It has been known that the producer contract between SM Entertainment and Lee Soo Man came to an end last year. But as it turns out, there was another contract made between Lee Soo Man and SM Entertainment which has a structure that allowed Lee Soo Man to collect billions of KRW (millions in USD) every year for the next 70 years.

On February 9, Align Partners Asset Management released the original text of the SM board's document on the claims of contract violations. According to this document, the contract between SM Entertainment and Like Planning (Lee Soo Man's private company) was terminated early on December 31 last year. However, according to Attachment 2 of the Like Planning Producer License Agreement, which was signed and extended in 2015, 'Agreement on Settlement after Contract Termination,' Lee Soo Man will receive 6% royalties until 2092 on the proceeds from previously released albums without any obligations. Additionally, he will receive 3% of royalties on management profits until the end of 2025.

According to Align Partners Asset Management, if the post-settlement agreement is fulfilled, it is calculated that more than 40 billion KRW (~31.7 million USD) will be paid to Like Planning for the first three years and more than 50 billion KRW (~39.6 million USD) for the next 10 years.

Align Partners said, “It is understood that the Seoul Regional Tax Service conducted tax audits twice and imposed large-scale fines of tens of billions of KRW on the Like Planning service contract and Like Planning producing license contract.” The company added, "The post-payment agreement is still in effect."

Align Partners also pointed out, "the SM board of directors' fulfillment of the post-settlement agreement could be an act of unfair support for a person in a special relationship or a violation of the statute of breach of trust in business under the Fair Trade Act. This is contrary to the director's duty of care (obligation to strive for the interests of the company), etc."

The document on the claims of contract violations is the rights given to minority shareholders to request directors to stop the violation if there is a concern that the director may cause irreparable damage to the company by violating the law or the articles of incorporation.

After stepping down as a registered director of SM in 2010, Lee Soo Man signed a production contract with SM Entertainment through Like Planning, his private company, and has been receiving millions of USD in royalties every year. He received royalties of 24 billion KRW (~19 million USD) in 2021 and earned 11.4 billion KRW (~9.02 million USD) in the first half of 2022 alone. The total amount of money that flowed from SM Entertainment to Like Planning for 22 years, starting from 2000, is 148.6 billion KRW (~117.6 million USD). This is equivalent to 35% of the operating profit recorded by SM Entertainment during the same period (420.7 billion KRW = 332.9 million USD).

Align Partners has been carrying out shareholder action, claiming that such a contract is damaging the shareholder value of SM, and SM terminated the contract with Like Planning early through a resolution of the board of directors on December 31 last year. Afterward, SM co-CEOs Lee Sung Soo and Tak Young Jun announced on February 3 that they would break away from Lee Soo Man's monopoly production system and introduce a 'multi-producing' system in which five production centers and internal and external labels produce music independently.

In addition, an emergency board meeting was held on February 7, and it was decided to issue new shares worth about 111.9 billion KRW and convertible bonds worth 105.2 billion KRW to Kakao. With this resolution, Kakao acquired 1.23 million of newly-issued SM shares and secured 1.14 million shares (based on conversion to common shares) through the acquisition of convertible bonds, for a total of 217.152 billion KRW (~172.3 million USD), becoming SM's second largest shareholder (9.05% stake).

However, Lee Soo Man responded by submitting an application for a provisional injunction to prohibit the issuance of new shares and convertible bonds through his legal representative, law firm Hwawoo. “If new stocks and convertible bonds are issued to a third party other than existing shareholders, they must be necessary to achieve business objectives and a method that minimizes infringement of shareholders’ preemptive rights to the extent necessary to achieve such objectives." He insisted that this resolution for issuing new stocks and convertible bonds was an illegal resolution that did not meet both of the above two requirements and said, “We plan to hold all legal recourse, both civil and criminal, against the directors who voted in favor of this illegal resolution.”