'Lonstar Lawsuit' South Korea Pays Only 280 Billion Won Out of 6 Trillion... Cautious Views on 'Decent Performance'

[Image source=Yonhap News]

[Asia Economy Reporter Kim Daehyun] The International Investment Dispute Settlement (ISDS) arbitration tribunal partially accepted Lone Star's claims but limited the compensation amount the Korean government must pay to 4.6% of the total claimed amount of $4.68 billion (approximately 6 trillion KRW). Accordingly, the government will pay $216.5 million (about 292.5 billion KRW based on an exchange rate of 1,350 KRW/USD). The interest amount is estimated to be around 100 billion KRW.

The specific judgments on each disputed issue have not been confirmed. However, the arbitration tribunal appears to have accepted some of Lone Star's claims while largely upholding the Korean government's defenses.

Previously, Lone Star acquired Korea Exchange Bank (KEB) in 2003 for 1.3834 trillion KRW and attempted to sell it to Hongkong and Shanghai Banking Corporation (HSBC) in 2007. However, the sale was canceled as the Korean government did not approve it, and in 2012, Lone Star transferred KEB to Hana Financial Group. Subsequently, Lone Star filed an ISDS lawsuit against the Korean government that year, claiming damages of $4.6795 billion, arguing that "if it had sold to HSBC, it could have made a larger profit, but the sale delay caused the price to drop." The claim, which was around 5 trillion KRW at the time, has now exceeded 6 trillion KRW due to exchange rate fluctuations. Foreign investors who suffer losses due to measures taken by the host country can apply for arbitration through international arbitration institutions under ISDS.

Lone Star argued that the Financial Services Commission arbitrarily and discriminatorily delayed approval of the KEB sale beyond the statutory review period without just cause, and that the National Tax Service imposed arbitrary and contradictory taxation. They claimed that undue pressure was applied to lower the sale price of KEB.

On the other hand, the Korean government argued through submitted documents that administrative measures related to Lone Star were conducted fairly and equitably without discrimination, based on the principle of equal treatment of nationals and foreigners under international laws and treaties. The government stated that the statutory review period for sale approval is only advisory and that considering the document supplementation period, the period was not exceeded. Furthermore, it contended that the delay was justified due to ongoing criminal trials that could affect Lone Star's major shareholder qualifications. The government also pointed out that the drop in KEB's price was due to Lone Star's guilty verdict.

The Korean government and Lone Star exchanged written arguments, submitting 1,546 pieces of evidence and 95 witness and expert statements to ICSID between 2013 and 2015. Subsequently, four hearings were held in Washington DC, USA, and The Hague, Netherlands, until June 2016. In June last year, former Canadian Supreme Court Justice William Ian Binnie was appointed as the new presiding arbitrator. In October of the same year, a Q&A session was conducted via video conference. After the change of the presiding arbitrator, additional hearings continued for about one and a half years, and the hearing procedure was finally concluded on June 29.

Concerns that the payment of compensation amounting to trillions of KRW could cause a massive 'financial blow' to the Korean government seem to have been partially alleviated by this ruling. However, since the government must bear compensation responsibilities amounting to several hundred billion KRW, the 'accountability' of the individuals involved in Lone Star's acquisition and sale of KEB at the time is unlikely to disappear easily.

Professor Jeon Seongin of Hongik University's Department of Economics pointed out, "It is necessary to distinguish between damages related to taxation and those related to financial supervision." He added, "We need to see how much of the 290 billion KRW compensation amount is recognized as damages related to financial supervision." Professor Jeon said, "In the arbitration proposal Lone Star sent to the Blue House in 2020, they themselves stated that they would claim only $400 million related to Hana Financial Group, not $1.7 billion related to HSBC. The recognized amount compared to this $400 million is the pure financial sector loss, and that is the real loss rate." He added, "The actual compensation amount, including delayed interest, ultimately becomes the burden of the people. Since financial supervision issues were clear, such as enabling industrial capital Lone Star's acquisition of KEB, if even one won is taken from the people's pockets, the responsibility of economic bureaucrats, including the 'Mofia,' must be held accountable."

Current Prime Minister Han Duck-soo was a legal advisor at Kim & Chang, representing Lone Star when it acquired KEB in 2003. Finance Minister Choo Kyung-ho was the vice chairman of the Financial Services Commission during Lone Star's sale of KEB.

Regarding the ruling, an appeal procedure such as a cancellation request can be filed within 120 days after the announcement. The government plans to decide on follow-up measures based on an analysis of the ruling document.

This content was produced with the assistance of AI translation services.