a high price.

According to the Nihon Keizai Shimbun (Nikkei), on the 9th, Junichi Miyakawa, CEO of SoftBank, said at a financial results briefing, "We are discussing capital review from the perspectives of security governance and business strategy at Line Yahoo's request," but also added, "If the entrusted relationship is zero, we might not need to touch the capital. I think capital review is not directly linked to security governance," suggesting that there are conflicting opinions within SoftBank regarding share readjustment.

Line Yahoo’s stock, listed on the Tokyo Stock Exchange, has been on a continuous decline from 495.1 yen per share at the beginning of the year to 362.6 yen on the 9th, the day after Line Yahoo requested to sell shares to Naver. The stock price continues to fall amid poor performance and high technological dependence on Naver, with concerns about Naver’s possible exit.

The value of Naver’s 50% stake in A Holdings is estimated at around 8 to 10 trillion won, requiring enormous resources to purchase all or part of it. The JV contract includes a clause that requires prior written consent from the other party before any share changes or related contracts involving Z Holdings, the predecessor of Line Yahoo, can be finalized. Considering management premiums, if Naver demands to buy shares at a price higher than the current market price, SoftBank must accept it to obtain consent for share changes.

The Asahi Shimbun quoted a SoftBank official saying, "From SoftBank’s perspective, there is no merit in additional share purchases," and "If technical measures to prevent recurrence can be established, there is a mood questioning whether capital relations need to be reconsidered."

Concerns Over Diplomatic and Overseas Investment Interests Being Undermined

[Image source=Yonhap News]

Within Japan, there are voices opposing the unusual administrative guidance from the government, warning it could harm practical interests. For Line Yahoo, which still desperately needs Naver’s technology, suddenly severing ties with Naver would only weaken competitiveness.

Ichiro Sato, a professor at the National Institute of Informatics in Japan, told the Asahi Shimbun, "Line Yahoo has promoted technological innovation, but the technological gap with Naver remains large. This is a level that cannot be bridged in one or two years," and pointed out, "Even if capital relations change, the structure of technological dependence on Naver is unlikely to change for some time and may not lead to a fundamental solution."

There are also concerns that unfair interference with companies from friendly countries, not adversaries, could become a diplomatic burden. In the case of the U.S. TikTok ban bill, China first blocked and sanctioned U.S. companies like Google, YouTube, and Facebook, providing a basis of reciprocity. However, the legitimacy of the Japanese government’s position in the Line Yahoo controversy is relatively weak.

Seungho Choi, a researcher at Sangsangin Securities, explained, "Since South Korea and Japan are not adversaries, this is different from the previous U.S. government’s forced sale controversy of China’s TikTok," and added, "Line Yahoo has announced plans to sequentially separate servers, networks, and authentication systems shared with Naver, so it is likely that the administrative guidance’s goal of separating security will be achieved and the issue resolved."