HYBE warns of potential ‘legal measures’ against SM Entertainment over Kakao deal (report)

SM Entertainment's Aespa

The battle between K-Pop giants HYBE and SM Entertainment escalated over the weekend as HYBE, the agency behind BTS, warned of potentially taking “all necessary legal measures” against its rival over a contract that it entered into with South-Korea-based Kakao Corp.

Last week (February 22), HYBE completed its acquisition of a 14.8% stake in SM Entertainment, the company behind K-Pop stars like NCT, EXO and Aespa. The deal was worth about 422.8 billion South Korean won (approx. USD $322 million).

HYBE had earlier disclosed its plans to further raise its stake in SM to around 40% by buying an additional 25.2% of its share capital in a reported 1.14 trillion South Korea won (approx. USD $900 million) deal with minority shareholders.

In response to what SM says was HYBE’s “hostile takeover attempt,” SM Entertainment CFO Jang Cheol Hyuk posted a video on YouTube, slamming HYBE’s plan, saying it would “cause more diverse and direct problems, including decreased diversity of artists, music and concerts.”

HYBE hit back at SM, with HYBE CEO Jiwon Park saying the plan would pave the way for “an era of change for both companies.”

But prior to the acquisition of a substantial stake by HYBE, South Korean tech and entertainment company Kakao, reportedly bought a 9.05% stake in SM Entertainment earlier in February for about 217.2 billion won (USD $162 million).

Most recently, on Friday (February 24), Yonhap News Agency and the Korea Times reported that HYBE could pursue legal action against SM over the terms of its deal with Kakao.

The Kakao contract gives the latter exclusive right to distribute SM’s albums and music and an option to buy new shares in SM, Yonhap reported.

“After learning of what is in the business contract, we were both surprised and concerned… A review is under way on legal problems contained in this contract. According to its result, we will take all necessary legal measures, both civil and criminal,”  HYBE was quoted by the local newspaper as saying.

HYBE fears that Kakao would take advantage of its preemptive share purchase right in order to keep boosting its ownership in SM, the report said.

The deal could undermine shareholders’ asset value, HYBE reportedly cautioned.

“Compared with the important business rights that SM is handing over, what it gets in return is unreasonably small,” HYBE reportedly said. 

“We believe this contract damages the value of SM shareholders, restricts the rights of SM artists and limits the future of SM employees. The current SM management should suspend all decision-making related to details of this contract.”

SM founder Lee Soo Man, who sold his stake in the agency to HYBE following disagreements with the company’s management, had also planned to file a lawsuit against SM after the Kakao deal, according to local newswire All K-Pop.

SM dismissed HYBE’s allegations, accusing it of “maliciously misinterpreting” commonly used contract phrases to mislead investors.

“We don’t plan to raise investment by issuing new shares through a third-party allotment,” SM reportedly said, adding that the company is already close to its limit of issuing new shares.

“It is legally impossible to issue new shares without changing the articles of association.”

SM reiterated its concerns about HYBE’s takeover attempt that it says could result in monopoly in the K-Pop industry as both companies accounted for about 70% of the local music revenue and 89% of the performance market in the third quarter of 2022, Yonhap added.

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