Naver, South Korea’s top internet company, is facing a potential loss of control over its Japanese affiliate, LY Corp. LY Corp. is jointly owned by Naver and Japan’s SoftBank, each holding a 50% stake. It runs LINE, a popular Japanese messenger app by Naver, and Yahoo, Japan’s largest portal by SoftBank. Last November, a hacking incident involving Naver’s cloud service, which manages LINE customer data, prompted Japan to demand a reassessment of Naver’s stake in LY Corp., citing concerns about the Korean management’s response.
Reports from local Japanese media indicate that SoftBank has urged Naver to sell its 64.5% stake in LY Corp., held through A Holdings, a joint holding company. Japan’s Ministry of Internal Affairs and Communications has twice pressured LY Corp. to restructure its stake relationship with Naver, following the hacking incident. SoftBank could potentially gain management control of LY Corp. by acquiring even a small additional stake from Naver.
Requests for stake restructuring in response to hacking incidents are rare, as governments typically demand remedial measures and impose penalties. Some industry observers view this as Japan’s attempt to alter the ownership structure of a major Korean platform in Japan.
Recent actions by the U.S. government and Congress, such as pressuring the sale of Chinese TikTok’s U.S. operations due to concerns about ‘information misuse’, reflect a global trend of scrutinizing platforms from adversarial countries. However, the situation with LY Corp. is perceived as fundamentally different. Despite potential diplomatic tensions between Korea and Japan, they are fundamentally allies, particularly under the Yoon Suk-yeol government in Korea, which has been working to enhance relations with Japan in response to China’s expansion, alongside the United States. Therefore, raising concerns about ‘information leakage’ and threatening ownership over Korean companies in this context could escalate into a diplomatic issue.
LY Corp. emerged from a merger between leading IT companies in Korea and Japan. In 2019, Son Jung-eui, chairman of SoftBank, proposed collaboration with LINE, aiming to create a comprehensive platform covering online services from search to shopping, messaging, and payments.
LINE is Japan’s most popular messenger app, boasting 96 million monthly active users, which accounts for roughly 80% of Japan’s population. It was developed by NHN Japan, a Naver subsidiary, in response to the Great East Japan Earthquake in 2011. Following the earthquake and tsunami, Japan faced a significant crisis with many unable to confirm the safety of loved ones. Lee Hae-jin, then-chairman of Naver’s board, proposed the creation of a service to instantly connect people, leading to the launch of LINE three months later.
After the merger of LINE and Yahoo, Naver and SoftBank equally divided the shares of the holding company, A Holdings, with each owning 50%. Despite initially agreeing to exercise joint management rights, SoftBank’s request for stake sale stems from administrative guidance from the Japanese government.
The Ministry of Internal Affairs and Communications of Japan issued administrative guidance to LY Corp. last month regarding a data breach incident involving over 510,000 cases that occurred in November last year. The ministry attributed the data leak to ‘excessive reliance on Naver for system operations’ and urged the company to ‘develop improvement measures, including reevaluation of its relationship with Naver.’ Although LY Corp. recently proposed preventive measures like ‘reducing and terminating system outsourcing with Naver,’ the ministry issued a second administrative guidance instructing them to submit revised improvement measures by July 1. SoftBank was asked to ‘strengthen its capital involvement in LY Corp.’ Essentially, the Japanese government is intervening to demand changes in the shareholding structure of a private company. Takeaki Matsumoto, Minister of Internal Affairs and Communications of Japan, stated, “We expect LY Corp. to take the situation seriously and respond thoroughly.”
Administrative guidance in Japan is a request for cooperation from individuals or companies by government ministries to achieve administrative purposes and does not have legal binding force. However, in bureaucratic Japan, it is highly unusual for companies like NTT, KDDI, and SoftBank to disregard administrative guidance from the Ministry of Internal Affairs and Communications.
Naver is contemplating various responses, ranging from bolstering service security to reassessing stake relationships. However, there is significant internal resistance to forced stake sales for what are perceived as unreasonable reasons. In platform industry, pressuring allied foreign companies to sell stakes is highly unusual, especially considering that there is virtually no possibility of Naver utilizing Japanese customer information for purposes other than commercial ones. If this situation escalates, it could not only impact economic exchanges between the two countries but also impede diplomatic relations. One industry insider remarked, “Expelling foreign platform companies essentially sends the message that the country is not trusted.”
