Korean Court Prohibits SM Entertainment From Issuing Shares as Hybe Charts Acquisition Plans With New Campaign

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Seoul, South Korea. Photo Credit: Mathew Schwartz

As it looks to secure a controlling stake in SM Entertainment despite strong opposition, Hybe has rolled out an “SM with Hybe” campaign. Meanwhile, with Kakao working to purchase a piece of SM as well, a court has approved a motion to stop the issuance of new shares and convertible bonds.

About one week ago, Seoul-headquartered Hybe (KRX: 352820) formally bought nearly 15 percent of SM Entertainment (KRX: 041510) in a deal with the company’s founder and former chief producer, Lee Soo-man. The high-profile investment arrived shortly after Hybe acquired Quality Control and emphasized its ambitious global-expansion plans.

However, SM execs (and fans) promptly pushed back against the deal and Hybe’s intention of obtaining a 40 percent controlling interest, including by speaking out against the “hostile takeover” in a lengthy video. And the entertainment division of Kakao (KRX: 035720), having pulled down around $1 billion in new funding in December, announced an agreement to buy roughly nine percent of SM.

As part of said agreement, Kakao and SM would establish a U.S. joint venture, and the latter entity reportedly intended to finalize an exclusive distribution tie-up with the former company. Hybe is challenging the overarching deal in court – a move that appears to have been successful – including because the pact would allegedly enable Kakao to buy additional SM stock before other shareholders could do so, thereby diluting their respective stakes.

Of course, SM has refuted this assessment, and Hybe is now expanding upon previously issued public remarks about the situation – and looking to obtain control of SM’s board – under the initially mentioned “SM with Hybe” effort.

“Let’s win together!” reads text featured on the homepage of the campaign’s website, which Hybe has made available in both Korean and English. Beyond this and similarly enthusiastic statements pertaining to the potential control of SM, though, the multifaceted digital resource lays out in detail Hybe’s plans for the operation.

Specifically, Hybe says that it would appoint directors and auditors “to ensure SM Entertainment’s management expertise, transparency, and shareholder value enhancement,” revise the articles of incorporation to “resolve governance-related issues and promise sustainable growth,” and implement “compensation policies for responsible management.”

Elaborating upon these points, Hybe has also published a 44-page document charting the sweeping proposal that it intends to deliver to fellow SM shareholders during a general meeting on March 31st.

“We sincerely ask for your support of our shareholder proposal at SM Entertainment’s (‘SM’) 28th Shareholders’ Meeting, to replace the unethical and ineffective management to those who can actually contribute to SM’s growth into a global entertainment company,” the text reads in part.

From there, the all-encompassing (and firmly worded) resource takes aim at SM’s CFO (who’s said to be “jointly accountable for the devaluation of SM due to poor management despite its rich IP resources”) and the “overly large” board size, before describing the purported advantages of its suggested directors (from Hybe’s executive team) compared to those put forward by SM.

(Interestingly, a portion of the voluminous presentation likewise compares the “combined equity value”
of SM and Hybe directly with those of the major labels, BMG, Concord, and others. Green-lighting the business combination would represent “a meaningful step towards” nearing the value of the “global top 3 music groups,” per Hybe.)

Finally, Hybe CEO Ji-Won Park has personally penned proposals to SM shareholders, summarizing the points explored in the 44-page presentation, and his company has gone ahead and debuted a press center for “SM with Hybe” itself.

In said press center’s latest release, Hybe indicated that the Seoul Eastern District Court had “granted a provisional injunction to prohibit the issuance of new shares and convertible bonds in SM Entertainment” as part of a case brought forward by the above-noted Lee Soo-man.

“This decision will suspend the illegal attempts committed by SM’s current management,” Hybe wrote, “as a means to influence the controlling rights of SM. With this result, everything should now fall back into place.”