Court citing provisional injunction to ban new stock issuance of SM Entertainment… Kakao-Invest Chosun weakening power to fight equity

Hive, favorable notice for SM Entertainment acquisition
Kakao, plans setbacks, will the stake fight continue?

The court upheld Lee Soo-man’s request for provisional injunction filed by former executive producer Lee Soo-man of SM Entertainment (hereinafter referred to as SM) to block the capital increase and issuance of convertible bonds against SM. As Kakao’s acquisition of a 9.05% stake in SM was put on hold, Hive, the current largest shareholder (currently 15.8%), stood at an advantage in the competition for shares.

On the afternoon of the 3rd, the 21st Civil Settlement Division of the Seoul Eastern District Court (Chief Judge Kim Yoo-seong) made a decision to cite the provisional injunction against the issuance of new stocks and convertible bonds issued by former general manager Lee Soo-man against SM.

According to the preliminary injunction, the court denied SM’s ‘urgent need for financing’. Regarding the strategic alliance with Kakao, it was judged that it was not a situation to raise funds worth about 217.2 billion won by issuing new shares and convertible bonds to Kakao, excluding the preemptive rights of existing shareholders, while the business strategy was only in the establishment stage. In addition, the court paid attention to the possibility that SM’s decision to issue new shares came from the purpose of weakening the dominant shareholder’s control by increasing Kakao’s stake in the face of an imminent management dispute.

In addition, the court can apply for a temporary injunction to ban issuance of new shares and convertible bonds alone, regardless of the number of shares held or voting rights, etc. The need for preservation was fully acknowledged.

Law firm Hwawoo, who represented former general manager Lee Soo-man, said, “With this decision, it has been clearly confirmed that the decision-making by the company’s management to arbitrarily influence the company’s governance is an illegal decision against commercial law.” We will sternly respond to illegal acts through legal action.”

Kakao was in a difficult position whether to continue fighting over shares or change strategic alliance partners in a situation where there was a difference in shares with Hive. ‘If you spend a lot of money’, you might be able to secure more than your current stake in Hive, but it’s not easy. We missed the opportunity to acquire stocks at around 90,000 won, and if we go through a tender offer, we will have to offer a higher price than the tender offer price proposed by Hive, which is a burden. The justification for acquiring it at a higher price is also ambiguous.

Kakao showed an ambiguous position until the results of the application for injunction came out. Then, on the 27th, Kim Seong-soo, CEO of Kakao Entertainment, issued a statement and suggested a counterattack. In the end, as the application for provisional injunction was cited, Kakao’s drive to ‘counter fire’ decreased, but if he pulled his foot out as it is, criticism that he only planted expectations in the market seems inevitable.

Hive, which is observed to have failed to meet its tender offer target, has somewhat eased the burden of securing a stake. Until the SM shareholders’ meeting this month, Hive is expected to focus on securing voting rights for minority shareholders.

Hive Chairman Bang Si-hyeok said in an interview with CNN, “Securing shares is not a priority, the shareholders’ meeting is the most important, and only when we get support can the board of directors we want be formed.” Hive opened a shareholder proposal campaign page on the 2nd and began persuading minority shareholders in earnest.

However, in order for Hive to stably secure SM’s management rights, it seems that the problem of securing a stake of more than 15% will continue in the future.

If the SM management dispute escalates into a full-fledged ‘equity fight’, it could lead to bloody competition between the two sides, so the possibility of Hive and Kakao joining hands cannot be ruled out. It is understood that the Hive side is also willing to cooperate with Kakao, but in this case, it is an observation that Kakao will have to remain as an ‘affiliated company’.