A court in Seoul on Friday blocked a proposed move to issue new shares in K-pop talent agency SM Entertainment to Korean tech giant Kakao Corp. and its Kakao Entertainment subsidiary.
An injunction was sought by Lee Soo-man, one of the pioneers of the Korean contemporary music industry, but who is recently at the center of a storm of controversy.
Lee, who has fallen out with his company’s current management team, announced at the beginning of February his plans to sell a 14.8% stake in SM to HYBE Corp., the firm behind hit group BTS and a rival to SM.
It then emerged that SM’s management was proposing to issue new shares to the Kakao pair, giving them a 9.05% holding, and sign an exclusive distribution contract. The share stake would make Kakao the second biggest shareholder in the firm after HYBE and dilute its influence.
HYBE said recently that it had paid for the initial tranche of shares and that it expects to buy Lee’s remaining 3.6% stake. It will also make an open offer to all shareholders for a further 25% of the company.
The Seoul Eastern District Court on Friday accepted Lee’s application for an injunction on the share issue and sale to Kakao. But it did not publish its reasons.
However, a letter from Yang & Yang, a law firm representing Lee, and seen by Variety, read: “The Court did not accept that SM has a compelling need for financing. Further, it opined that at the stage of merely drawing up a business strategy for the strategic alliance with Kakao, SM was not in a situation to raise funds worth around KRW 217 billion by issuing new shares and convertible bonds to Kakao in disregard of the preemptive rights of the existing shareholders. [..] the resolution by SM’s current management to issue new shares, etc. appears to have stemmed from their intent to weaken the largest shareholder’s control.”
The letter also warned that if the existing management attempts other means of redistributing control further legal actions would follow.
SM’s current management has accused Lee of illegal financial activities and collaboration with Hybe against his own company.
Some 208 staff signed an open letter last month that labelled Lee’s activities as illegal. “Once former chief producer Lee Soo Man was in danger of having his illegal tax evading actions unveiled, he sold his shares to a competitor company that he used to speak ill of and ran away,” they said.
Both HYBE and SM have launched campaigns to win over other minority shareholders ahead of an investors’ meeting at the end of March.