Looking at the ISDS Ruling Summary... Lone Star 'Sudden Withdrawal' - Government 'Wait and See', Both Parties Responsible

[Image source=Yonhap News]

[Asia Economy Reporter Kim Hyung-min] The arbitration tribunal that reviewed the international investment dispute between our government and the U.S.-based private equity fund Lone Star evaluated Lone Star's stock manipulation case as going beyond the so-called "Eat and Run" to "Cheat and Run." It also acknowledged the fault of our financial authorities for delaying the approval review of the sale of Korea Exchange Bank to avoid criticism from politicians and public opinion at the time. It stated that both parties should share equal responsibility.

According to the legal community on the 7th, the summary of the international investment dispute (ISDS·Investor-State Dispute Settlement) case released by the Ministry of Justice the day before confirmed these contents.

In particular, the arbitration tribunal had differing opinions on whether our government unfairly delayed the approval review process and pressured Lone Star to lower the sale price when selling Korea Exchange Bank to Hana Financial Group.

The majority (2 members) judged that our financial authorities delayed the sale review of Korea Exchange Bank for improper purposes. They pointed out, "The financial authorities adopted a 'Wait and See' policy by withholding approval review until the sale price was lowered, and such actions were arbitrary and irrational as they were not for legitimate policy purposes."

While the Financial Services Commission can consider the efficiency and soundness of banking operations in the acquisition approval review and may exceed the statutory review period, the problem was that this waiting was motivated not by legitimate regulatory purposes but by 'political motives' to avoid criticism from politicians and the public.

They added, "Although intervening in the terms of a contract between private parties is not within the financial authorities' jurisdiction, the financial authorities tried to lower the sale price of Korea Exchange Bank to avoid political burdens," criticizing that "this was an arbitrary and malicious exercise of regulatory authority by the financial authorities."

On the other hand, the minority (1 member) opposed, stating, "There is no direct evidence attributing the price reduction pressure to the financial authorities, and responsibility of the state cannot be recognized based solely on the text and speculation." They also pointed out that the articles submitted by Lone Star as favorable evidence had limited probative value.

They further stated that no evidence was found in the Financial Services Commission's witnesses and internal documents indicating that the Commission instructed a price reduction, and that the Commission consistently maintained the position that "the sale price should be autonomously determined between the contracting parties."

The majority of the arbitration tribunal found that our government violated the obligation of fair and equitable treatment under the investment protection agreement but also held Lone Star 50% responsible due to its conviction on stock manipulation charges. "Considering Lone Star's confirmed criminal conviction related to the Korea Exchange Card stock manipulation case, the so-called 'Eat and Run' analogy can be further developed to say Lone Star 'Cheat and Run,'" they said.

They added, "Following the guilty verdict in the stock manipulation case by the Seoul High Court on October 6, 2011, and the Financial Services Commission's order to sell Korea Exchange Bank shares, Lone Star was no longer able to hold a major shareholder stake in Korea Exchange Bank after May 18, 2012," noting that "this gave the financial authorities room to pursue a reduction in the sale price."

Concluding that Lone Star's guilty verdict for stock manipulation and the financial authorities' illegal acts directly and significantly contributed to the reduction of the sale price to Hana Bank, the tribunal ruled that both parties should equally bear the damages.

Accordingly, the arbitration tribunal ruled on the 31st of last month that our government should compensate Lone Star with half of the reduced sale price ($433 million), amounting to $216.5 million (approximately 280 billion KRW based on an exchange rate of 1,300 KRW/USD). The Ministry of Justice is reviewing the application for annulment and suspension of enforcement of the arbitration award. The arbitration parties may apply for annulment of the award only once within 120 days after the award to the ICSID Secretary-General on five grounds: excess of authority by the tribunal, omission of reasons in the award, serious violation of procedural rules, among others.

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