This is proving to be a rough year for HYBE.
For much of 2024, the world’s leading K-pop company has been dealing with a very public dispute involving Min Hee-jin, the former CEO of HYBE’s label ADOR.
Last week, girl group NewJeans, ADOR’s principal act, announced they are leaving the label, apparently the result of Min’s departure earlier this year. HYBE is disputing the group’s unilateral decision, arguing their contract is still in effect.
The company also faced public embarrassment last month when a trove of internal documents was released at a Korean National Assembly committee. The documents included disparaging comments about some HYBE acts, as well as acts from other K-pop agencies.
Now, according to news reports, HYBE’s founder and Chairman, Bang Si-hyuk, is facing an investigation by the Financial Services Supervisor (FSS) – South Korea’s financial regulator – over what the media are calling “secret” contracts with certain shareholders before and during the company’s initial public offering in 2020.
According to news reports, those contracts netted Bang some 400 billion South Korean won (USD $338.8 million, at the average exchange rate for 2020) in the wake of the IPO.
The contracts involved three local private equity funds – STIC Investments, Estone Equity Partners, and New Main Equity. The funds struck a deal with Bang in 2018 – two years before the IPO – to take stakes in HYBE (at the time called Big Hit Entertainment).
The contracts exempted a majority of the funds’ stake from lock-up restrictions that would have prevented them from selling shares immediately after the IPO, according to Business Korea. They also entitled Bang to take 30% of the profits from the PE firms’ stock sales if the IPO was successful. If not, Bang would be required to repurchase the PE firms’ stakes under a put option clause in the contract.
As a result, the funds were able to offload a significant chunk of their stake – 4.99% of HYBE’s outstanding shares – in the days after the IPO. Some news outlets, including Korea Economic Daily – say this was the cause of HYBE’s share price plunge shortly after a rip-roaring IPO day.
On October 15, 2020, HYBE began trading on the Korea Exchange, opening at KRW 270,000 ($229) per share, or double its IPO price of KRW 135,000 ($114.50). The soaring stock price meant Bang’s net worth soared to more than $2 billion, MBW reported at the time.
However, within days, HYBE’s stock price began to plunge, falling from a peak of KRW 351,000 all the way to its IPO price of KRW 135,000.
“HYBE stock and its retail investors were battered and bruised after the much-anticipated IPO, which… benefited only Bang and the [private equity funds],” opined Korea Economic Daily.
The Daily reported that STIC Investments made a profit of KRW 961.1 billion ($814 million) from the stock sales, on an investment of KRW 103.6 billion, while the other two private equity funds made “a similar amount” on their initial investment of KRW 125 billion.
And Bang himself cleared around KRW 400 billion.
The legal sticking point here is that HYBE reportedly didn’t disclose the shareholder agreements to regulators and investors before the IPO, potentially causing early investors in HYBE to lose money as the company’s shares fell below their opening price.
That has now triggered the FSS investigation into whether the deals violated Korea’s Capital Markets Act and amounted to unfair trading practices, Korea JoongAng Daily reported.
HYBE denied allegations of any wrongdoing in a disclosure on Friday (November 29).
“Our company provided the shareholder agreement in question to the IPO underwriters during the listing preparation process,” and the underwriters reviewed the disclosure, HYBE said, as quoted by JoongAng Daily.
HYBE’s IPO was underwritten by NH Investment & Securities and JPMorgan, with Mirae Asset Securities acting as a co-underwriter.
An unnamed representative from one of these securities firms told Business Korea that, as it was a “private agreement between shareholders,” it didn’t need to be disclosed.
“However, the possibility of [private equity fund] share sales was mentioned in the securities report.”
“Our company provided the shareholder agreement in question to the IPO underwriters during the listing preparation process.”
HYBE
The private equity funds dispute the assertion that their share sales caused the plunge in HYBE’s stock price, Business Korea reported.
“When Bang and the [PE firms] signed the agreement in 2018, [K-pop group] BTS was expected to complete their military service before the IPO, making it a long-term investment of five to six years, and the [PE firms] requested a put option as a countermeasure,” an unnamed investment banking industry insider told the publication.
“Bang decided to take the put option with his personal shares to avoid burdening the company and agreed to share some of the excess profits.”
The insider added that “multiple law firms” were consulted during the application for an IPO and in the writing of the securities report, “and it was legally determined that there were no procedural issues, so it was not included in the report.”
HYBE’s stock price fell 2.77% on Monday (December 2), in the wake of the news that the FSS is investigating the contracts, closing at KRW 189,800 ($135) per share.
Like other K-pop agencies, HYBE’s stock price has been under pressure this year. Despite a short-lived rally in the stock since late September, the company’s shares are down more than 21% year-to-date.Music Business Worldwide