SM faces management dispute led by founder Lee Soo-man

The rift between SM Entertainment and its founder Lee Soo-man continues to deepen as Lee called out the process of making Kakao the company's second-largest shareholder an “act of illegality.”

On Tuesday, SM Entertainment and South Korean tech giant Kakao announced a partnership that involved Kakao acquiring a 9.05 percent stake in the K-pop powerhouse.

The share acquisition amounts to more than 217 billion won ($173.12 million).

The partnership was a trilateral deal between SM Entertainment, Kakao and its subsidiary Kakao Entertainment aimed at expanding the reach of content overseas.

Lee Soo-man opposed the partnership, making his stance clear via a legal representative.

“SM Entertainment is currently going through a business management dispute between the largest shareholder Lee Soo-man and alliance partners clothed as a shareholders’ private equity fund. Therefore it is an act of illegality against the commercial law and article of association for the SM board of directors to issue new stock and convertible bonds to a third party,” Lee Soo-man said through law firm Yoon & Yang.

The statement added that it would hold them responsible for the breach of business laws.

Lee Soo-man returned to South Korea on Tuesday from a stay in the US, according to industry sources.

SM’s co-CEOs Lee Sung-soo and Tak Young-jun had announced Friday that the company had terminated its contract with the producer Lee Soo-man and laid out the blueprints of SM’s new chapter under “SM 3.0.”

SM 3.0 involves establishing five different production centers and independent music labels to diversify production, which is completely different from the former system in which Lee was in charge of the entire music production process.

Following the announcement, actor and singer Kim Min-jong, who is also an SM executive, sent an email to all SM employees berating the company for making the decision without the consent of others. Kim emphasized that SM artists need Lee’s producing skills.

However, some employees were also showing support for the company’s new vision.

Analysts evaluate the partnership between SM Entertainment and Kakao to have a positive effect on both parties.

“SM will be able to make use of Kakao’s content-related value chain and metaverse capability. Kakao will be capable of expanding its reach to markets beyond Korea by making use of SM’s systematic process and intellectual property. They could create a synergy in creating content such as webtoons for Kakao Entertainment,” said Ahn Jae-min, an analyst at NH Investment & Securities.