SM, Hybe dispute snowballs over Lee Soo-man tax evasion allegation

SM Entertainmet / Hybe

The feud between SM Entertainment and Hybe is escalating as the two companies continue to refute each other's position in relation to SM founder Lee Soo-man's suspected offshore tax evasion.

The allegation was first made Thursday by SM's co-CEO Lee Sung-soo, also the founder's nephew, when he posted a video to YouTube exposing his uncle's alleged offshore tax evasion.

In the video, the CEO claimed Lee Soo-man had established a production company in Hong Kong in 2019 under the name of CT Planning Limited. The video claimed that Lee Soo-man established the company using SM's assets. The CEO said CTP was the foreign equivalent of Like Production, a local production company owned by Lee Soo-man through which Lee had been receiving royalties from SM.

"(Lee Soo-man) takes 6 percent in royalties from SM by making the production go through (the deals between) CTP and foreign labels," the CEO said in the video, adding, "this abnormal process seems like an effort to avoid the surveillance of the National Tax Service."

He added that SM's contract with the Hong Kong-based company remains solid even after SM ended its business contracts with Like Production last year.

Hybe released a press statement later the same day, claiming it had not been aware of CTP or its deals with SM at the time when it had signed the acquisition agreement with Lee. It added that, even if any contracts it had not been aware of gets discovered later, its deal with Lee will compel him to resolve them completely.

On Friday, SM refuted Hybe's assertions through a press release, saying CTP is not signed with SM but with foreign labels and hence the deals cannot be dissolved by Hybe.

Accusing Hybe of "distorting (Lee Soo-man's) suspected offshore tax evasion," SM's CEO said in a statement, "CTP signed deals directly with the foreign labels to hide its existence, not through SM. Since there is no contract between CTP and SM, the deals cannot be dissolved by Hybe through contract termination."

Hybe instantly countered SM's accusation through another statement.

"If CTP had not been signed directly with SM as claimed by SM, then it is even more difficult for us to acknowledge its existence. Regardless, it has been agreed through our deal with Lee (Soo-man) that, even if not based on a direct contract with SM, Lee will not take any profits in relation to SM artists who had previously been signed with CTP," Hybe said in its statement release on Friday afternoon, following SM's rebuttal.

Hybe also expressed discomfort at SM's accusation that it its attempting to distort SM's position.

"The problems raised by SM are invalid as we plan to take care of the contracts transparently through our board of directors. We are currently trying to solve SM's issues and hold no reason to make distortions of any kind, and nor will there be any reasons for our efforts to be targeted by such accusations," Hybe said in its statement.

Hybe also questioned SM in its continued attacks.

"If SM believes that CTP's deals cannot be resolved through our share purchase agreement with Lee, we would like to know what SM's stance is in exposing the deals," said Hybe.

Hybe claimed that it would have been SM's responsibility to take care of any contracts that involve the label's artists.

"We presume it requires approval from the management level for such contracts to be made, and whoever had given the approval, we hope that the current executives take the necessary actions for the contracts in question," Hybe said.

"All of these accusations and alleged doubts by SM are only exposing the problems of SM's governance, and, unfortunately, those problems have all happened inside SM," Hybe said. "Changes will only be possible when there is effort from inside SM to actually solve the problem. This kind of approach where accusations are made against the largest shareholder trying to solve SM's problems is unacceptable," the company added.

SM's CEO made the allegations against Lee Soo-man after the founder signed a deal with Hybe on Feb. 10 to sell 14.8 percent of his stake in SM for 422.8 billion won ($334.28 million), making Hybe the largest shareholder of SM. Hybe has also offered to buy another 25 percent from other shareholders.

By Choi Ji-won(jwc@heraldcorp.com)