Kakao-SM Entertainment deal challenged by agency founder

SM Entertainment founder Lee Soo-man speaks at the World Travel & Tourism Council (WTTC) Global Summit in Saudi Arabia, November 30, 2022. [SM ENTERTAINMENT]

Kakao acquired a 9.05 percent stake in SM Entertainment for 217.2 billion won ($172.8 million), becoming the second-largest shareholder in the K-pop agency known for founding aespa and NCT.

According to lawyers for Yoon & Yang LLC, Lee Soo Man, founder and largest shareholder of SM Entertainment, is challenging the deal — claiming it is illegal — and seeking a court injunction to halt the deal.

Kakao said on Tuesday it would buy 1.23 million newly issued shares, or 4.91 percent of SM Entertainment, at 91,000 won per share and 105.2 billion won in convertible bonds, which would give Kakao 1.14 million additional shares. The boards of both companies voted in favor of the investment on Tuesday and said the deal would close on March 6.

The deal would make Kakao the second-largest shareholder after Lee, who owned 18.4% of the institution before the deal. His stake in Kakao after the acquisition of 9.05 was not disclosed.

Kakao and SM Entertainment also signed a business agreement with Kakao Entertainment on Tuesday to develop new K-pop artists and operate a global business. Kakao and Kakao Entertainment will manage K-pop artists at SM Entertainment and use intellectual property (IP) related to SM artists to develop new movies, dramas, music and other creative products.

SM Entertainment Co-CEO Lee Sung Soo (left) and Joo Young Joon [SM ENTERTAINMENT]

“We hope to secure strong growth momentum through our agreement with Kakao, making SM Entertainment a leading global entertainment company,” SM Entertainment co-CEOs Lee Sung-su and Tak Young-jun said in a release.

Lee’s lawyer, Ahn Sang-hyun, said SM Entertainment and Kakao had been discussing a possible investment since 2021, making the latest deal “aimed at undermining shareholders’ influence over the company.”

“Lee Soo-man has been in talks with Kakao to sell his shares, but the talks have been put on hold,” he said. “This decision by the company was made without considering Lee’s wishes. We will apply to the court for an injunction to suspend the illegal actions of the SM board.”

Lee is not a member of the board of directors, nor does he hold any management position with the company.

SM Entertainment fell 2.28 percent on Tuesday, but is up 36 percent year-over-year. At the end of 2022, the company severed ties with Like Planning, a private company owned by Lee, which took up to 6% of SM Entertainment’s revenue due to Lee’s “insight” into music production.

The contract between the two companies ended on Dec. 31, and SM Entertainment has been rolling out measures to improve governance, adding three outside directors to its board and making internal transactions more transparent.

The agency also said on Friday it would launch a multi-label system for the first time in its 28-year history, vowing to eliminate its reliance on Lee as lead music producer and introduce two new groups each year.

Kakao said it has not yet decided whether to purchase an additional stake in SM Entertainment.

Yoon So Yeon [yoon.soyeon@joongang.co.kr]