Lone Star arbitration ruling to be challenged by Korea

Finance

Published: 31 Aug. 2022, 17:45 Updated: 02 Sep. 2022, 17:54

Lone Star arbitration ruling to be challenged by Korea

Justice minister Han Dong-hoon speaks on an arbitration ruling ordering the Korean government to pay $216.5 million in compensation during a briefing in Gwacheon, Gyeonggi, on Tuesday. [YONHAP]

Dallas-based Lone Star Funds has been awarded $216.5 million in an arbitration with the Korea government over losses it incurred when it sought to sell a stake in Korea Exchange Bank (KEB).

The private equity firm had its complaint heard by International Centre for Settlement of Investment Disputes (ICSID), an arbitration body under the World Bank.

Korea is one of the 163 signatories to the ICSID convention, which means it has agreed to enforce ICSID rulings, which are binding on all parties.

The award is far less than the $4.68 billion Lone Star had claimed in damages related to regulatory delays in approving the sale of KEB to HSBC. Korea was also ordered to pay accumulated interest from Dec. 2011 to the period the payment is completed. That is an additional 18 billion won ($13.4 million).

"It is difficult to accept the decision," Justice Minister Han Dong-hoon said on the day of the ruling. The award should be zero, according to the tribunal’s minority opinion.

While the decision is binding, the ministry said it can file for an annulment of the ruling.

Annulments are granted for a number of reasons, including corruption, improper constitution of the tribunal and departures from proper procedure. A request for an annulment must be filed within 120 days.

While annulments are requested for ICSID decisions in about half the cases, only about 5 percent of all decisions are actually annulled.

The justice ministry said it cannot accept the order and will "actively push to file an objection." It said the government maintains its stance that it was fair and equitable in the application of administrative processes involving Lone Star.

Lone Star filed for arbitration claiming Seoul's financial regulatory authorities deliberately delayed approval of its deal to sell its stake in KEB to HSBC in 2007. The company also said that the government put pressure on it to cut the sale price of KEB in the deal with Hana Financial Group after the deal with HSBC fell through.

Lone Star acquired 51 percent of the KEB for 1.38 trillion won in 2003. It had planned to sell the stake to HSBC for around 5.94 trillion won, but eventually ended up selling the ownership stake to Hana Financial Group for 3.9 trillion won in 2012.

The government denied the accusations, saying it "did not meddle with the sales price" and that the sales price for the Hana Financial Group deal was cut after Lone Star's Korean unit was found guilty in 2012 of manipulating the stock price of a credit card company related to KEB.

Lone Star also claimed it was forced into paying unfair taxes and claimed the tax authorities should reimburse the taxes it paid on the proceeds from selling its assets because the transactions where carried out by Belgium or Luxembourg subsidiaries.

The justice ministry "will prepare the necessary procedures to file a formal objection," Han said. The order was just "the first outcome of an event that has been going on for 10 years, and we will try our best to do what is best for the national interest."

Prime Minister Han Duck-soo was an adviser to Kim & Chang when it represented Lone Star from November 2002 through July 2003.

Finance Minister Choo Kyung-ho served as vice chairman of the Financial Services Commission when Lone Star sold its stake in KEB to Hana Financial Group in 2012.

The activities of Lone Star in Korea have been characterized as being predatory, as the company profited by buying assets cheap following the Asian financial crisis in the late 1990s.

BY JIN MIN-JI [jin.minji@joongang.co.kr]