[SM Management Battle] March is Shareholders' Time... HYBE and Kakao Target Each Other's Weaknesses

Fierce Public Opinion Battle Ahead of March 31 Shareholders' Meeting to Seize Board Control
SM Side: "If HYBE Leads, SM Shareholders May Suffer Losses"
HYBE Side: "SM's Contract Unilaterally Favors Kakao"

With Hive's public tender offer for SM Entertainment (SM) shares effectively failing, the management rights battle between Hive and Kakao over SM has not tilted decisively to either side. As a result, the voting intentions of shareholders other than these two parties have become even more crucial at the SM shareholders' meeting scheduled for the 31st of this month.

To exercise voting rights at this shareholders' meeting, one must have been an SM shareholder as of the end of last year. According to the shareholder registry at that time, excluding the shares held by former SM Chief Producer Lee Soo-man (18.46%), the remaining shares are effectively held by the National Pension Service, KB Asset Management, Com2uS, and small shareholders. Although Lee Soo-man can delegate his voting rights to Hive, giving Hive a more advantageous starting position than Kakao, the shareholding ratio does not guarantee victory at the meeting. Both the Hive-Lee Soo-man camp and the Kakao-SM alliance must win over the votes of the other shareholders to control the board of directors in their favor at this meeting. This is why both sides have appointed proxy voting agencies and mobilized their employees to secure votes.

While both sides are actively securing shares, the key point at this shareholders' meeting is the proposal for director appointments. Currently, SM's board consists of four members: three inside directors and one outside director. Their terms all expire on the 27th. Since the entire board will be replaced, the number of board members each side can place in their favor at this meeting will significantly influence the outcome of the management rights dispute.

Small shareholders with less than 1% stake hold 63.55% of shares

The Kakao-SM side has nominated a total of nine candidates for inside and outside directors combined. The Hive-Lee Soo-man side has nominated six candidates. As of the end of December last year, small shareholders holding less than 1% of shares accounted for 63.55%. Ultimately, the side that persuades these shareholders is likely to seize the advantage. Accordingly, a fierce battle of public opinion is expected between the two sides, with a high possibility of each exploiting the other's weaknesses.

The Hive-Lee Soo-man camp needs to actively explain and alleviate concerns regarding potential conflicts of interest between SM shareholders and Hive shareholders if Hive acquires SM. For example, they must dispel worries that Hive might focus more on its own artists or content rather than SM's.

The SM side is exploiting this point. In a recent letter sent to small shareholders, SM explained, "Good trainees, good songs, good choreographers, and performance planners are all inevitably assigned first to subsidiary labels such as Big Hit (home to BTS), ADOR (home to NewJeans), Source Music (home to LE SSERAFIM), and Pledis (home to Seventeen), which hold higher shares in Hive than SM does." They also emphasized, "If Hive holds up to 40% of SM shares and the remaining 60% are held by general shareholders, conflicts of interest between SM shareholders and Hive shareholders are inevitable," adding, "Hive is the industry's largest competitor, vying for first and second place with SM." They stressed that SM's corporate value could decline due to being deprioritized in content or investment. Some market players are even drafting merger scenarios between SM and Hive. Hive needs to actively devise and announce measures to protect SM shareholders.

Explanation is also needed regarding SM's consistent claim of a "no due diligence M&A." SM has criticized Hive's share acquisition as a "hostile M&A involving over 1 trillion won without a single due diligence." They have pointed out, "Hive's corporate governance is neither sound nor rational." The criticism questions whether a vision for enhancing corporate value post-acquisition can be properly presented given the rushed M&A without a detailed due diligence process. Moreover, to escape the "pro-Lee Soo-man" frame, SM must demonstrate to shareholders its determination to thoroughly resolve various issues caused under the "Lee Soo-man one-man producing" system.

The Kakao-SM camp also has weaknesses. One is the significance of the 9% SM shareholding that Kakao plans to acquire. In February, Lee Soo-man filed an injunction against SM to prohibit the issuance of new shares and convertible bonds by Kakao. The purpose was to prevent SM from issuing new shares or convertible bonds to Kakao, which would allow Kakao to secure a 9.1% stake amid the management rights dispute.

Hive argues that the business cooperation agreement and new share subscription agreement between Kakao and SM infringe on shareholder value. According to the agreement, Kakao secured the right of first refusal to subscribe to new shares if SM conducts additional third-party allotment capital increases in the future. Also, SM's domestic music album and digital music distribution rights were exclusively granted to Kakao Entertainment.

Kakao and SM stated that this new share subscription is a management decision for strategic collaboration between the two companies. If so, they must explain a concrete roadmap regarding the synergy effects of this collaboration to shareholders. It will be difficult to persuade shareholders with mere expectations or unclear stances on M&A participation. Amid the intensifying management rights dispute, Kakao Entertainment's official statement saying, "We can no longer just watch the current situation" and "We plan to actively consider all necessary measures in close consultation with Kakao" has been interpreted as a declaration of full-scale entry into the M&A battle.

Variables such as court injunction decisions and regulatory investigations into market manipulation allegations

Aside from the shareholders' meeting, the competition to secure shares between the two sides is expected to intensify further. There are also significant pending issues. With Hive's public tender offer effectively failing, the court's decision on the injunction requested by Lee Soo-man has become even more important. The court's ruling is expected as early as this week or by March 6 at the latest.

Regulatory intervention is also a major variable. On the 1st, the Financial Supervisory Service announced it would promptly investigate whether there are any allegations of market manipulation under the Capital Markets Act related to SM's public tender offer. Earlier, Hive submitted a petition to the Financial Supervisory Service on the 28th of last month, requesting an investigation, alleging abnormal large-scale stock purchases aimed at obstructing the public tender offer. Hive pointed out that on the 16th of last month, at the IBK Investment & Securities Pangyo branch, 683,398 shares (2.87% of SM's total issued shares), accounting for 15.8% of SM's total daily trading volume, were purchased, indicating abnormal buying activity suspected to be market manipulation intended to obstruct the tender offer. Similar situations occurred on the last day of the tender offer subscription on the 28th of last month. On that day, other corporations net-purchased 1,087,801 shares on the market, and a specific account alone bought 666,941 shares (2.80%).

This content was produced with the assistance of AI translation services.