Bracing for investor lawsuits

The investor-state dispute (ISD) clause, made to protect investors from any damages from regulations and policies of host governments, has put the Seoul government in a sticky spot. The International Centre for Settlement of Investment Disputes (Icsid) ordered the Korean government to pay 73 billion won ($68 million) out of 93.5 billion won claimed by Dayyani Group of Iran, a major shareholder of Entekhab Industrial Group, against state-run Korea Asset Management Corporation for allegedly ruining its deal to take over Daewoo Electronics.

The Iranian group was chosen as the preferred bidder to purchase the majority stake in Daewoo Electronics in 2010, but the contract was called off after it missed the deadline for the final payment. The group turned to the international arbitrary court to reclaim its upfront payment, including interest. The defeat raises concerns for the vulnerability of the state against claims by foreign investors.

Seoul has mandated ISD protection in most of its investment treaties with other states, and the clause is also included in free trade agreements. An open market that requires foreign capital must have protective mechanisms like ISD to attract investment, but latest developments suggest how unprepared and naïve the government has been about the clause. The government did not take any responsible action when Lotte Group was outright discriminated and unfairly treated by Chinese authorities after it yielded a location to host a U.S. antimissile system. Meanwhile, it was targeted for a series of lawsuits by outside companies.

The Seoul government has more or less invited damage suits by investors. A ruling on a case — involving Lone Star Funds claiming damages from losses the government caused for the private equity firm by intervening and delaying the sale of Korea Exchange Bank shares — is due later this year. Elliott Management also warned that it was suing the Korean government for meddling in the merger of Samsung C&T and Cheil Industries.

The government must carefully study ISD provisions and prepare thoroughly for any attacks so that foreign speculative funds do not wreck Korean companies as well as public finance.

JoongAng Ilbo, June 11, Page 30