Lessons from the Lone Star case

A decade-long court battle between the Korean government and Lone Star Funds over the sale of now-defunct Korea Exchange Bank (KEB) has been concluded with an award of $216.5 million (285.5 billion won) to the Dallas-based hedge fund. The International Center for Settlement of Investment Disputes (ICSID) under the World Bank on Wednesday ordered the Seoul government to pay 4.6 percent of the $4.68 billion in damage claim plus the accumulated interest from Dec. 2011 amounting to about 18 billion won ($13.4 million).

In total, the amount to be paid by the Korean government is about 300 billion won. The government said it will file for annulment of the arbitration ruling in objection to the decision

Lone Star Funds filed a damage claim with the international arbitration body in December 2012 against the Korean government for causing losses from its alleged intentional interference and delay in approving the sale of the bank it had acquired in the wake of the 1997-98 Asian financial crisis. Lone Star had bought a 51 percent stake in the exchange bank at 1.38 trillion won and attempted to sell it to HSBC at 5.94 trillion won. After the deal fell through, it eventually sold the bank to Hana Financial Group in 2012 for 3.92 trillion won. Lone Star maintained that if not for the government meddling, it could have made a bigger profit. It argued that it had been forced to cut price when it sold it to Hana Financial Group.

The results have drawn a mixed reaction. The Korean government could argue that it had partially won the case as damage would stop at a mere 4.6 percent of the claimed amount. Still, it will have to waste about 300 billion won of public funds. The result will have to be watched further as the government plans to appeal.

At the time, there had been no other option with the major bank on the brink of bankruptcy from the currency crisis. The acquisition by Lone Star and its sale process had caused much controversy about speculative capital profiteering from a fire sale in a country in crisis. The controversy and cost escalated while government and political figures were caught between domestic and international sentiment.

The government has six other investor disputes pending at the ICSID. Disputes will only grow when the economy and foreign investment expand. The government must do its best to minimize the damage from the Lone Star case and examine related regulations so as not to stoke further disputes with foreign investors.