S. Korea ordered to pay Lone Star US$216.5 mln in investor-state suit

August 31, 2022

An international tribunal ordered South Korea to pay the U.S. private equity firm Lone Star Funds US$216.5 million plus interest, officials said Wednesday, bringing an end to a decadelong legal battle surrounding its sell-off of a local bank.

South Korea said it cannot accept the decision and will actively consider pursuing an appeal.

The Washington, D.C.-based International Centre for Settlement of Investment Disputes (ICSID) delivered the verdict in the investor-state dispute settlement suit that Lone Star filed in 2012 to demand US$4.68 billion in compensation from South Korea’s government, according to the justice ministry.

The ordered amount is about 4.6 percent of Lone Star’s demand.

In addition, South Korea was also ordered to “pay interest, compounded annually at the average one-month U.S. Treasury rate, from Dec. 3, 2011, to the date of payment,” according to the ruling released by the ministry.

The government estimates the interest at around 18.5 billion won ($13.8 million).

“It is difficult to accept the decision by a majority opinion … We express regret,” the justice ministry said in a statement. “The government will consider filing for its cancellation or suspension of implementation, and push actively for it.”

Minister Han Dong-hoon also said, “Not a single penny of taxpayer money should be wasted.”

The buyout firm claimed its 2007 plan to sell a controlling stake in the now-defunct Korea Exchange Bank (KEB) to global banking giant HSBC fell through because Seoul’s financial regulatory authorities delayed approval of the deal.

Lone Star, which acquired the KEB stake for 1.38 trillion won in 2003 through a Belgian entity, had planned to sell off the stake to HSBC for about 5.94 trillion won but eventually ended up selling it to Seoul-based Hana Financial Group for some 3.9 trillion won in 2012.

Lone Star claimed that South Korea deliberately delayed approval of the deal with HSBC and pressured it to lower the price in the deal with Hana Financial Group, depriving the firm of fair and equitable treatment and other protections guaranteed in the investment treaty.

South Korea rejected the claims, arguing it treated Lone Star equally and fairly, as in the case of domestic entities, in accordance with international laws and local regulations.

The Seoul government has also maintained there were legitimate reasons to hold up the deal with HSBC, citing legal issues involving the firm were going on at the time, including allegations of stock manipulation in the course of Lone Star’s acquisition of KEB’s credit card unit.

In another issue, Lone Star claimed local tax authorities applied inconsistent standards, seeking to reimburse the taxes it paid on the proceeds from selling off its assets because it is technically the subsidiaries based in either Belgium or Luxembourg that carried out the transactions.

The firm claims it should be exempt from taxes under investments treaties South Korea has with the European nations. But South Korea says the subsidiaries are paper companies and should not be protected by investment treaties.

“The government’s position has been consistent that in taking administrative measures with regard to Lone Star, we treated it equally and fairly without any discrimination,” the justice ministry said. “The majority opinion did not take this government’s position into account.”

The ministry said the ICSID partially sided with Lone Star’s claim that local financial authorities delayed the approval in the deal with Hana Financial Group, which goes against the rules under the agreement between South Korea and the Belgium-Luxembourg Economic Union.

However, the panel also determined Lone Star is 50 percent responsible for the fall in the KEB sale price in the final deal, because KEB’s share prices fell after some Lone Star officials were convicted of stock manipulation, according to the ministry.

The $216.5 million is only half of the fall in the sale price at the time, ministry officials said.

Legal experts said the ICSID’s decision is unlikely to be reversed, though there is a process to seek its cancellation. South Korea can file an application for annulment within 120 days after the verdict is awarded, according to the ICSID.

It marked the first time for South Korea to compensate millions of won in the investor-state dispute. In 2018, the ICSID ruled in favor of the Iranian family, the Dayyanis, and ordered Seoul to pay 73 billion won in compensation over a failed takeover of Daewoo Electronics.

The ruling could also affect five other investor-state suits involving South Korea.

The ruling was closely watched in South Korea not only because of the amount of money involved but also the alleged involvement of several incumbent high-ranking officials in the issue.

Allegations arose earlier this year that Prime Minister Han Duck-soo was paid a total of 150 million won between November 2002 and July 2003 as an adviser for the local law firm Kim & Chang, which represented Lone Star at the time.

Lone Star’s entry into and exit from South Korea has been a target of criticism in South Korea amid widespread public perceptions that the firm made huge profits by taking advantage of the country’s economic difficulties in the wake of the Asian financial crisis in the late 1990s.