Korea ordered to pay Lone Star $216.5 mil. in investor-state suit

August 31, 2022


Leaders of Korea Exchange Bank's union attempt to enter the building of the Financial Services Commission (FSC) in Seoul in this Nov. 18, 2011 file photo, as the FSC holds a meeting to discuss whether to order Lone Star Funds to sell most of its stake in Korea Exchange Bank. The workers are calling for the authorities to impose a punitive measure against Lone Star's stake sale, such as ordering the fund to sell its share on the market, in a bid to prevent the buyout fund from pocketing more than twice the money it spent on purchasing KEB stocks. Yonhap

An international tribunal ordered Korea to pay the U.S. private equity firm Lone Star Funds $216.5 million, bringing an end to a decadelong legal battle over the firm's claims it suffered massive losses due to Seoul's delay in approving a lucrative deal, officials said Wednesday.

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 $4.68 billion in compensation from Korea's government.

The decision is seen as a victory for Korea as the amount is only 4.6 percent of Lone Star's demand.

The Texas-based 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 ($1.02 billion) in 2003, 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 Korea deliberately delayed approval of the deal, and deprived the firm of fair and equitable treatment and other protections guaranteed in the investment treaty.

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.

Leaders of Korea Exchange Bank's union attempt to enter the building of the Financial Services Commission (FSC) in Seoul in this Nov. 18, 2011 file photo, as the FSC holds a meeting to discuss whether to order Lone Star Funds to sell most of its stake in Korea Exchange Bank. The workers are calling for the authorities to impose a punitive measure against Lone Star's stake sale, such as ordering the fund to sell its share on the market, in a bid to prevent the buyout fund from pocketing more than twice the money it spent on purchasing KEB stocks. Yonhap
This file photo shows Lone Star's signboard in a building located in Gangnam, Seoul, Nov. 11, 2006. Yonhap

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 ICSID's decision is unlikely to be reversed, though there is a process to seek its cancellation, according to legal experts.

The latest ruling is expected to deal a blow to South Korea, which is currently involved in five other investor-state dispute arbitrations.

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. (Yonhap)

Selected articles from The Korea Times