Naver to submit remedies to Japan without A Holdings stake sale

LY Corp., the operator of Japan’s popular messenger app Line, is expected not to propose Naver Corp.’s stake sale in its largest stakeholder A Holdings in response to the Japanese government’s administrative guidance over Line users’ personal data breach incident.

A high-ranking official from the South Korean presidential office, asking to remain unnamed, said in an interview with The Korea Economic Daily on Tuesday, “The government has been in close consultation with Naver, and the report LY will submit to the Japanese government won’t include Naver’s stake divestiture (in A Holdings).”

“The Japanese government should not penalize Naver for excluding its stake sale option in the report,” added the official.

Another Korean government official explained that this means Naver won’t reduce its control in LY in response to Japan’s administrative guidance over Line users’ personal information leakage incident in November last year.

LY is ordered to submit a action plan with measures to fortify its cybersecurity infrastructure against any cyberattack in the future to the Japanese government by July 1. LY, also known as Line-Yahoo, operates both Line and Yahoo Japan in Japan.

This is the first time Seoul has indicated that Naver’s stake sale in A Holdings, which is reportedly pressured by Tokyo, is not up for discussion for now.

Earlier the same day, the Korean presidential office held an additional briefing to voice its concern about possible interference by the Japanese government over the Korean information technology (IT) giant’s overseas business.

A SHOW OF STRONG SUPPORT

This is the presidential office’s second briefing on the Naver case, a day after it vowed stern responses to any unfair meddling by Tokyo against Naver.

“If Line-Yahoo intends to submit measures to reinforce cybersecurity without changes in capital ownership to the Japanese government, the Korean government will give full support to Naver in its implementation of such measures,” Sung Tae-yoon, the director of national policy at the presidential office, said in a Tuesday briefing.

“Our state support may include technical and administrative advice from relevant institutions within the country.”

Sung added, “Given that the Japanese government has repeatedly said it has not directed stake sale or changes in management control in its administrative guidance, it should never take any adverse actions against Naver.”

At the same time, Sung promised the Korean government’s resolute and stern measures to prevent unfair treatment and disadvantage against Korean companies’ operations in foreign countries.

Seoul has ratcheted up its warning against Tokyo this week in a gesture of its strong backing for Naver during Naver-SoftBank negotiations amid growing national calls on the Korean government to take a greater role.

LENGTHY NEGOTIATIONS EXPECTED

Naver is expected to mainly offer measures to strengthen its cybersecurity infrastructure in LY’s July corrective action report to the Japanese government.

However, the exclusion of Naver’s stake reduction option from the remedies does not mean that capital ownership change in A Holdings is off the table.  

Instead, Korea’s portal giant Naver and Yahoo Japan operator SoftBank Corp. are expected to take longer time beyond the July 1 deadline to discuss changes in their stakeholding structure in A Holdings.

The escalating diplomatic tension between Seoul and Tokyo stemmed from a cyberattack on Naver Cloud Corp., a unit of the Korean tech giant, in November last year, resulting in the breach of Line users’ personal data in Japan.

The Japanese government responded not just with a call for tighter cybersecurity but also administrative guidance suggesting a complete severance of ties between Naver and LY’s IT infrastructure.

In March, Japan's Ministry of Internal Affairs and Communications issued the second administrative guidance, suggesting Naver’s divestiture of its stake in A Holdings.

Naver and SoftBank each hold a 50% stake in A Holdings, a joint venture controlling 64.5% of LY. If SoftBank acquires an additional stake in A Holdings, it would thus control LY.

During its latest earnings conference call, LY CEO Takeshi Idezawa said the company has requested Naver to divest its shares in A Holdings, citing the ministry's guidance.

SoftBank CEO Junichi Miyakawa last week also confirmed that SoftBank was in talks with Naver over the fate of their joint management of LY. Naver also announced they were in negotiations to discuss all possible measures, including a stake sale.

But SoftBank CEO said their stake sale talks would take long time to reach an agreement, highly unlikely before the July 1 deadline for the remedy submission.  

Even some people expect their negotiations would continue until next year.

CLOSE TIES BETWEEN LINE AND NAVER'S INTERNATIONAL BUSINESSES 

Mobile messenger app Line, which is also a super app, was initially launched by Naver’s Japanese unit in June 2011. It became popular in Japan after an earthquake earlier that year disrupted landline telecommunications, leaving Line a rare communication system available in the country.

The app, which also offers messenger services in Southeast Asia, including Taiwan, Thailand and Indonesia, now boasts over 200 million users across the globe.

As Line’s overseas businesses are closely connected to Naver’s other businesses aboard, any change in capital ownership in A Holdings means reorganization of Naver’s international businesses.

The Korean portal giant said last week that it is in “close communication” with the Korean government, including the Ministry of Science and ICT, over how to handle the issue.

Korea’s Science and ICT Minister Lee Jong-ho said last week he is monitoring the situation and discussing countermeasures with Naver.

He said the ministry plans to address the matter with a priority on the fair treatment of Korean companies’ overseas operations and their investments abroad.

“We are in close discussions with Naver to ensure its authority is protected to the fullest extent possible,” he said.

Write to Seung-Woo Lee and Byung-Uk Do at leeswoo@hankyung.com
Sookyung Seo edited this article.