Align Partners Capital Management: First Investment in Chaos Custom Case Solution & Analysis

Evidence Brief: SM Entertainment Governance and Financial Performance

Financial Metrics

Valuation Disparity: SM Entertainment traded at a forward Price-to-Earnings ratio of approximately 15x in late 2021, compared to HYBE at 40x and JYP Entertainment at 25x.
Related Party Leakage: Between 2000 and 2021, SM Entertainment paid over 140 billion KRW in consulting fees to Like Planning, a private entity 100 percent owned by founder Lee Soo-man.
Margin Impact: Fees paid to Like Planning represented up to 46 percent of SM Entertainment operating profit in certain fiscal years.
Capital Structure: Align Partners Capital Management acquired a 0.91 percent stake in SM Entertainment to initiate activism.

Operational Facts

Market Position: SM Entertainment is a pioneer of the K-pop industry with a massive library of intellectual property and active talent including NCT, Aespa, and EXO.
Governance Structure: The board of directors historically consisted of individuals closely aligned with Lee Soo-man, despite him holding no formal executive role or board seat.
Contractual Terms: The contract with Like Planning lacked a termination clause and mandated payments even if Lee Soo-man provided no specific services.

Stakeholder Positions

Lee Chang-hwan (Align Partners): Asserts that the Like Planning contract is the primary cause of the Korea Discount for SM Entertainment.
Lee Soo-man (Founder): Maintains that his creative direction is the essential ingredient for company success and justifies the royalty structure.
Institutional Investors: Large domestic and international funds expressed dissatisfaction with governance but remained passive until Align Partners intervention.

Information Gaps

Specific breakdown of services provided by Like Planning versus internal SM Entertainment production teams.
The exact voting intentions of the National Pension Service (NPS), which holds a significant minority stake.
Legal feasibility of clawing back historical payments made to Like Planning under Korean commercial law.

Strategic Analysis: Closing the Valuation Gap

Core Strategic Question

How can a minority shareholder with less than 1 percent ownership force the termination of a multi-decade related-party contract to unlock shareholder value?

Structural Analysis

The Agency Problem is the central hurdle. The founder exerts control without accountability, leading to significant wealth transfer from minority shareholders to a private entity. The Korean market environment traditionally protects founders, but rising retail investor participation and ESG awareness create a window for change. Competitive rivalry is high; SM Entertainment is losing market share to HYBE, which operates with a more transparent corporate structure.

Strategic Options

Option 1: Proxy Fight for Auditor Appointment. Nominate an independent auditor to investigate the Like Planning contract.
- Rationale: Korean law allows shareholders with 3 percent or more (combined) to elect an auditor with restricted voting rights for the largest shareholder, neutralizing the founder advantage.
- Trade-offs: High public profile; requires significant coordination with other institutional investors.
Option 2: Shareholder Derivative Suit. Pursue legal action against the board for breach of fiduciary duty regarding the Like Planning contract.
- Rationale: Directly challenges the legality of the fees.
- Trade-offs: Lengthy timeline; high legal costs; potential to alienate the creative talent loyal to the founder.

Preliminary Recommendation

Pursue Option 1. The 3 percent rule in Korean commercial law provides the most effective mechanism for a minority shareholder to exert influence. By installing an independent auditor, Align Partners can gain access to internal records and pressure the board to terminate the Like Planning contract voluntarily to avoid further legal or regulatory scrutiny.

Implementation Roadmap: 90-Day Execution Plan

Critical Path

Coalition Building (Days 1-30): Secure public support from institutional investors and proxy advisory firms. Target a combined 5-10 percent voting block to signal momentum.
Formal Nomination (Day 45): Submit the proposal for an independent auditor candidate before the deadline for the Annual General Meeting.
Public Campaign (Days 46-75): Release a detailed presentation illustrating the correlation between Like Planning fees and stock price underperformance.
AGM Vote (Day 90): Execute the proxy solicitation strategy to win the auditor seat.

Key Constraints

Founder Loyalty: Lee Soo-man remains the creative heartbeat of the firm. Aggressive tactics could lead to a talent exodus.
Regulatory Nuance: Interpretation of the 3 percent rule by Korean courts can be unpredictable if the founder attempts to split his holdings among friendly parties.

Risk-Adjusted Implementation Strategy

The strategy must lead with the financial benefit to all shareholders rather than a personal attack on the founder. If the auditor election fails, Align Partners should immediately pivot to a public shareholder proposal for a dividend increase to force a discussion on capital allocation.

Executive Review and BLUF

BLUF

Align Partners must win the auditor seat at the upcoming Annual General Meeting to terminate the Like Planning contract. This contract is the sole structural barrier to a 100 percent increase in valuation. The 3 percent rule in South Korea provides a unique tactical advantage that neutralizes the founder voting power. Success requires a coalition of institutional investors to move from passive discontent to active opposition. Failure to act now leaves SM Entertainment vulnerable to continued capital leakage and permanent loss of market leadership to HYBE.

Dangerous Assumption

The analysis assumes that institutional investors, particularly the National Pension Service, will prioritize governance reform over their historical preference for stability and avoiding conflict with powerful founders.

Unaddressed Risks

Talent Flight: If Lee Soo-man perceives the audit as a hostile takeover of his creative legacy, he may encourage key artists or producers to exit, destroying the underlying value of the firm. High probability; high consequence.
White Knight Intervention: The founder may sell his stake to a strategic partner like Kakao or CJ ENM at a premium, effectively blocking Align Partners through a friendly corporate merger. Moderate probability; high consequence.

Unconsidered Alternative

A negotiated settlement where the founder agrees to phase out Like Planning over three years in exchange for a formal, salaried executive role and a performance-based bonus. This preserves his creative input while fixing the governance structure without a public battle.