[Market Eye] Lone Star verdict highlights Korea’s systematic flaws, experts say

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This photo taken in 2006 shows the now closed Lone Star headquarters in Seoul (Yonhap)

An international dispute settlement body’s order on Wednesday that South Korea must pay Lone Star “less than expected” $216.5 million may seem like a reasonable solution to a decade-long battle between the government and the US-based private equity firm.

But the verdict and the 10-year battle itself have revealed flaws in Korea’s financial and legal system that need to be fixed before they can achieve the progress they aspire to, experts said.

“The dispute has raised the question of whether Korea’s legal and financial system – which has remained largely unchanged over the past decade – is on par with global standards,” said Lee In-cheol, CEO and chief analyst. from the Real Good Economic Research Institute. told the Korea Herald on Wednesday.

“The South Korean government has a history of getting overly involved in the process of mergers and acquisitions between foreign hedge funds and local companies by heavily involving taxpayers’ money. This may give grounds for foreign companies (to argue) that excessive government involvement in the ‘sell-back’ process has created major obstacles, ultimately backfiring on Korea,” he added.

Lee said the Korean government’s “over-involvement” was also reflected in the ongoing dispute between US activist fund Elliott Management and Seoul over a controversial 2015 merger of two Samsung subsidiaries following the loss d’Elliott in a proxy battle to block it.

“There was government involvement and pressure in the sale of the then-struggling Korea Exchange Bank to Lone Star amid controversy that Korean law prohibits the sale of banks to private equity – Seoul will now have to reduce that,” said Lee, the former business journalist-turned-analyst.

As South Korea aims to become Asia’s next financial hub, experts have also called for transparency in the process of settling international disputes through policy reforms in line with international business and trade standards.

“The investor-state dispute settlement lawsuit with the Washington-based International Center for Settlement of Investment Disputes has remained officially classified for the past decade, technically leaving many people in the dark,” said Jun Sung-in, an economics professor at Hongik University. .

“It was unusual because all the cases I saw on the ISDS website were open to the public. There were some leaks of information between the two, but the case overall lacked transparency, which is not in line with Korea’s efforts to become a financial hub.

Meanwhile, Korea’s Justice Ministry expressed regret over the latest ICSID verdict, saying it would consider seeking the cancellation or suspension of the $216.5 million award.

Industry insiders expect then-government officials who approved Lone Star’s acquisition of the defunct KEB in 2003 to be questioned by current authorities. Incumbent Finance Minister Choo Kyung-ho has been involved in the government approval process. He and Financial Services Commission Chairman Kim Joo-hyun were both senior officials at the regulator in 2011 when Lone Star was in negotiations with Hana Financial Group for the resale of KEB.

Besides the Lone Star dispute, Korea is currently involved in a total of six cross-border disputes, including the one with Elliot.

The ICSID verdict comes 10 years after Lone Star filed a lawsuit against the Korean government in November 2012, seeking $4.68 billion in compensation. Lone Star has claimed financial authorities here botched its initial plans to sell a 51% majority stake in KEB – which it bought for 1.3 trillion won ($1 billion) in 2003 – to HSBC end of 2007.

It took eight months for the FSC to assess and approve the application filed by Lone Star in November 2007 to sell its stake in KEB to HSBC. But by then HSBC had backed off due to risks stemming from the 2008 global financial crisis, and the stake had been sold to Korean financial giant Hana Bank for 3.9 trillion won in 2012. The US capital firm -Investment believes it could have gained more from the canceled deal with HSBC.

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