SEOUL– An international tribunal’s order for South Korea to pay compensation to the U.S. private equity firm Lone Star Funds is seen as not too bad of a decision, but is nevertheless expected to spark criticism over waste of taxpayer money.
The Washington D.C.-based International Centre for Settlement of Investment Disputes (ICSID) has awarded Lone Star $216.5 million, only 4.6 percent of its demand of $4.68 billion, in an investor-state dispute settlement suit that the firm filed against South Korea in 2012.
Many legal experts and government officials view the verdict as the outcome of a decent defense by South Korea, considering that investor-state dispute settlements (ISDS) are often more challenging for the government side.
“Considering that the ISDS is a system designed to protect investors, there was huge possibility that our government would lose,” said Chung Hyuk-jin, a lawyer who also serves as an arbitrator for the Korean Commercial Arbitration Board.
The Texas-based firm initiated the arbitration, claiming it suffered losses because the financial regulator used discriminatory measures to delay the sale of the now-defunct Korea Exchange Bank (KEB) to global banking giant HSBC in 2007.
The bitter dispute dates back to the early 2000’s when South Korea was suffering from the aftermath of the disastrous Asian financial crisis, resulting in the government accepting a $57 billion rescue package from the International Monetary Fund.
Public sentiment at the time was hostile against foreign equity firms, as they were largely viewed as taking advantage of local assets whose value was depressed following the bailout.
Lone Star, which had acquired a controlling stake of KEB stake for 1.38 trillion won in 2003, had planned to sell off the stake to HSBC for about 5.94 trillion won in 2007.
However, the global banking giant dropped its bid after the Lehman Brothers collapse in 2008, as local financial authorities delayed approval of the planned transaction, citing legal disputes over stock manipulation.
Lone Star eventually sold its controlling stake to Seoul-based Hana Financial Group for some 3.9 trillion won in 2012.
Lone Star later claimed that South Korea had deliberately delayed approval of the deal with HSBC and pressured it to lower the price in the deal with Hana Financial Group, depriving the firm of fair and equitable treatment and other protections guaranteed in the investment treaty.
South Korea rejected the claims, arguing it treated Lone Star equally and fairly, as in the case of domestic entities, in accordance with international laws and local regulations.
“It is clear that the Ministry of Justice carried out the suit in a compact manner without any negligence, as only 4.6 percent of the claimed amount was recognized in an international arbitration trial,” said Soung Jea-hyen, a lawyer serving as a consultant for prosecution.
Many also point out that the ICSID — a system through which countries can be sued by foreign investors — often does not strike an appropriate balance between investor protection and state sovereignty.
“Our government suffered a crushing defeat when sued in the case related to mergers and acquisitions of Daewoo Electronics,” Chung said.
In 2018, the ICSID ruled in favor of the Iranian family, the Dayyanis, and ordered Seoul to pay 73 billion won in compensation over a failed takeover of local electronics maker, Daewoo Electronics.
Other legal experts and civic groups, however, argue that the compensation amount is not small at all, and that the government should look into alleged involvement of several incumbent high-ranking officials in the issue.
“(The government) must unveil the ruling and investigate why taxpayers’ money should be paid out to Lone Star,” said Song Ki-ho, a lawyer of a local civic group, Lawyers for a Democratic Society, also known as Minbyun.
Spec Watch Korea, a civic group, also strongly condemned Prime Minister Han Duck-soo and other ranking officials. Allegations arose earlier this year that Han was paid a total of 150 million won between November 2002 and July 2003 as an adviser for the local law firm Kim & Chang, which represented Lone Star at the time.
Also, further criticism could arise as the Seoul government is estimated to have spent a whopping 47 billion won in legal expenses by hiring high-profile law firms.
The government announced that it cannot accept the decision and will actively consider pursuing an appeal, including seeking an annulment.
A party can file an application for annulment with the ICSID within 120 days after the verdict is awarded.
The ICSID’s decision, however, is unlikely to be reversed, unless a party may apply for full or partial annulment on the basis of one or more of five grounds such as whether there was corruption on the part of a member of the tribunal or there has been a serious departure from a fundamental rule of procedure.
Even if the annulment application is rejected, many legal experts say South Korea does not have to pay the compensation amount immediately, citing an earlier ICSID ruling against the Dayyanis, when the government took almost three years to complete the payment.
Others also cite the possibility of the Seoul government engaging negotiation with Lone Star on payment in installments.
Source: Yonhap News Agency