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SM Entertainment cancels Kakao deal after Hybe-supported founder scores win in South Korean courts

By | Published on Monday 6 March 2023

SM Entertainment

South Korean music company SM Entertainment announced earlier today that it has cancelled its controversial deal with internet firm Kakao following a court ruling on Friday, in a move that will please its rival and new shareholder Hybe.

Management at SM previously said that their proposed deal with Kakao, which involved issuing new shares, would enable a revamp of the company domestically and put in place the infrastructure needed to capitalise on the recent growth in popularity of the K-pop genre globally.

However, SM’s founder Lee Soo-man – until recently the company’s biggest shareholder – objected to those plans, the issuing of any new shares obviously diluting his share-holding. With that in mind, he launched legal action to block the Kakao deal and the issuing of any new shares.

As the dispute between SM’s founder and current management team gained momentum, it emerged that Lee had sold most of his shares in the company to rival K-pop firm Hybe, best known as the home of BTS. That deal gave Hybe a 14.8% shareholding in SM, but it quickly let it be known that it was interested in acquiring more shares in a bid to secure a 40% controlling stake in the company.

Meanwhile, Hybe CEO Park Ji-won initially said that he wasn’t opposed to SM forming an alliance with Kakao in principle, providing any deal was in the interest of all SM shareholders. However, having seen the deal, Hybe then joined Lee in opposing the proposed partnership.

Both SM and Kakao defending their alliance, insisting elements of the deal were being misrepresented by Lee and Hybe. However, on Friday the court considering Lee’s legal claim sided with the SM founder and issued an injunction basically blocking the Kakao deal.

A legal rep for Lee told the Korea JoongAng Daily: “In the ruling, the court denied the need [for SM] to urgently raise cash and form a strategic alliance by stripping existing shareholders of the preemptive rights to acquire new shares and convertible bonds”.

Hybe, in its guise as an SM shareholder, responded to that court ruling by demanding that the SM management team confirm they would comply with the injunction and not enter into any deals that violated the court order. SM then said that its proposed deal to issue and sell new shares to Kakao had now been withdrawn.

Alongside all the legal wranglings, Hybe also ramped up its efforts last week to woo SM’s other shareholders, with it both wanting their support in opposing the plans of SM management, and – of course – to buy more shares.

Indeed, it has already confirmed another SM share purchase, buying stock from Hyosung Group’s affiliate Galaxia SM. That deal gets Hybe another 0.98% of SM, bring its total shareholding up to 15.78%.