April 24, 2024

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[THE INVESTOR] The ongoing US$4.7 billion investor-state dispute case that Lone Star Funds has filed against the Korean government is expected to be finalized in the first half of next year after a series of battles spanning more than a decade.
 
ICSID, the World Bank arm for investor-state dispute arbitration, said its proceedings will likely be completed this month, according to the Ministry of Justice on Nov. 4.

Under the ICSID rules, the tribunal has 180 days to issue its written decision, or award, after the proceedings are closed. Which means, the ruling will be announced by May next year.

In the first and largest ISD litigation faced by the Korean government, Lone Star -- which since 2000 invested and then exited many companies and real estate properties here, claims it suffered losses of over US$4.7 billion due to the government’s delay in approving its sale of Korea Exchange Bank and tax assessed on its investment gains. 

In 2003, the Texas-based private equity fund took over a 51.02 percent stake in KEB, then the fifth-largest bank that was financially distressed amid the Asian financial crisis, through its Belgian subsidiary. From 2005-2012, Lone Star tried to offload its stake multiple times but failed to meet the financial regulator’s approval. The government said it could not approve the sale because of pending legal issues involving Lone Star at the time, including allegations of stock manipulation.

In January 2012, Lone Star finally exited KEB by selling its stake to Hana Financial Group. But in May, it filed the ISD against the Korean government claiming its delayed approval forced the PEF to sell its shares at a much lower price.

Another issue is taxation involving Lone Star’s sale of KEB and other real estate. The Korean government has imposed 85 billion won (US$76.07 million) taxes on Lone Star for its 4.6 trillion won profits derived from investments here. But Lone Star argues that the tax on profits should be exempted because the investments were made by its Belgian subsidiary, citing Korea-Belgium Bilateral Investment Treaty, which exempts taxes on income from overseas equity investment.

Even as the high-stake decision is approaching soon, the government is embroiled with growing ISD claims for its involvement with companies. Global activist hedge funds Elliott Management and Mason Capital Management lodged an ISD lawsuit in April and June, respectively, for its approval of a controversial merger between two Samsung affiliates three years ago.

Last month, Schindler Group also filed an ISD suit against the Korean government seeking US$300 million in compensation for losses over its approval of controversial paid-in capital increase of Hyundai Elevator.

By Ahn Sung-mi (sahn@heraldcorp.com)