HYBE warns SM about the disadvantage of handing over distribution rights to Kakao, “We will take all necessary legal measures”
HYBE expressed their position on the business cooperation contract between SM Entertainment and Kakao.
On the morning of February 24th, HYBE released a statement regarding SM-Kakao business cooperation contract reported on the 23rd, saying “In accordance with the result after reviewing the legitimacy of the mentioned contract, we will take all necessary civil and criminal legal measures.”
Through the statement, HYBE said, “In the contract for the acquisition of convertible bonds concluded separately at the time SM and Kakao signed the business cooperation contract, the content that SM will preferentially give new shares or stock-linked securities to Kakao”.
They continued, “According to this clause, Kakao can continuously increase their stake by using the preference to boost the paid-in capital allocation whenever SM’s stock price falls, making it impossible to prevent the scenario of inequality for general shareholders. In this case, other shareholders, except for Kakao, may continue to suffer dilution of equity.”
HYBE also pointed out that the main content of the business cooperation contract is hard to be considered horizontal cooperation like SM claimed. They said, “Kakao will have an exclusive right to distribute SM’s domestic and international albums/digital sources without a time limit, and will have the rights to manage SM artists in North and South America. Kakao’s overall distribution of tickets for performances/fanmeetings will also limit artists’ negotiating power.”
Citing the content “SM’s subsidiary SM Life Design will produce albums of artists under Kakao, and Kakao artists will use the music video set constructed by SM Life Design”, HYBE emphasized, “Compared to the important business rights that SM passed on to Kakao, the business content that SM receives seems to be disadvantageous”
HYBE stated, “In the entertainment industry, albums and digital sources are the main sources of revenue for agencies and artists, and the negotiating power of revenue distribution varies depending on the status of each artist”, adding “Through this contract, SM handed over these important business rights to Kakao, giving them the exclusive rights without a time limit”.
They added, “It is clear that SM artists’ future activities in North and South America will be reorganized under Kakao’s leadership through this cooperation contract. Considering the fact that SM has been superior to Kakao in every way in the North and South American markets, we are wondering whether this decision is reasonable”.
Lastly, HYBE said to SM’s current management board, “We believe that this contract undermines SM’s shareholder value, restricts SM artists’ rights, and limits the future of everyone under SM. Therefore, we ask SM’s current management board to stop all detailed decision-making processes related to this contract.”