Introduction
South Korean prosecutors have issued an arrest warrant for Brian Kim, founder of the internet conglomerate Kakao, amid an investigation into alleged stock market manipulation during a bidding war for SM Entertainment in 2023.
Background on the Case
In March 2023, Kakao and its subsidiary, Kakao Entertainment, emerged as the controlling shareholder of SM Entertainment by acquiring a 39.9% stake in the K-pop giant. This victory followed a heated bidding war with Hybe, the company behind the famous K-pop group BTS. Kakao offered to purchase SM Entertainment shares at 150,000 KRW ($115) each, surpassing Hybe’s earlier offer of 120,000 KRW ($87) per share.
Tender Offer Explained
A tender offer occurs when a company proposes to buy shares directly from another company’s shareholders within a specified period. The goal is typically to gain control of the target company, with success dependent on acquiring a significant percentage stake.
Allegations of Stock Manipulation
Prosecutors allege that Kakao manipulated SM Entertainment’s share price just before finalizing the deal. Reports suggest that Kakao purchased KRW 240 billion ($174 million) worth of SM Entertainment shares across 553 trades in February 2023. This activity allegedly increased the share price beyond Hybe’s tender offer of 120,000 KRW, prompting Hybe to withdraw its offer. Additionally, Kakao is accused of failing to report these substantial stock purchases to financial authorities.
Previous Arrests and Trials
Kakao’s chief investment officer, Jae-Hyun Bae, was arrested in October following accusations of stock price manipulation during the takeover. He is currently on trial.
Impact on Kakao and SM Entertainment
Following Kakao’s acquisition, Hybe sold part of its stake in SM Entertainment to Kakao, reducing its ownership from 15.8% to 8.8%.
Potential Regulatory Consequences
If executives at Kakao Entertainment are found guilty of violating South Korea’s Capital Markets Act and face significant penalties, the financial regulator may require Kakao to divest at least 10% of its stake in Kakao Bank.
South Korea’s Online Banking Regulations
Under South Korean law, non-financial companies must maintain a clean record, free from violations of financial or fair trade laws for five years, to hold more than 10% voting rights in mobile-only banks.
About Kakao
Founded in 2006, Kakao is a leading internet firm in South Korea. The company operates various platforms, including messaging service Kakao Talk, on-demand taxi service Kakao Mobility, online banking platform Kakao Bank, music streaming service Melon, and comics hosting platform Kakao Webtoon.
FAQ: Frequently Asked Questions
Q: What are the allegations against Brian Kim, the founder of Kakao?
A: Brian Kim is accused of stock market manipulation related to Kakao’s acquisition of a stake in SM Entertainment.
Q: How did Kakao become a major shareholder in SM Entertainment?
A: Kakao became the controlling shareholder by winning a bidding war against Hybe, purchasing a 39.9% stake in SM Entertainment in March 2023.
Q: What is a tender offer?
A: A tender offer is a proposal by a company to buy shares directly from another company’s shareholders within a specified timeframe, usually to gain control of the target company.
Q: What potential regulatory actions could affect Kakao?
A: If found guilty of violating financial laws, Kakao could be compelled to reduce its ownership in Kakao Bank due to South Korea’s online banking regulations.
Q: What is Kakao’s role in South Korea’s tech industry?
A: Kakao is a major player in South Korea’s internet sector, offering services like messaging, ride-hailing, online banking, music streaming, and digital comics.
