Lone Star wins $216mn damages as South Korean financial saga nears end

South Korea has been ordered to pay $216.5mn plus interest to Lone Star Funds, in a ruling that is expected to bring to an end the 20-year saga of the Texan private equity group’s acquisition of Korea Exchange Bank.

The International Centre for Settlement of Investment Disputes, a World Bank arbitration tribunal based in Washington, awarded damages amounting to just 4.6 per cent of the $4.68bn Lone Star had sought in compensation for delays in the disposal of its Korean investments.

Lone Star initiated the international arbitration in 2012, claiming that the fund’s investors suffered huge losses because of the Korean government’s “unlawful interference with Lone Star’s rights as the major shareholder of KEB and other Korean companies Lone Star acquired in the early 2000s”.

For years, the case was regarded by global financiers as emblematic of Korea’s perceived hostility towards foreign investment, damaging the country’s credentials as an investment destination as Lone Star struggled to sell Korean assets acquired in the wake of the Asian financial crisis of the late 1990s.

Lone Star Funds paid $1.2bn in 2003 for a controlling stake in KEB, regarded by many in Seoul as the jewel in the crown of the Korean banking system.

Amid an outpouring of public outrage, Korean financial authorities later attempted to declare the acquisition illegal, in effect killing a proposed sale of the bank to HSBC.

Prosecutors also accused Lone Star executives of tax evasion and stock price manipulation, sending country manager Paul Yoo to prison in 2008. The senior finance ministry official who approved the transaction was also imprisoned.

The stake was finally sold to South Korea’s Hana Financial Group for Won3.9tn ($3.45bn) in 2012. Lone Star was forced to cut the price after being found guilty of stock price manipulation.

“The tribunal ruled that our government violated its duty of providing fair treatment by delaying its approval for Lone Star’s sale of KEB to Hana Bank,” South Korean justice minister Han Dong-hoon told reporters on Wednesday. “But it did not accept Lone Star’s claim that it suffered losses by the delayed sale of KEB to HSBC.”

He said the government would consider seeking an annulment of the tribunal order, making an appeal likely. It estimated it would have to pay about Won18.5bn in interest. The ruling will come as a relief to Seoul, however, given longstanding predictions it would have to compensate Lone Star to the tune of billions of dollars.

“The government did a good job in defending its case. The ruling will free South Korea of longtime legal risks,” said Sung Tae-yoon, professor of economics at Yonsei University.

“But it is a wake-up call against the problem of Seoul’s arbitrary taxation and a reminder that the government should not intervene politically or arbitrarily in deals between private parties without enough legal grounds.” 

“The decision took entirely too long to be issued and confirms that the Korean government should not interfere with commercially negotiated transactions, despite the public unpopularity of the investment,” said Jeffrey D Jones of Seoul law firm Kim & Chang, which advised Lone Star on its acquisition of KEB.

“This matter has plagued the foreign investment environment in Korea for too long,” Jones added. “My hope is the Korean government quickly pays the somewhat minimal damages awarded so we can get this behind us.”