(2nd LD) Hybe warns SM Entertainment of legal actions over deal with Kakao

(ATTN: UPDATES with CJ ENM's decision not to acquire stake in SM Entertainment in last three paras)
By Kim Eun-jung

SEOUL, Feb. 24 (Yonhap) -- Hybe, the K-pop powerhouse behind BTS and the largest shareholder of SM Entertainment, said Friday it will take all necessary legal measures against a recent contract that SM struck with its alliance partner Kakao Entertainment in defiance of Hybe's takeover bid.

The contract, which 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 Thursday amid Hybe's ongoing bid to take over SM after becoming its largest shareholder.

"After learning of what is in the business contract, we were both surprised and concerned," Hybe said in a statement. "A review is under way on legal problems contained in this contract. According to its result, we will take all necessary legal measures, both civil and criminal."

Hybe claimed the deal means Kakao could keep increasing its share in SM by taking advantage of the preemptive share purchase right, and would end up hurting ordinary shareholders by undermining the value of assets held by other shareholders.

"Compared with the important business rights that SM is handing over, what it gets in return is unreasonably small," Hybe said. "We believe this contract damages the value of SM shareholders, restricts the rights of SM artists and limits the future of SM employees. The current SM management should suspend all decision-making related to details of this contract."

On Wednesday, Hybe completed its acquisition of a 14.8 percent stake in SM from its founder Lee Soo-man despite SM's criticism of the purchase as a hostile merger and acquisition to control the firm. Hybe is seeking to acquire a 40 percent stake in SM by the annual shareholders meeting slated for March 31.

SM refuted Hybe's claims related to its agreement with Kakao Entertainment, accusing its rival of "maliciously misinterpreting" commonly used contract phrases to mislead shareholders.

"We don't plan to raise investment by issuing new shares through a third-party allotment," SM said in a statement. "As (the company) nears its limit of issuing new shares, it is legally impossible to issue new shares without changing the articles of association."

SM also denied the claim that it has offered music distribution rights for "an indefinite period" to Kakao Entertainment, saying it will discuss detailed terms of agreement when signing separate contracts in the future.

SM raised concerns Hybe's "hostile" merger and acquisition attempts could result in monopoly in the K-pop industry, disadvantage shareholders and pressure SM to streamline its business in the process of the antitrust watchdog's regulatory reviews.

SM and Hybe accounted for about 70 percent of the domestic music revenue and 89 percent in the performance market in the third quarter of 2022, according to SM.

Later on Friday, CJ ENM, a leading media and entertainment company, said it has decided not to acquire a stake in SM Entertainment.

"We have considered buying a stake in SM Entertainment and a synergy in business, but made a final decision not to buy," the company said in a regulatory filing.

There have been rumors that the subsidiary of CJ Group was interested in purchasing a stake in the K-pop pioneer, which the conglomerate has dismissed as "groundless."

ejkim@yna.co.kr
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