Like dealing with a hostile country… Japan urges Korean IT companies to sell their shares and leave

Naver, Korea’s leading Internet company, is in a position to lose the management rights of its Japanese affiliate ‘Line Yahoo’. Line Yahoo is a company half-owned by Naver and Japan’s Softbank. It services the Japanese national messenger ‘Line’ developed by Naver and the largest portal site ‘Yahoo’ operated by Softbank. After Naver’s cloud (virtual server), which manages Line’s customer information, was hacked in November last year, the Japanese government is demanding that Naver liquidate its shares in Line Yahoo. This is because “Korean companies exercise management rights, so their response to hacking is inadequate.”

According to Japanese local media on the 24th, Japan’s Softbank reportedly requested Naver to sell shares of ‘A Holdings’, a holding company that holds a 64.5% stake in Line Yahoo. Naver and Softbank each own 50% of ‘A Holdings’ shares. Japan’s Ministry of Internal Affairs and Communications issued administrative guidance to Line Yahoo last month regarding the hacking incident and pressured the company to end its equity relationship with Naver on two occasions. Japan’s Kyodo News reported, “If Softbank acquires even a few additional shares of A Holdings (from Naver), it can take the lead in Line Yahoo’s management.”

Normally, when a hacking incident like this occurs, the government demands supplementary measures and imposes fines and other penalties, but it is extremely rare to request a liquidation of shares like this. This is why some interpret this measure as “the Japanese government’s intention to change the situation in which the country’s representative platform is owned by a Korean company.”

Just as the U.S. government and Congress are recently pursuing a policy of forcing the sale of the U.S. business of the Chinese video app TikTok, there is a movement to expel the platforms of hostile companies due to the possibility of “information misuse.” However, it is pointed out that Naver Line has a completely different personality. Korea and Japan may have conflicting diplomatic interests, but they are fundamentally friends. In particular, since its inauguration, the Yoon Seok-yeol government has worked with the United States to improve bilateral relations in order to respond to China’s expansion. In this situation, there are concerns that targeting Korean companies and threatening their management rights by raising concerns about ‘information leakage’ could become a diplomatic issue.

Line Yahoo was created through the combination of leading Korean and Japanese IT companies. It is known that in 2019, Softbank Chairman Masayoshi Son first proposed collaboration with Naver’s Line, the No. 1 messenger service at the time, saying that he would complete a platform that encompasses online business such as search, shopping, messenger, and simple payment.

Line is the most used messenger app in Japan. Monthly active users (MAU) reach 96 million. 80% of Japan’s population (approximately 122 million people) are Line users. Line was developed and launched by NHN Japan, a Japanese subsidiary of Naver, in 2011. The background to the development of the line is the Great East Japan Earthquake, which terrified the Japanese people. After the earthquake in March 2011, a tsunami wreaked havoc in Japan, with no one knowing whether their friends or family were alive or dead. Lee Hae-jin, chairman of Naver’s board of directors at the time, suggested, “Let’s create a service that connects precious people through a ‘hotline,'” and the service was launched three months later.

◇Ignoring the joint management agreement and putting pressure on the sale of shares.

With the merger of Line and Yahoo, Naver and Softbank equally divided 50% of the shares in the holding company, A Holdings. The two companies hold exactly the same number of shares, without the customary ‘50% + 1 share’ to secure management rights for one side during mergers and acquisitions between companies. The two companies agreed to a merger at the end of 2019 and agreed to ‘exercise joint management rights’ when launching the integrated corporation in 2021.

Despite the agreement at the time, the Japanese government’s administrative guidance was behind Softbank’s request to sell its shares. Last month, Japan’s Ministry of Internal Affairs and Communications issued administrative guidance to Line Yahoo for over 510,000 personal information leaks that occurred in November last year. Japan’s Ministry of Internal Affairs and Communications defined the cause of the personal information leak as ‘due to excessive dependence on Naver for system work’ and issued administrative guidance to the effect of ‘preparing improvement measures, including a review of the shareholding relationship with Naver.’ Japan’s Ministry of Internal Affairs and Communications recently issued a second administrative guidance ordering Line Yahoo to submit an improvement plan again by July 1, although it recently submitted a measure to prevent recurrence, ‘reduction and termination of the scale of system consignment with Naver’. Softbank was requested to ‘further strengthen its capital involvement in Line Yahoo.’ In fact, the Japanese government is requesting a change in the ownership of private companies. Japanese Minister of Internal Affairs and Communications Takeaki Matsumoto said, “We expect LINE Yahoo to take the situation seriously and respond thoroughly.” This is why some say that it is the Japanese government’s intention to completely exclude Korean companies from the management of Line, which is used by over 96 million Japanese people every month, under the pretext of ‘cyber security measures’.

Administrative guidance is an act in which Japanese government departments request cooperation from individuals or companies to achieve administrative goals, and is not legally binding. However, in Japan, where bureaucracy is strong, it is difficult to find a precedent in which companies such as NTT, KDDI, and Softbank did not follow the administrative guidance of the Ministry of Internal Affairs and Communications.

◇”Interference in the management of companies in friendly countries is unusual.”

Naver is considering various countermeasures, including strengthening service security and reexamining equity relationships. However, it is known that there is strong opposition to the forced sale of shares for unreasonable reasons internally. An official from a domestic platform company said, “Japan is putting pressure on foreign platforms due to its own ‘data sovereignty,’” and added, “As Naver is ahead in terms of technology, it will not be unilaterally pushed out.”

In the IT industry, there is a response that it is very unusual to pressure a company from a friendly country that is collaborating with a domestic company to sell its shares. This is because there is virtually no possibility that Naver will use Japanese customer information for purposes other than commercial purposes. It is pointed out that if this situation is prolonged, it could pour cold water on not only the economic exchanges between the two countries but also the improvement of diplomatic relations. An IT industry official said, “The expulsion of foreign platform companies is essentially a message that the country in question is not trusted.”

☞LINE

It is a Japanese national messenger with 96 million users in Japan, and was developed by NHN Japan, the Japanese branch of Naver, in 2011. It is currently operated by ‘Line Yahoo (LY Corporation)’, a Japanese company whose largest shareholder is a holding company (A Holdings) in which Naver and Softbank of Japan each hold a half stake.