Neither the Government nor Lone Star Satisfied with Arbitration Award... Likely to Undergo Review by ICSID Annulment Committee

Lonestar Also Dissatisfied with 4.6% Approval Rate Compared to Claimed Amount
Cancellation Possible Within 120 Days... Takes Over a Year

Minister of Justice Han Dong-hoon is giving a briefing on the Lone Star international investment dispute (ISDS) case ruling at the Ministry of Justice building in Gwacheon-si, Gyeonggi Province on the 31st of last month. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] Both the South Korean government and the foreign private equity fund Lone Star are dissatisfied with the arbitration tribunal's ruling in the international investment dispute (ISDS·Investor-State Dispute Settlement) case filed by Lone Star against the South Korean government, increasing the likelihood that the case will undergo review by the annulment committee under the International Centre for Settlement of Investment Disputes (ICSID).

On the 1st, the legal community largely evaluated the ICSID arbitration ruling announced the previous day as "effectively a victory for our government."

4.6% of Lone Star's Claim Recognized... Government Effectively Wins

In this case, four major issues?jurisdiction, finance, taxation, and damages?were contested between the South Korean government and Lone Star.

First, the jurisdiction issue involved whether the Investment Protection Agreement between South Korea and Belgium-Luxembourg, which came into effect in 2011, would apply (temporal jurisdiction), and the question of the claimant status of Lone Star's claimants. The arbitration tribunal ruled that it had no jurisdiction over acts that occurred before the Investment Protection Agreement between South Korea and Belgium-Luxembourg came into effect on March 27, 2011, siding with the South Korean government. Regarding claimant status, the tribunal recognized the claimant status of Lone Star's claimants as the legal owners of the taxable investment assets.

Next, the financial issue concerned whether financial authorities unduly delayed approval during the sale of Korea Exchange Bank (KEB) to HSBC in 2007?2008 and to Hana Financial Group in 2011?2012. The tribunal dismissed Lone Star's claims related to HSBC, ruling that these acts occurred before the Investment Protection Agreement came into effect and thus were outside its jurisdiction.

However, regarding the KEB-related part, the tribunal rejected the government's argument that the approval review period stipulated by domestic law was merely advisory and that the delay was justified due to ongoing criminal trials that could affect Lone Star's qualifications as a major shareholder at the time. Instead, it ruled that the Financial Services Commission's delay in approval until the sale price was reduced was beyond the authority of the financial authorities and constituted a violation of the obligation to provide fair and equitable treatment.

Nevertheless, the tribunal found that Lone Star bore some responsibility for the reduction in the sale price to Hana Financial Group due to a criminal conviction related to stock price manipulation of KEB Card, recognizing a 50% contributory negligence. Consequently, the tribunal acknowledged the South Korean government's liability for compensation amounting to half of the reduced sale price, $216.5 million out of $433 million (partial acceptance of Lone Star's claim).

The taxation issue concerned whether the government's refusal to grant tax exemptions to Lone Star was arbitrary. Lone Star argued that the government applied inconsistent and arbitrary standards regarding whether Lone Star had a domestic permanent establishment and the determination of the actual beneficiary of income, with the intent to maximize taxation. However, the tribunal completely rejected Lone Star's claims, ruling that the government's application of the substantial taxation principle and tax assessments complied with international standards and did not constitute arbitrary or discriminatory treatment. The tribunal accepted the government's argument that Lone Star's Belgian entities were "conduit companies" (companies established solely for tax avoidance) without substance.

Finally, regarding damages, Lone Star claimed approximately 6 trillion KRW in damages plus interest until full payment, other arbitration costs, and taxes (about 28 billion KRW) that might be imposed by South Korea and Belgium on future compensation. The tribunal dismissed the claim for future taxes on the award, stating there was no basis to consider such taxes in the ruling.

In conclusion, the tribunal partially accepted Lone Star's claims on the financial issue, ordering the South Korean government to pay $216.5 million (approximately 280 billion KRW, based on 1,300 KRW per USD) plus interest calculated at the one-month US Treasury yield from December 3, 2011, until full payment. Conversely, the tribunal dismissed Lone Star's claims on the remaining financial and taxation issues, confirming no jurisdiction or violation of international law as argued by the government.

In terms of amounts, Lone Star won on $216.5 million out of its approximately $4.68 billion (about 6.1 trillion KRW) claim, while the South Korean government prevailed on the remaining $4.46 billion (about 5.8 trillion KRW). The government won 95.4% of the claim and lost 4.6%.

Judging solely by the compensation amount recognized relative to Lone Star's claim, it is reasonable to evaluate this as an effective victory for the government. However, some in the legal community argue that since Lone Star's initial claim of 6 trillion KRW was an absurd amount, the 280 billion KRW awarded may seem small by comparison, but when including interest and litigation costs, it is not a trivial sum. Given that this must be covered by taxpayers' money, it is difficult to regard this as a clear victory.

Minister of Justice Han Dong-hoon Hints at Annulment Application... Lone Star Also Likely to Apply

Minister of Justice Han Dong-hoon stated at a briefing on the Lone Star international investment dispute case held at the Government Complex Gwacheon Ministry of Justice the previous day, "The government finds it difficult to accept the arbitration tribunal's ruling," adding, "The dissenting opinion fully accepted our government's position, stating there is no government liability, so we believe it is worth contesting within the procedural framework."

He also said, "We will do our utmost to ensure that not a single penny of the hard-earned taxes of the Korean people is lost through annulment or suspension of enforcement procedures in the future."

International investment dispute arbitration cases are basically conducted as a single instance. However, an arbitration party may apply for annulment of the award once within 120 days after receiving the award if one or more of five grounds are met, including excess of authority by the tribunal, omission of reasons in the award, or serious violation of procedural rules. In such cases, a separate annulment committee (three members) is immediately formed to decide on annulment. Typically, it takes at least one year to receive a result.

Annulment applications are accepted in about 10?15% of cases, mostly on grounds of serious procedural violations or jurisdictional issues. Therefore, even if the government applies for annulment, the likelihood of significantly reducing or avoiding compensation is considered low. If an application for suspension of enforcement is accepted along with the annulment application, enforcement can be suspended until the annulment committee's decision, but interest continues to accrue during the suspension period.

Meanwhile, Lone Star reportedly expressed disappointment in response to a media inquiry via email about the arbitration tribunal's ruling the previous day.

In a spokesperson's statement, Lone Star said, "The compensation is insufficient for the unfair acts of the Korean government, the risks Lone Star bore when rescuing Korea Exchange Bank in 2003, and the added value Lone Star contributed to all shareholders of Korea Exchange Bank and the Korean banking system."

Annulment applications can only be made by each party against unfavorable rulings. Therefore, it is highly likely that both the South Korean government and Lone Star will file annulment applications.

Minister Han stated the previous day, "Although there is a confidentiality agreement, we plan to disclose case information within the scope permitted by relevant laws and the arbitration tribunal to enhance transparency of the arbitration process and ensure the public's right to know."

Meanwhile, it is known that the background for the tribunal's recognition of Lone Star's contributory negligence and reduction of compensation was significantly influenced by the 'Lone Star stock price manipulation case' investigated jointly in 2006 by President Yoon Seok-yeol, Minister of Justice Han Dong-hoon, National Intelligence Service Policy Director Cho Sang-jun, and Financial Supervisory Service Governor Lee Bok-hyun at the Supreme Prosecutors' Office's Central Investigation Department.

At that time, the Supreme Prosecutors' Office's Central Investigation Department indicted former Lone Star Korea CEO Yoo Hoe-won and Lone Star on stock price manipulation charges in 2007. In 2011, Yoo was sentenced to three years in prison, and Lone Star was fined 25 billion KRW.

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