Controversy brews over HYBE Chair Bang’s investment deal with PEFs

Bang Si-hyuk, founder and chairman of HYBE Co., the South Korean entertainment giant behind K-pop global sensations BTS and NewJeans, is embroiled in a controversy over his private shareholders’ contract with private equity firms, which is believed to have dealt a huge blow to the company’s stock immediately after its listing some four years ago.

According to financial and investment banking industry sources on Thursday, it is confirmed that Bang raked in about 400 billion won ($287 million) from HYBE’s initial public offering thanks to his private shareholders’ agreement signed with local PEFs — STIC Investments Inc., Estone Equity Partners and New Main Equity — a few years before the company’s IPO in 2020.

The agreement stated that PEFs with stakes in HYBE after their investment in 2018 and 2019 should share with Bang 30% of their profit from their exit if HYBE goes public as agreed.

Following the PEFs’ investment in HYBE under the agreement, STIC Investments held a 12.2% stake in the Korean entertainment giant, which was then called Big Hit Entertainment, while Estone and New Main Equity jointly owned 11.4%.

If HYBE failed to go public before their agreed time, Bang would've had to repurchase the PEFs’ stakes plus interest, according to the shareholders’ agreement.

CHEERS TURN TO PANIC

On October 15, 2020, HYBE triumphantly debuted on Korea’s main bourse Kospi with its stock price more than doubling from the IPO price, 135,000 won per share, reflecting high expectations for the company behind global boy band sensation BTS.

But soon after the stock hit the intraday high of 351,000 won, it began retreating and ended its first trading day at 258,000 won, 4.4% lower than its opening price of 270,000 won.

The next day, it plunged 22.3% and then plummeted 60% to the 150,000 won level over the course of the week.

The stock’s freefall was largely driven by the PEFs’ massive selloffs of HYBE shares after its IPO.

Of the total 23.6% stake held by the PEFs, 15.1% were free from lock-in contracts, meaning that such shares could be unloaded any time after the IPO.

STIC, Estone and New Main cashed in on 4.99% or nearly 1.8 million shares of their holdings in HYBE over the four days after the IPO to reap 425.8 billion won. 

HYBE stock and its retail investors were battered and bruised after the much-anticipated IPO, which benefited only Bang and the PEFs.

The IPO allowed STIC Investments to collect 961.1 billion won from its investment of 103.9 billion won in HYBE, while Estone and New Main were suspected to have raked in a similar amount from their investment of 125 billion won.

Under the shareholders’ agreement between the PEFs and Bang, suspected of being an earnout contract, the HYBE founder was alleged to have received some 400 billion won from the PEFs after the HYBE IPO.

UNUSUAL PRACTICE

It is unusual for a company’s largest shareholder to profit from its own sake by signing a shareholders’ agreement just before an IPO, market analysts said. 

At the heart of the controversy is the absence of a proper report about the shareholders’ agreement between Bang and the PEFs to share the profit from share divestitures after the IPO, said industry observers.

HYBE did not disclose the PEFs-Bang agreement to the Korea Exchange during its IPO review process or in its stock prospectus reported to Korea’s Financial Supervisory Service (FSS).

HYBE said it decided not to report the agreement because its IPO underwriters and legal advisors concluded that the contract between certain major shareholders would barely dent the holdings of minority shareholders.

When HYBE shares nosedived right after the IPO, the market was unaware of the contract between Bang and the PEFs.

An official who took part in the Korea Exchange's HYBE IPO review process argued that a company and its IPO underwriter must report any special contract between major shareholders.

“None of the company and IPO underwriters gave notification of the Bang-PEF contract,” said the official.

HYBE’s lead IPO underwriters were NH Investment & Securities Co., Korea Investment & Securities Co. and JP Morgan. Mirae Asset Securities Co. was the co-underwriter.

An FSS official who was a regulatory filing reviewer also said any investment agreement between a company’s largest shareholder and outside investors is subject to a filing but the official did not recall any document disclosing the Bang-PEFs shareholders’ agreement before the IPO.

Legal advisors are divided, however, over whether it is essential for HYBE to report the shareholders' agreement.

DEPARTURE OF NEWJEANS

Meanwhile, HYBE shares lost 4.1% to end at 195,200 won on Friday after NewJeans, a popular K-pop girl group, on Thursday called on its label ADOR under music powerhouse HYBE to end its exclusive contract.

All five NewJeans members agreed to leave the agency over to the company’s mistreatment, they said.

Their departure had been anticipated after a dispute between their former executive producer Min Hee-Jin and HYBE, which forced Min, who is also ADOR’s former chief executive, to leave the company earlier this month.

NewJeans expressed hopes of working Min again and continuing to perform under a different group name.

Write to Jin-Hyoung Cho, Jun-Ho Cha and Seok-Cheol Choi at u2@hankyung.com
Sookyung Seo edited this article.