K-pop powerhouse HYBE is dealing with yet another controversy after it emerged that South Korea’s Financial Supervisory Service is investigating recent reports about shareholder deals done prior to the company’s 2020 initial public offering, and whether a failure to disclose those deals violated the country’s Capital Markets Act. The deals involved HYBE founder and Chairman Bang Si-hyuk, who personally benefited from them to the tune of $285 million.
HYBE has already denied any wrongdoing, insisting it provided a copy of “the shareholder agreement in question” to its IPO underwriters as they were preparing for the listing on the South Korean stock market.
The underwriters “reviewed the relevant shareholder agreement in accordance with the listing-related laws”, it says, and decided that the information about the deals that was revealed in the press last week did not need to be disclosed. To that end, concludes HYBE, “we have determined that our company did not violate any relevant laws during the listing process”.
The reports about the pre-IPO deals involving Bang come as HYBE continues to deal with its very public feud with the co-founder of its Ador label, Min Hee-jin, which has now also become a very public feud with Ador-signed NewJeans. Plus in October it was revealed that HYBE was having to repay millions in debt after spooked investors in the company’s bonds opted to redeem their investments, prompting a new round of bond issuing.
The pre-IPO deals now being reviewed by the regulator involved three private equity firms - STIC Investments, Estone Equity Partners and New Main Equity - which each bought a stake in HYBE, then still known as Big Hit, in 2018.
According to a report from The Korea Economic Daily last week, as part of those deals Bang agreed to repurchase the shares, plus pay interest, if the company failed to IPO by an agreed deadline. However, if the IPO went ahead - as it did - Bang would get 30% of the shareholders’ profits from their share sales.
According to BusinessKorea, that agreement was partly to allay fears among investors about the potential impact on the business if and when members of BTS, by far the company’s biggest act, had to complete military service in South Korea. The military service obligations of BTS members, which started to be met when eldest member Jin enlisted in December 2022, were a big talking point in Korea for years.
Bang himself agreed to commit to repurchase the shares if the IPO deadline was missed, sources say, in order “to avoid burdening the company”. As it turned out, it was a good deal to sign up to, because the IPO did go ahead and Bang shared in the profits when the private equity firms started selling their shares.
The current controversy mainly relates to the failure to disclose all this in documentation published ahead of the IPO. Though there are claims that the private equity deals also excluded a chunk of the shares acquired by the funds from ‘lock-up restrictions’, meaning there were no restrictions on the funds when it came to selling those shares as soon as the IPO had happened.
Some allege that the private equity funds quickly selling off shares after the IPO in 2020 had an impact on the HYBE share price, which initially spiked but then tanked, costing other shareholders money.
That said, BusinessKorea notes that the funds insist that their share sales did not cause the sharp drop in the HYBE share price, while also insisting that their deals with Bang were totally legit. Plus, despite the initial wobble, the HYBE share price went on to recover and increase over the next couple of years.
All of which means it may turn out that HYBE’s current position is correct, and that nothing dodgy occurred before and immediately after the 2020 IPO. But, for the time being, the regulator’s investigation is another bit of drama for HYBE’s management team to navigate.