Corporate governance fight over SM Entertainment

• Published date: 05 March 2023
• Publication title: The Korea Times

In a rare event that happens every decade or so, a war is being waged around SM Entertainment, one of the most successful entertainment companies in South Korea, which manages several world-famous K-pop groups. This time, the struggle for management control is between Kakao, the internet conglomerate, and HYBE, another K-pop company that has the ridiculously popular group BTS on its roster. The tussle is over the controlling stake of SM held by its founder, Lee Soo-man, and is challenged by a consortium comprised of SM management, Kakao, and activist fund Align Partners.

For many decades, Korea's corporate governance has been considered by many global investors as one of the reasons for the "Korea Discount," a term used to describe stock valuations chronically trading below regional peers. After many false hopes in the past, global investors are understandably skeptical about hopes for Korea's corporate governance movement. But there are signs that this time could be different.

Activist investors have been rising in profile globally over the past decade as investors seek to unlock the underappreciated value of many companies whose management is underperforming for many reasons. In Korea, the complex legal hurdles, lack of transparency, and the inability to actively engage with company management have often hindered foreign investors' efforts for corporate governance reform. Unlike other developed economies, in Korea, the term minority shareholders is a misnomer as collectively, they often hold bigger stakes than founder families but are treated as an afterthought.

This is due to the complex legal structure making it difficult to bring a collective action against companies or their management. Another reason is the cross-shareholdings within chaebol groups, making it difficult for outside shareholders to voice their grievances. The high-profile case revolving around SM Entertainment is a potential game-changer as it is gaining attention from not just foreign investors but the broader local investment community and the general public.

So far, the HYBE-Lee alliance seems to have the upper hand as HYBE is already the largest shareholder of SM Entertainment, with a 15 percent stake from Lee, as announced recently. HYBE now holds the largest stake in SM, followed by the National Pension Service, the nation's dominant owner of the local stock market. In addition to the 15% stake, HYBE has made a public tender offer seeking to secure an additional 25 percent stake...