The Dallas-based private equity firm Lone Star Funds warned the South Korean government yesterday that it is initiating arbitration proceedings over the sovereign state’s involvement in Lone Star’s sale of Korea Exchange Bank to Hana Financial Group earlier this year for roughly $3.5 billion.
Lone Star Funds (“Lone Star”) confirmed today that it has notified the South Korean government of its intention to initiate arbitration of its claim for damages suffered as a result of the Korean government’s unlawful interference with Lone Star’s rights as the major shareholder of Korea Exchange Bank (“KEB”) and other Korean companies Lone Star acquired in the early 2000s. The claims arise out of the government’s failure to comply with its obligations under the investment treaty between Belgium and South Korea.
John Grayken, Chairman of Lone Star Funds, explained, “When Lone Star made these investments, we were optimistic about Korea’s ability to recover from the shock of the 1997-98 Asian financial crisis and believed we could rely on the Korean regulatory and tax laws to protect our interests in these investments. However, as the economy strengthened and Korean banks and businesses, including many foreign-owned banks like KEB, returned to profitability, public sentiment towards foreign investment in Korea soured. Korean financial and tax regulators responded with a series of illegal actions that resulted in billions of Euros of damages to Lone Star’s investors.
“These investors include mainly pension funds for thousands of government and corporate employees and retirees, as well as endowments that support medical research, higher education and other philanthropic causes. As the manager of the funds that they have entrusted with Lone Star, it is our duty to protect their interests wherever necessary.
“We have reviewed this matter carefully with Korean and international legal experts and have been advised that we have compelling legal claims. Therefore, while we sincerely hope that the South Korean government will engage in good faith discussions to resolve these claims, if the dispute cannot be resolved amicably, Lone Star will file for arbitration. The claims will be heard in an international forum based in Washington, D.C., by an impartial panel of arbitrators whom we are confident will order Korea to compensate Lone Star for the damages its investors have suffered.”
The Agreement between the Government of the Republic of Korea and the Belgium-Luxembourg Economic Union for the Reciprocal Promotion and Protection of Investments protects investors against unlawful government interference with their property rights. The shareholders of these Korean investments reside in Belgium and are therefore protected by the Treaty. The Treaty provides for arbitration under the auspices of the International Centre for Settlement of Investment Disputes, or “ICSID”, which is affiliated with the World Bank in Washington, D.C.
The investments underlying this dispute include, most notably, Lone Star’s Euro 1 billion majority stake in KEB, made in 2003, and other investments in Korean corporations made between 2001 and 2004. The claims relate to (i) the Korean regulators’ unwillingness to approve a string of prospective buyers of Lone Star’s majority stake in KEB, thereby forcing Lone Star to hold the stake many years longer than necessary and to dramatically reduce the price; and (ii) arbitrary, unlawful and confiscatory taxation on the sales of all these investments.
The notice Lone Star has submitted complies with the Treaty’s requirement to notify the Korean government at least six months before actual initiation of the arbitration. If the matter cannot be resolved amicably, Lone Star anticipates that the arbitration will be filed in November 2012.
About Lone Star Funds
Lone Star invests capital committed to it by institutional investors worldwide in corporate, commercial real estate, single-family residential, and consumer debt products, as well as equity investments in residential and commercial real estate, banks and other operating companies. Since 1995, the principals of Lone Star have managed private equity funds totaling approximately $33 billion of committed capital.
SOURCE Lone Star Funds