S.M. Entertainment on July 31 effectively refused to merge with Like Agency, a private business entity owned by Executive Producer Lee Soo-man, in its latest response to activist shareholders’ call to improve corporate value.

The remarks left shareholders dissatisfied, causing its stock price to dip on Aug. 1. As of 1:30 p.m., S.M. shares were trading 8.2 percent lower than the previous day’s close.

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S.M. under pressure to answer activist shareholders

In a delayed response, the K-pop powerhouse, home to artists like EXO, Red Velvet and Girls’ Generation, reiterated its stance that its monetary transaction with Like Agency is legitimate.

“(S.M.’s) merger plan is unfeasible because Like Agency is not recognized as a corporation in the legal framework, and we do not have a right to force the merger,” the agency said in an open letter to activist shareholders. “A sudden termination or change in contracts with Like Agency will undermine S.M.’s competitive edge.”

This came as activist shareholders such as KB Asset Management and Korea Investment Value Asset Management ramped up pressure. KB Asset in June said S.M.’s merger with Like Agency is a preemptive measure against a possible litigation between Lee and ordinary shareholders.

Lee, the largest shareholder of S.M. that holds 19.04 percent stake, was not paid a remuneration as he is not a member of its board of directors. But instead, money went into his own pockets in the form of expenses through an undisclosed contract, up to 6 percent of S.M.’s revenue. The agency’s payments to Like Agency in 2017 and 2018 combined amount to 25.3 billion won ($21.3 million).

“Questions have been raised about whether it is fair and well-founded (for S.M.) to pay up to 6 percent of its revenue as expenses to Like Agency, in a process that is nonexistent among market competitors,” said Kim Ki-hoon, an analyst at Hana Financial Investment, in a memo on Aug. 1.

Other than the proposed merger plan, S.M. fell short of answering shareholder demands with regards to higher dividends and removing nonprofitable business operations, by saying it would take them into consideration.

“Despite the sufficient time given to review the demand by shareholders, (S.M.’s) answer does not indicate any concrete action plan,” Kim wrote.

S.M. is one of the largest entertainment companies in South Korea by market cap, along with YG Entertainment and JYP Entertainment.

Activist shareholders are scrambling to take further actions, but said nothing has been confirmed. KB Asset, the third-largest shareholder following the National Pension Service, owns 7.59 percent stake, while KIVAM holds 5.13 percent.

By Son Ji-hyoung (consnow@heraldcorp.com)