YOON&YANG

On February 7, 2023, SM ENTERTAINMENT (“SM”) resolved to issue new shares valued at around KRW 111.9 billion and convertible bonds amounting to around KRW 105.2 billion to KAKAO via a third-party allotment. In response, Mr. Lee Soo Man, SM’s former executive producer, filed for a provisional injunction against SM’s issuance of these new shares and convertible bonds, asserting that the resolution by SM’s current management was made in an unlawful attempt to influence the company’s control and governance.

Indeed, Mr. Lee Soo Man’s motion for provisional injunction garnered significant attention both domestically and worldwide as it revealed the possibility of a management dispute between SM and KAKAO.

Yoon & Yang, the legal counsel for Mr. Lee Soo Man, vigorously argued in its motion for the provisional injunction as follows: (i) The issuance of new shares and convertible bonds via a third-party allotment must be legitimately in line with the company’s managerial objectives; and (ii) the issuance should only be permitted if it is considered unavoidable even though it would infringe upon the preemptive rights of existing shareholders. However, (iii) SM’s issuance failed to satisfy the foregoing requirements.

In particular, Yoon & Yang maintained that, given SM’s ample cash liquidity, SM lacked any compelling managerial need to raise funds from a third party in violation of the proportional interests of existing shareholders.  Further, Yoon & Yang asserted that SM lacked a valid basis for issuing such substantial amount of new shares and convertible bonds, which represent nearly 9.5% of SM’s total stake, through a third-party allotment.

On March 3, 2023, the Seoul Eastern District Court accepted most of Yoon & Yang’s arguments and granted Mr. Lee Soo Man’s provisional injunction against SM’s issuance of new shares and convertible bonds. Specifically, the Court endorsed the arguments put forth by Yoon & Yang on the following grounds: (i) Considering SM’s managerial objectives, such as securing urgent funds, expanding business operations, and forming strategic partnerships, it cannot be readily concluded that SM had a compelling managerial need to allocate and issue new shares and convertible bonds to KAKAO in disregard of the preemptive rights of existing shareholders; and (ii) there is considerable cause for concern that issuing new shares and convertible bonds in a seemingly unfair manner or in violation of the Korean Commercial Code and SM’s Articles of Incorporation may adversely influence existing shareholders by potentially infringing upon their proportional interests or diluting their control in SM.

Yoon & Yang now has successfully amassed a record of accomplishment in management disputes related to the issuance of new shares and convertible bonds allocated to third parties. In 2020, Yoon & Yang successfully defended Hanjin KAL against the motion for preliminary injunction by activist fund KCGI to prohibit Hanjin KAL from issuing new shares through a third-party allotment to the Korea Development Bank for the purpose of participating in the paid-in capital increase of Korean Air to acquire Asiana Airlines.