Kakao Cancels SM Entertainment Investment After Court Order

HYBE’s plan to control competing K-pop company SM Entertainment and thwart a partnership with tech company Kakao took another step forward on Monday when Kakao, responding to a court injunction, announced it had canceled its stock purchase agreement to acquire a 9.05% stake in SM Entertainment.

Last week, the Seoul Eastern District Court granted a provisionary injunction against SM’s plan to issue new shares and convertible bonds. The judge ruled that SM had made its decision without shareholders’ consent. It was a remarkable win for SM’s controversial founder, Lee Soo-man, and for HYBE, the reigning K-pop company and home to boyband BTS. 

For weeks, SM’s management has been trying to wrest control of the company from Lee, who has been found guilty of embezzlement and exercised iron-fisted control over the company he founded in 1995. After SM made a deal with Kakao, Lee turned to HYBE, which became SM’s largest shareholder on Feb. 22 after it acquired a 14.8% stake from Lee, whose production contract with SM was canceled as of Dec. 31. 

On Monday, HYBE sent a letter to SM demanding that “the current [SM] Board of Directors should fulfill its duty of care and duty of loyalty towards SM and actively exercise the right to terminate the business cooperation agreement, which contains clauses that are disadvantageous to SM and advantageous to Kakao,” according to a statement that described the letter.  

With the injunction in place, HYBE also called for SM to exercise its right to withdraw the recommendation of the director candidate nominated by Kakao. SM had put forward Jang Yoon-Joong, Kakao’s global strategy officer, as a part-time director.

SM and HYBE are pushing competing visions for SM’s future before shareholders vote on a new board of directors at SM’s annual general meeting on March 31. SM wants to partner with Kakao – owner of the Melon music streaming service and KakaoTalk messaging service – to better monetize its intellectual property and launch a joint venture in the U.S.

Called “SM 3.0,” the road map calls for SM to break from the single-producer system maintained by Lee until his removal. Instead, SM wants to develop artists through multiple labels and production centers in Korea, Japan, Southeast and the U.S. 

HYBE calls an SM-Kakao tie-up an “unfair partnership” that would give Kakao permanent and exclusive rights to distribute SM’s music, protect SM’s equity at the expense of other shareholders and create conflict of interests that favor Kakao. “We believe that these details demonstrate the bias and irrationality of the current SM management who approved such arrangements,” Jung Jinsoo, HYBE’s chief legal officer, wrote in a letter to SM shareholders on Thursday (March 2).