Joseph Hwang
1. The Impresario System and the Inalienability
The core point of the entertainment management business is a dual structure that requires both a star as a product and a manager as a business entity and that the attractiveness of the star, which cannot be replaced by others, must be sold through the medium of personality. The former is called the “impresario system,” and the latter the “inalienability” of an entertainer.
2. Why Do K-pop Artists Work in Groups?
Have you ever wondered why almost all K-pop artists perform in groups, except for a few solo artists? Korean impresarios want to overcome the entertainers’ inalienability.
The birth of a star means that the focus of the business has shifted from impresario to entertainer. When you rely on an exclusive contract written on paper, it’s common for someone to approach the star and try to egg it on to go independent. The bird that leaves the nest never returns, and where will the impresarios find the money they spent to promote and produce?
Korean impresarios have learned from this repeated betrayal of famous stars and have organized their contracted entertainers into groups rather than individuals, creating a “brand” from the ground up. Of course, this is challenging too. They must bear huge expenses and overcome discord between members before their debut. However, although the barriers are high, there are many advantages once they succeed. If they can keep the core idol members, they can maintain the brand even if the impresarios have to fire or replace the members, causing discord. If they can trademark the team name, they can guarantee exclusivity. It’s a bonus that they can exercise their ownership rights of the brand even after the end of the exclusive contract. In addition, they can have a first or second series of the group; they can organize sub-groups called “units” to provide new attractions and to control the off-season and the peak season. Sell as a group, as an individual - so far, so good.
3. Why an Entertainment Business as a Corporation?
Simply put, the Korean entertainment industry has grown in size. As the initial investment costs of the Korean impresarios have increased, they have had to raise more capital compared to the past. The Korean Wave, moreover, has expanded the market size abroad, which also requires higher operating costs—almost like sunk costs. They turned and focused on the stock market.
A corporation is a type of legal entity created for partnerships. To enter the stock market, they independently needed a separate legal entity, “a corporation,” that shareholders could join. They could attract large amounts of capital by signing entertainers to exclusive artist contracts and assigning trademarks and copyrights of idol groups to the corporation. This is because the entertainment business is rights-based.
4. Artists are Irrelevant to This Dispute!
Most disputes in the Korean entertainment industry, especially regarding idol groups, can be traced back to conflicts between the impresario system and the inalienability of artists.
The issue between HYBE, which is listed on the KOSPI (not the KOSDAQ) based on BTS, a huge superstar and the most prominent Korean impresario, and Min Hee-jin, the CEO of its subsidiary ADOR, has exposed the problems of the Korean impresario system. In fact, this is a problem in the system of impresarios who produce idol-based brands.
Why do artists need a corporation, a stock market listing, and a parent/subsidiary governance structure when all they do is fine art? This is a strict business of selling popular art and consuming famous artists. That’s it!
Inalienability is a legal principle that declares the production limit that a famous artist’s personality cannot be reproduced arbitrarily or by force. Therefore, their personality rights do not have the original power to be transferred to others, and impresarios have the justifiability to protect the human rights of artists as much as possible. Thus, even if it is enforced by an exclusive contract, the way of working with public artists should be bound to require a procedure called “consent.” In the current case of HYBE and Min Hee-jin, the idols, all members of NewJeans, are irrelevant.
5. Why an Artist Based Company?
Let’s look at the problem between the impresarios.
An exclusive artist contract forms a business relationship between an impresario and an entertainer. The relationship is not an employment relationship, but it has a unique attribute in that the entertainer is supervised and managed by the impresario. At the same time, it is mixed into a partnership relationship where expenses are settled, and profits are shared by the contracted share.
K-pop impresarios who want to brand the personalities of celebrities organize entertainers into groups, which requires more training than before this system because of the grouping. This gives rise to the “trainee system” to improve the quality of artists’ performance, which significantly increases production costs.
The next problem is the management of ordinary expenses. The Popular Culture and Arts Industry Development Act stipulates that the general expenses/costs of the artist management company and the expenses/costs related to the contracted entertainers must be separated, and the accounting between the entertainers must be separated (Principle of Separate Accounting, Article 14). In particular, misunderstandings and disputes arise at the point of separate accounting of ordinary expenses/costs incurred between the artist management company and the entertainers and ordinary expenses/costs among group entertainers. This issue becomes even more complicated when the company manages multiple idol groups. It’s not easy to keep track of them all.
The solution to this problem is legally creating a separate business entity for each idol group. HYBE has labeled and systematized this. In principle, each idol group is a separate corporation. And the parent company controls the independent subsidiary with enough shares to ensure management control.
In the case of ADOR, led by Min Hee-jin (I’ll leave out what is already known), they had to register a trademark to expand NewJeans. Since they had to operate overseas, they applied in English, and even typos and shortened versions of the team name were filed in case of overseas piracy. Anyone who searches the Korean Intellectual Property Office’s online search site, Kipris, can see them. There are at least a few dozen applications (including the company name ADOR). Mainly because of their international activities, they have to file overseas applications with patent offices in foreign countries where they want to expand. All of this requires an unprecedented amount of money.
6. Fundraising (Equity and Debt)
HYBE, the parent company, provided all of these funds to ADOR to support the debut of NewJeans under the rule of “one idol group, one corporation.” The artist company ADOR, with an original founding capital of approximately USD 73,900 (KRW 100 million), has undergone two capital increases and is now a corporation with a capital of approximately USD 11,887,270 (KRW 16.1 billion). To raise this money, HYBE, as a listed company, raised money from the stock market through the paid-in capital increase. In other words, NewJeans was funded by its many parent company shareholders; therefore, when HYBE didn’t supply the above investments and support to ADOR, NewJeans would not exist today.
In addition to its investment in ADOR, HYBE’s disclosure data shows that it has frequently lent operating funds to ADOR, and the amount of money transferred in the first half of the year alone is approximately USD 3 million (KRW 4 billion) (HYBE Semi-Annual Report, August 14, 2023). If an ordinary entertainment management company had raised that much money from the finance industry, it would not have been able to afford the acquisition fees and interest costs.
Furthermore, HYBE split off Source Music (artists management company of LE SSERAFIM) to form ADOR by incorporating some of the NewJeans members who belonged to Source Music, and about USD 3.5 million (KRW 4.8 billion) of goodwill was booked at that time (HYBE Consolidated Audit Report, March 16, 2023). We are still determining how this goodwill will be depreciated in the future, but this fact also means that HYBE did recruit the NewJeans members, not for free.
7. Entering into a Shareholders’ Agreement and Attempting to Become Independent
I am still determining how it is now, but as of June 30, 2023, Min Hee-jin held 2,700 common shares of the parent company, HYBE (HYBE Consolidated Audit Report dated March 16, 2023). She also has 17.8% of NewJeans’ exclusive management company ADOR shares. Of course, it depends on the purchase price. Still, considering that ADOR’s current equity capital is approximately USD 11,887,270 (KRW 16.1 billion), it is easy to estimate the amount at the par value of its shares. It’s optional to mention how much it’s worth at the corporate valuation, but nothing at all.
Min Hee-jin is the CEO of ADOR. Previously, she was a producer who discovered, cast, trained, and debuted idols, but now her status has been changed to ‘executive producer’ with administrative authority. Whether this was done to ensure independent management or just to lend her name as a symbolic figurehead to use her career in SM does not matter. The Korean Commercial Code states that a director who uses a name that can be recognized as an authorized representative of a corporation is liable to a bona fide third party (Article 395 of the Commercial Code). This fact means that she must not be able to avoid the responsibilities of ADOR in connection with the company’s management, either internally or externally.
Min Hee-jin is both a shareholder and CEO of ADOR. When she acquired her stake in the company, she signed a Shareholders’ Agreement with the parent company, HYBE. She agreed to all sorts of options that prevented her from unilaterally disposing of her stake to a third party without HYBE’s consent. How many CEOs do you think there are in Korea who are CEOs of a company with a capital of USD 11.8 million (KRW 16.1 billion), a company that is only three years old, and in the entertainment industry in South Korea?
In such a situation, if whoever is trying to become independent has to get the approval of the majority shareholder parent company, it is normal. Still, suppose there are third-party investors, and she is trying to shake up the company she is working for or use a series of events to secure a more favorable position for herself and the benefit of those third-party investors. In that case, it might be deceiving the public.
There are many charges against Min Hee-jin, including embezzlement, but as we know, if she is found guilty, breach of trust is punishable even if it is an attempted offense. Because this crime is not unpunishable over the objection or subject to complaint, she will not escape punishment even if HYBE, the parent company, drops the charges. Unfortunately, the die is cast!
The idols and all of the members of NewJeans are irrelevant to this matter. This time, the impresarios screwed up.
Comments