South Korean prosecutors said Wednesday they had requested an arrest warrant for Brian Kim, founder of South Korean internet giant Kakao, as part of an investigation into suspected stock market manipulation linked to a high-profile 2023 takeover battle for SM Entertainment, one of South Korea's biggest music labels.
The warrant was issued a week after Seoul prosecutors began investigating Kim's involvement in alleged stock price manipulation at SM Entertainment.
Kakao did not respond to a request for comment before publication.
In March 2023, Kakao and Kakao subsidiary Kakao Entertainment won a bidding war for a 39.9% stake in K-pop label SM Entertainment, becoming the controlling shareholder. Kakao was competing against Hive, owner of South Korean music agency BigHit, known for signing popular K-pop boy band BTS. Kakao launched a tender offer to buy SM Entertainment shares for 150,000 won ($115) per share, up from Hive's previous offer of 120,000 won (about $87) per share.
A tender offer is when a company directly asks the shareholders of a target company to buy their shares within a certain period of time. The goal of a tender offer is usually to gain control of the target company, and the success of such an offer depends on the bidder acquiring a certain percentage of the shares.
South Korean prosecutors suspect that SM Entertainment's share price was manipulated just before the deal was completed. Kakao reportedly purchased 240 billion won (approximately $174 million) of SM Entertainment shares in 553 transactions in February 2023. This caused the company's share price to exceed Hive's tender offer price of 120,000 won per share, causing Hive to withdraw its offer.
Kakao has also been accused of failing to report large stock purchases to financial authorities.
Kakao's chief investment officer, Bae Jae-hyun, was arrested in October last year on suspicion of manipulating stock prices after the acquisition and is currently on trial.
After Kakao acquired SM Entertainment in March last year, Hive sold some of its shares in the company to Kakao, reducing its ownership stake from 15.8% to 8.8%.
Founded in 2006, Kakao is one of South Korea's largest internet companies. It operates the popular messaging service KakaoTalk, on-demand taxi service Kakao Mobility, online banking platform KakaoBank, music streaming service Melon and comic book hosting platform Kakao Webtoon.
If Kakao's chief investment officer and other executives at Kakao Entertainment are found to have violated South Korea's capital markets law and face penalties heavier than fines, South Korean financial regulators could force Kakao to sell at least 10 percent of its shares in its online banking subsidiary, Kakao Bank.
According to South Korea's online banking regulations, in order to hold more than 10% of the voting rights of a mobile-only bank, non-financial companies must not have violated any financial laws, such as the Capital Markets Act or the Fair Trade Act, in the past five years.