[KH explains] Why is Korea going for a second legal bout with Elliott?

A yearslong legal dispute between the South Korean government and US hedge fund Elliott Investment Management has entered another phase, as the government decided to file a suit to reverse an international tribunal's order to pay some $108 million in damages to the hedge fund.

At the center of the protracted legal battle is the controversial 2015 merger of two Samsung Group affiliates -- Samsung C&T and Cheil Industries.

Elliott, a minority stakeholder in Samsung C&T, sued the Korean government in 2018 for pressing the state-run National Pension Service to exercise its voting right to permit the merger.

Elliott asserted that it incurred losses from the NPS' vote, since the terms of the merger had been unfavorable to Samsung C&T.

On June 21, the Hague-based Permanent Court of Arbitration ruled in favor of Elliott, ordering the Korean government to pay some $108.5 million, about 7 percent of the $770 million that the hedge fund had claimed.

On July 18, Korea’s Ministry of Justice announced its decision to revoke the arbitration ruling, saying tribunal did not have jurisdiction to make the ruling due to Korea's free trade agreement with the US. The ministry said it would seek to reverse the ruling via a British arbitration body.

Is the government responsible?

The gist of the suit raised by the Korean government is whether the NPS' exercising of its vote can be the subject of an investor–state dispute settlement (ISDS) case. ISDS refers to a system through which individual companies can sue host states for alleged discriminatory practices.

The Ministry of Justice argued that in order to be recognized as an ISDS case, the “measures” in question must be adopted or maintained by “the government” under the Korea-US FTA.

The ministry saw that the exercise of shareholder voting rights by the NPS was not a "government measure.”

In its ruling, the Permanent Court of Arbitration saw the NPS as “de facto a state organ” and its conduct attributable to the Korean state, as Korean citizens are legally mandated to contribute to the fund.

“The NPS’ operational expenses are funded from the national state budget and the NPS’ annual budget proposal must be approved by the Minister of Health and Welfare. The NPS’ officials are appointed and supervised by the ministry,” it said in the ruling.

The Justice Ministry said the concept of a "de facto state institution" is not stipulated in the Korea-US pact. “It is unfair to acknowledge the responsibility of the state based on the concept of a 'de facto state institution,’” it said in a statement.

Slim chance of winning

Justice Minister Han Dong-hoon, who publicly announced the government’s decision to take further legal action on July 18, said there’s a slim chance of winning.

“If you look at the probability, it's not that high. Is it within 10 percent? But I think it's something worth trying,” Han said during a press conference the day of the announcement.

Experts are divided on whether the government should bring the case back to court.

Roh Jong-hwa, a lawyer at Solidarity for Economic Reform, said the major premise of this case is the corruption scandal in 2016 which led to prison terms for former President Park Geun-hye and then-Samsung Vice Chairman and current Chairman Lee Jae-yong.

“I think there is legal room for dispute about whether it is correct to view these acts (taken by Park and Lee) as acts belonging to South Korea, or whether to deal with such issues in line with the purpose of the international arbitration system,” he said.

Some experts point out that given the legal costs and interest incurred for delaying payment to Elliott, it is realistic for the government to claim the right to indemnity against Samsung and former President Park instead of filing the lawsuit.

“Now the government needs to take measures to preserve some of Samsung Chairman Lee’s property before the outcome of the cancellation lawsuit comes out,” Kim Jong-bo, a lawyer at law firm Human said during a roundtable discussion hosted by the nongovernmental organization Minbyun -- Lawyers for a Democratic Society on July 19.

The Justice Ministry concluded that filing a suit to cancel the ruling was "necessary," because there is a possibility that unfair ISDS filings regarding voting rights exercised by public institutions and public funds can continue in the future if not corrected this time.