The South Korean government and U.S. private equity firm Lone Star Funds would finally settle their six-year-long dispute over Lone Star’s sale of a Korean bank by March at the latest.
The International Center for Settlement of Investment Disputes (ICSID), an international arbitration institution under the World Bank that administers the settlement of investment disputes between governments and foreign investors, sent a notice to the Korean government, Lone Star and other related parties late last month that it would make a final decision by March 2019, according to sources from international arbitration circles on Sunday.
The Korean justice ministry corroborated this claim, saying it also received word from its legal representatives last month that “the arbitration court is likely to reach a conclusion soon.”
In 2012, LSF-KEB Holdings SCA, Lone Star’s Belgian subsidiary that had invested in Korea Exchange Bank (KEB), now KEB Hana Bank, brought an arbitration case against South Korea before the ICSID based on the bilateral investment treaty between South Korea and Belgium-Luxembourg. It claimed the Korean government’s delay in approving its sale of KEB and unfair tax levies cost it about $4.68 billion in damages.
In September 2003, Lone Star had acquired a controlling share in KEB, Korea’s then fifth-largest bank, through its Belgian subsidiary at a time when many Korean banks were put up for fire sale in the wake of the Asian financial crisis in 1997-1998. Under Korean law, non-bank entities, like Lone Star, could not buy a controlling share in a Korean bank unless the bank was in financial distress. The issue of whether KEB was in fact distressed was somewhat controversial as there were news reports that it had stabilized by mid-2003. But Korean regulators determined that KEB was in need of outside help and signed off Lone Star’s acquisition.
The bank’s quick turnaround, however, raised suspicions that the bank might have been unfairly sold off to Lone Star. The Korean government launched an investigation and the case went up to the Supreme Court, which ultimately found KEB’s sale to Lone Star legitimate. But during the course of its own investigation, the court hit upon another wrongdoing by Lone Star in 2011 and found it guilty of stock manipulation.
Lone Star, which had tried to sell its shares in KEB between 2005 and 2011, claimed that its sales attempts were blocked by the Korean authorities and that it was forced to sell them later at a much lower price. The Korean government refuted it could not approve the sale at the time because of the ongoing investigations and trials.
Another point of contention is taxation. Lone Star accused Korean tax authorities of overcharging about 800 billion won ($712.8 million) in taxes on its real estate investments in Korea. The investments, according to Lone Star, were made by its Belgian subsidiaries and should be protected by the Korea-Belgium bilateral investment treaty, which levies no taxes on overseas investments made by companies in Belgium. In response, the Korean government argued that the subsidiaries were paper companies formed to evade taxes.
Experts say the final ruling is expected to come out before February as it is custom for the ICSID to reach a conclusion before the officially announced date.
By Chae Jong-won and Kim Hyo-jin
[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]