Lone Star starts arbitration proceedings against Korean government
Lone Star Funds has initiated arbitration of its claim for damages suffered as a result of alleged unlawful intervention by the Korean government with the private equity firm’s rights as a major shareholder in Korea Exchange Bank (KEB) and other companies acquired in the early 2000s.
Lone Star provided formal notice of its claims - specifically, a failure to comply with obligation codified in an investment treaty between South Korea and Belgium and Luxembourg - to the government in May. The private equity firm said it sought discussions to resolve the dispute amicably but this wasn't possible.
Now the case will go before International Center for Settlement of Investment Disputes in Washington, D.C.
Lone Star purchased a 51% stake in KEB for $1.2 billion in 2003 but subsequently ran into regulatory problems. Last year the private equity firm was found guilty of manipulating KEB's stock price around the time of its purchase, and was ordered to pay KRW3.92 billion ($21 million) in damages and sell down its stake to less than 10%.
Paul Yoo, Lone Star's former South Korea head, was also sentenced to three years in prison. He appealed against the ruling.
The treaty protects investors against unlawful government interference with their property rights. It is relevant to Lone Star's investment in KEB because some of the LPs reside in Belgium.
In the claim, Lone Star cites Korean regulators' unwillingness to approve a string of prospective buyers of the KEB stake, thereby forcing it hold the asset for longer than necessary, and the arbitrary, unlawful and confiscatory taxation of exit proceeds from its investments.
Lone Star first attempted to exit KEB in 2006 through a sale to domestic player Kookmin Bank for $7 billion. Regulators rejected that transaction, leading Lone Star to relaunch the auction process in early 2010. Prospective investors including MBK Partners and ANZ entered talks about acquiring the asset, but issues relating to regulations and financing meant that Hana was the only viable option.
Hana officially agreed to acquire the shareholding in late 2011 for KRW3.92 trillion, or KRW14,900 per share - a 46% premium to KEB's last close. The financial services player initially offered $4.2 billion in November 2010, but regulators withheld their approval until Lone Star's court case was resolved.
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