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(Line promotional image)

Under pressure from the Japanese government, Japanese multinational investment holding firm SoftBank Group Corp. is in talks to purchase additional shares of A Holdings, a joint venture between SoftBank and Naver. A Holdings oversees operations of the Line messenger service and Yahoo Japan. If SoftBank purchases those shares, Naver will lose control over Line after contributing to its development for 13 years. 

Integration efforts to combine Line and Yahoo Japan under operator Z Holdings — now LY Corp. — got off to a bad start with issues involving personal data leaks. But instead of addressing those security issues, the conversation has turned toward management control.  

According to the Thursday editions of Kyodo News and Sankei Shimbun, SoftBank is pushing for talks to purchase additional shares of A Holdings, referring to the security issues and personal data leaks as its justification.

“If SoftBank secures additional shares of A Holdings from Naver, it will become the majority shareholders and secure operational control,” Kyodo News reported. 

“A minor increase in holdings is insufficient to implement foundational reforms to [Line and Yahoo operator] LY Corp., which is why SoftBank is seeking to become the majority shareholder,” Kyodo News added.

“SoftBank is looking to reach a deal before its monthly accounting report on May 9.”

A Holdings controls around 65% of LY Corp. shares. SoftBank and Naver each control 50% of A Holdings shares, making them both de facto parent companies. If SoftBank secures enough A Holdings shares to become the majority shareholders, Naver will lose management control over Line. 

Naver first launched Line in Japan in June 2011. It has since grown into “the people’s messenger” in Japan, with 96 million users who use Line more than once a month. Line is also the dominant messenger app in Taiwan, Thailand and Indonesia, with 200 million users worldwide.

Naver is reportedly hesitant to relinquish control over LY and is therefore lukewarm on the idea of selling shares.

It also appears that the Japanese government is pressuring SoftBank to make the deal. On March 5, the Japanese Ministry of Internal Affairs and Communications (MIC) pointed to security issues involving Line servers, suggesting that excessive reliance on Naver was a problem. The ministry issued an “administrative guidance” demanding that SoftBank “reexamine the influence of Naver capital.” 

In response, LY management issued a report containing measures to prevent a relapse in security. Yet the ministry declared that the measures were insufficient, issuing another administrative guidance on April 16. In its second administrative guidance, the MIC called for “a reexamination of the capital” that controls management, adding, “It’s vital to accelerate a review that enables measures to improve security governance.”

Even the Japanese press commented on how such a move from the MIC was unprecedented.

Japanese politicians have also expressed strong opinions on the matter. The Nikkei has reported that many members of the ruling Liberal Democratic Party are calling for people to “take responsibility for the management structure of LY Corp,” calling its security issues “a risk to economic national security.”

In November of last year, Line reported that there was a “possibility that 440,000 items of data were leaked involving Line users, customer accounts, and Line employees” had occurred. Line indicated that a malicious third party had accessed the central Naver Cloud server based in South Korea. Reportedly, an employee for a subcontractor under Naver Cloud was hacked, leading to a leak of data involving Line users in Japan. Additional investigations revealed that over 510,000 pieces of data had leaked.

Naver seems to have adopted a wait-and-see stance.

“Nothing is set in stone right now, but we will likely issue a public statement soon,” said an anonymous Naver official.

Since the data leak, Japanese regulators have adopted the viewpoint that foreign capital controlling the country’s top messenger service, with 96 million monthly active users within Japan, is a security threat. Japanese authorities believe that Japanese capital should increase its control over the service. The MIC has gone from expressing concerns over security to insisting on increased Japanese control over shares, essentially saying that Line being a “Korean platform” is the fundamental problem. Naver is required to submit a list of measures to prevent another data leak by July 1.

Industry observers are commenting that while MIC administrative guidelines are not legally binding, they have significant influence over company decisions. The South Korean government is monitoring the situation to ensure the issue does not erupt into a wider trade conflict.

“If Naver decides to stand its ground in refusing to sell its shares, the issue could erupt into a wider trade conflict,” said an official at the Ministry of Science and ICT.

“If that happens, we will have to pool our resources with the Ministry of Foreign Affairs and the Ministry of Trade, Industry and Energy to issue a set of joint response measures.” 

By Kim So-youn, Tokyo correspondent

Please direct questions or comments to [english@hani.co.kr]