Lone Star ruling regarded as '50% defeat' for Korean gov't: experts

The lobby of Star Tower in Seoul's Gangnam District, where Lone Star's Seoul office had been located / Korea Times file

Legal, economic experts critical of justice ministry's self-praise

By Anna J. Park

Debates continue over the ruling by the International Centre for Settlement of Investment Disputes (ICSID) that came after a decade-long legal battle between the Korean government and U.S.-based Lone Star Funds over the private equity firm's sale of Korea Exchange Bank (KEB).

The Korean justice ministry described the ICSID's ruling ― ordering the Korean government to pay $216.5 million plus interest ― as an "overall victory" on the grounds that only 4.6 percent of the $4.68 billion that Lone Star had been claiming was acknowledged in the international arbitration court. The ministry also said it is worth pursuing the last available measure of seeking an annulment of the award to the ICSID, given that one minority view of the ruling fully accepted the Korean government's stance that it shouldn't have to pay Lone Star at all.

However, some legal and economic experts criticized the justice ministry's self-praise, stressing that the Korean government actually lost a key argument in the case, in arguing that the country's financial authority had not improperly interfered in the private sales deals of the U.S. private equity firm.

"The core argument of the case was whether the Korean government had inflicted losses on Lone Star by unfairly delaying the approval procedures of the U.S. equity firm's sale of KEB to Hana Financial. The Korean government was ordered to pay half of the damages claimed by Lone Star according to this legal argument. Thus, it should be regarded a 50 percent defeat, not a 4.6 percent defeat as touted by the justice ministry," said Jun Sung-in, an economics professor at Hongik University.

Lone Star brought the case to the international arbitration tribunal in late 2012, arguing that the Korean government had inflicted massive losses on the firm by both pressuring and delaying the approval of its sales deal for KEB. After the firm acquired KEB in 2003 for 1.3 trillion won ($970 million), it first tried to sell the bank to HSBC in 2007, which was allegedly hampered by the Korean government. When it sold KEB to Hana Financial Group in 2012 for 3.9 trillion won, Lone Star argued that the Korean financial authority also put pressure on the negotiations for it to lower the sales price.

Although the Korean government argued against such claims and insisted that the process was unavoidably delayed due to questions surrounding Lone Star's qualification to be the major shareholder of KEB as well as a number of criminal cases involving the private equity firm, the ICSID still acknowledged that the Korean government held 50 percent of the responsibility in the matter.

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Justice Minister Han Dong-hoon speaks to lawmakers during a committee meeting at the National Assembly in Seoul, Thursday. Yonhap

Legal experts pointed out that two arbitrators, which constitute the majority of the three-member arbitration panel, acknowledged the Korean government's interference in the private transactions. They said that it should be a lesson for the future to prevent the Korean financial authority's improper intervention in other deals.

"The decision confirms that the Korean government should not interfere with commercially negotiated transactions, despite the public unpopularity of the investment. This matter has plagued the foreign investment environment in Korea for too long," Jeffrey Jones, who is a long-time partner at Kim & Chang as well as chairman of the Board of Governors at the American Chamber of Commerce in Korea, told The Korea Times.

"My hope is that the Korean government quickly pays the somewhat minimal damages awarded so that we can get this behind us."

Another legal expert pointed out that the Korean government needs to clarify why the arbitration at the ICSID took an exceptionally long time, which only resulted in an exponential increase in the legal fees and award.

"On average, international arbitration cases take three to four years. This case took 10 years, meaning that it took more than double the average. Given that the award that Korea needs to pay will increase each day until it's fully paid, the government should explain to the public the detailed reasons for the exceptionally long wait," Choi Won-mog, a professor at Ewha Womans University Law School, told The Korea Times.

Choi, a legal expert in international commercial disputes, also added that the government's planned action to ask for the annulment of the award might only result in racking up more legal fees.

"The ICSID Convention states that an annulment is only allowed on five limited grounds, such as the tribunal's corruption or a serious departure from a fundamental rule in the procedures. As neither the Korean government nor Lone Star seem to satisfy these five grounds for an annulment, the annulment registration process might end up costing more in legal fees," Choi said.

Lone Star announced that it is "disappointed in the amount of the award which fails to fully compensate Lone Star and its investors for losses," but didn't say what action it would take following the ruling.

Rep. Min Byoung-dug of the main opposition Democratic Party of Korea, right, and Rep. Bae Jin-gyo of the minor opposition Justice Party, third from right, attend a press conference along with representatives of civic groups at the National Assembly in Seoul, Thursday, demanding a National Assembly hearing on those responsible for the Lone Star incident. Yonhap

Meanwhile, the main opposition party Democratic Party of Korea and civic groups are demanding a National Assembly hearing on the financial officials mired in the Lone Star case.

"The financial regulator, which condoned and de facto helped a mere private equity fund to violate Korea's economic and legal order, should be held responsible," the leading civic group, People's Solidarity for Participatory Democracy, said in a press conference, Thursday.