South Korea to appeal international tribunal’s order to pay Lone Star

South Korea plans to seek annulment of an international tribunal’s verdict to compensate Lone Star Funds in a decadelong investor-to-state dispute arbitration.

According to the Ministry of Justice, the World Bank’s International Center for Settlement of Investment Disputes has ruled that South Korea should pay damages of 280 billion won ($216 million). The amount is just 4.6 percent of the 6.1 trillion won sought by the US private equity fund plus interest.

Justice Minister Han Dong-hoon told a press briefing Wednesday that the government would apply for an annulment of the ruling by the international arbitration tribunal.

“The government maintains that its handling of the administrative process involving Lone Star had been fair and equitable per the international standard, and finds it difficult to accept the tribunal’s decision,” he said.

“Although the ordered compensation has been significantly reduced than that demanded by Lone Star, the government will be taking steps to suspend and annul the decision so that not a single dime of South Korean taxpayer money is spent on damages.”

Han added that in November 2020, Lone Star had offered to settle with 1.17 trillion won ($870 million), which the government declined.

Wednesday’s decision came nearly 10 years since Lone Star filed for an arbitration proceeding with the World Bank institution in 2012.

Lone Star accused South Korea’s financial authorities of delaying the review process in the sale of the now-defunct Korea Exchange Bank, of which the US fund stood as the biggest shareholder, as well as unfair taxation.

According to the Justice Ministry, the tribunal found South Korea delaying the sale approval to be a violation of its obligation to provide fair and equitable treatment under the bilateral investment treaty.

But the ministry said some on the tribunal pointed out that the delay was caused by Lone Star being found guilty of stock price manipulation by a South Korean court.

The ministry said the tribunal rejected Lone Star’s claim that it was taxed too heavily.

In a closed-door briefing held the same day, a senior Justice Ministry official said “the South Korean government’s ability to process the approval of the bank’s sale was impeded by Lone Star’s criminal conviction.”

“So the fault lies with the fund,” the official said.

The official said amending the tribunal’s decision through the annulment process could take at least a year or longer. If Lone Star also asks for an annulment, the process could “get complicated,” the official said.

According to the World Bank institution’s rules, a disputing party can bring an appeal within 120 days from the decision of the tribunal.

South Korea is currently involved in at least six other ongoing arbitration proceedings in addition to that lodged by Lone Star.

About a dozen foreign investors have launched arbitration claims against South Korea in the past 10 years, with the combined claims made against the government totaling over 14 trillion won, according to Lawyers for a Democratic Society, or Minbyun. The total claims figure includes those that have been refused.

Over the years, the civic society has called for opting out of the investor-state dispute mechanism.

Minbyun, a progressive lawyers’ group, said South Korea should pull out of the investor-state dispute settlement entirely, citing a lack of transparency and threat to the jurisdiction of domestic courts.

“The investor-state dispute settlement enables foreign investors to sue the government, and if the government loses arbitration, the case, which is usually exorbitantly expensive, has to be settled using taxpayer money,” the group said.

The Lone Star arbitration proceeding had already cost South Korea more than 47.8 billion won, according to the Justice Ministry.

By Kim Arin (arin@heraldcorp.com)