Kakao Entertainment defends partnership deal with SM Entertainment

February 27, 2023

South Korean tech firm Kakao’s entertainment arm said Monday its business agreement with K-pop powerhouse SM Entertainment is aimed at creating synergy between the companies and it will take measures against rival agency Hybe’s alleged attempt to threaten the strategic partnership.

Kakao Entertainment Corp. issued a statement three days after Hybe, the K-pop powerhouse behind BTS and SM’s largest shareholder, openly criticized a recent contract it signed with SM and warned of legal actions.

“The business partnership agreement comprehensively covers the future vision and direction pursued by Kakao, Kakao Entertainment and SM Entertainment,” Kakao Entertainment CEO Kim Sung-soo said in the statement. “We plan to consult with each business to draw up a win-win structure for all companies and sign deals with fair contract terms based on it.”

The contract, which reportedly gives Kakao the exclusive right to circulate SM’s albums and music, as well as the preemptive right to purchase new shares in SM, was made known last week amid Hybe’s ongoing bid to take over SM after becoming its largest shareholder.

Kakao and SM earlier said the business agreement is aimed at using their expertise in tech, entertainment and music to roll out new K-pop artists and run global businesses.

This undated file photo shows Kakao Entertainment Corp. (Yonhap)
This undated file photo shows Kakao Entertainment Corp. (Yonhap)

The company refuted Hybe’s claim that the clause on its preemptive right to buy SM’s new shares and convertible bonds will hurt SM shareholders’ profits.

It said the clause is nothing but part of anti-dilution provisions for minor shareholders to prevent their investment from potentially losing value.

“We express regret over Hybe for misinterpreting some contract terms for its own advantage and causing unnecessary confusion,” Kim said.

The company also claimed Hybe is denying the current management of SM by demanding the rival agency stop making all decisions related to its trilateral contract with Kakao and Kakao Entertainment in a reversal of a previous position that Hybe can work with Kakao.

“We think it is inevitable to revise the current strategy and will actively seek all necessary measures in close consultations with Kakao.”

Kakao bought a 9.05 percent stake in SM earlier this month to become its second-largest shareholder.

Hybe was quick to release a statement refuting the claim by Kakao Entertainment.

“We have not changed our position that we can fully consider Kakao Entertainment’s business proposals for SM if they are helpful for the company’s business, on the precondition that Kakao is not interested in participating in the company’s management. We hope there will be no misunderstanding about our position,” Hybe said.

It urged Kakao to first make it clear whether the company wants to actively participate in SM’s management, not just a business partnership, or not.

As for the clause on Kakao Entertainment’s preemptive right to buy SM’s new shares, Hybe said it sees it as a very unusual preferential treatment for Kakao although the company claimed it is part of anti-dilution provisions for minor shareholders.

“Small unlisted companies, such as startups, may be able to employ such a clause, but it must be deleted to protect shareholders in order to proceed with the IPO process and can be a big problem for listed companies,” Hybe said.