Seoul ordered to fork over $230 mn to Lone Star over KEB deal

An international tribunal delivered a ruling in favor of Lone Star on Wednesday over a dispute with South Korea relating to its 3.9 trillion won ($3 billion) sale of Korea Exchange Bank (KEB) in 2012, which had been widely expected to wrap up their decade-long wrangle.

The International Centre for Settlement of Investment Disputes (ICSID) ordered South Korea to pay around $230 million to Lone Star in compensation claimed by the private equity firm.

Lone Star argued that the protracted regulatory process led to a longer-than-expected exit from the Korean lender, cutting the profits by about half, or some $3 billion, it could have reaped from KEB.

But the legal battle shows no signs of ending, with the South Korean government indicating its intention to appeal the ICSID's decision.

For Lone Star, it might be unhappy with the amount of compensation calculated by the arbitration body. It falls far short of its $4.7 billion demand, just 4.6% of what it requested.

The much lower-than-expected compensation, including 18.4 billion won in relevant interest payments, appeared to bring a sigh of relief for South Korea.

The never-ending saga over KEB involves incumbent high-ranking government officials, including Prime Minister Han Duck-soo, Finance Minister Choo Kyung-ho and Bank of Korea Governor Rhee Chang-yong.

They worked as senior regulatory officials or an advisor of a law firm representing Lone Star in the period between 2003 and 2012, spanning Lone Star's KEB purchase to exit.

President Yoon Suk-yeol, Justice Minister Han Dong-hoon and Lee Bok-hyun, head of the regulatory Financial Supervisory Service investigated the case and indicted Lone Star as then prosecutors on behalf of the government.

ROOM FOR APPEAL

In response to the tribunal's ruling, the justice ministry said it was hard to accept.

“The government will take aggressive action to cancel the ruling or suspend the execution of the decision,” the justice ministry said in a media briefing.

It was not immediately known whether the Dallas-based investment firm would also prepare an appeal.

Experts say that a meaningful change to the decision is unlikely, given the particular nature of state-investor lawsuits. 

What is at issue is whether the South Korean government unfairly intervened in the sale process of Lone Star’s KEB shares, and whether the 850 billion won in the tax imposed on the PE firm's capital gains from the KEB sale can be justified.

The US investment firm argued Seoul’s delayed approval derailed a $6.3 billion sale of KEB shares to HSBC Holdings plc in 2007, which would have created returns of more than five times its investment of 1.4 trillion won ($1.1 billion).

Lone Star eventually sold its KEB stake to South Korea’s Hana Financial for 3.9 trillion won in January 2012. But the value was about half the price at which HSBC had agreed to buy the shares. 

THE COUNTERCLAIM

The South Korean government, for its part, explained it had shelved its review of the Lone Star-HSBC deal because the private equity firm faced a criminal trial for the alleged stock price manipulation of a former credit card unit of KEB so that it could buy it at a lower price, alongside KEB.

The case would have affected its eligibility as KEB’s largest shareholder at the time, according to the government.

Seoul also argued that HSBC's withdrawal from the $6.3 billion deal had little to do with its approval process, but was due to the 2007-08 global financial crisis. 

Regarding taxes on Lone Star's capital gains from the Korean bank, the buyout firm stated that it was not subject to Korean taxation because the entity that was to invest in KEB was based in Belgium.

The Korean authorities rebutted the claim, stating the investment vehicle was no more than a paper company set up to avoid taxes.

GOVERNMENT OFFICIALS INVOLVED

The long-running conflict between Lone Star and South Korea dates back to 2003, when the PE firm purchased KEB shares from state-run banks and Germany's Commerzbank.

The deal faced a national backlash amid allegations that the South Korean government colluded with the US fund to sell KEB at a cheap price by illegally manipulating the bank's financial measurement.

Such allegations led to thorough investigations by prosecutors, tax authorities and an audit body of the relevant government officials, who were later found not guilty by local courts. 

SECOND TIME NOT A CHARM

Wednesday's verdict marks the second time the ICSID has ruled against the South Korean government.

Dayyani, the family behind Iranian consumer electronics firm Entekhab, filed an ISDS complaint in 2015 against Seoul.

The family claimed the Korean government did not return the $50 million deposit it paid for a failed bid to purchase a majority stake in bankrupt Daewoo Electronics, now renamed Winia Electronics.

In 2018, the World Bank tribunal ordered Seoul to provide compensation totaling 73 billion won to the Dayyani family. South Korea's protest against the ISDS’ decision, however, was rejected by a higher court in the UK.

There are six other lawsuits against the South Korean government at the International Centre for Settlement of Investment Disputes, including one filed by US investment management firm Elliott Management, another by US financial firm Mason Capital, and another by Swiss elevator maker Schindler Holding AG. 

(Corrected the amount of compensation to include interest payments related to the principal and added President Yoon Suk-yeol took charge of the investigation into the KEB deal at a senior prosecutor)

Write to Jin-Seong Kim, Hanjong Choi and Hyun-Ah Oh at jskim1028@hankyung.com
Jee Abbey Lee and Yeonhee Kim edited this article.