The International Center for Settlement of Investment Disputes (ICSID) under the World Bank ruled that Korea has to pay 310 billion won, including approximately 216.5 million U.S. dollars of principal and 18.5 billion won of interest to Lone Star Funds, a U.S. private equity firm. This accounts for 4.6 percent from the 4.68 billion dollars of claim for compensation by Lone Star. Against this backdrop, the Korean government disclosed its stance of dissent.
Around 9 a.m. on Wednesday, the Lone Star tribunal of the ICSID sent the ruling ordering the Korean government to pay about 292 billion won to Lone Star with quotes from Lone Star to the Korean Justice Ministry. The ruling also ordered the Korean government to pay the interest from Dec. 3, 2011 until the date when the compensation is fully paid based on one month Treasury Bill. The Korean Justice Ministry stated that the estimated interest stands at circa 18.5 billion won.
This ruling came out in 10 years since Lone Star Funds initiated the 6 trillion won of Investor State Dispute (ISD) suit. ISD could be raised seeking compensation for damages through international arbitration when foreign investors are inflicted of damages through the laws and policies of the counterparty country.
Key disputes lie in whether the Korean government unduly delayed the sales and put pressure on Lone Star Funds to lower the sales price during the negotiation talks with Hana Financial Group on sales of its stake in Korea Exchange Bank (KEB). In fact, the tribunal acknowledged that both sides - Korean government and Lone Star Funds - are accountable. The tribunal pointed out the Korean government breached the responsibility of the Agreement between the Government of the Republic of Korea, Belgium and Luxemburg for Fair and Equitable Treatment in Negotiations to Guarantee Investment but at the same time Lone Star Funds is accountable for the delay in sales by stock price manipulation of which Lone Star Funds was ruled guilty. Lone Star Funds has its paper company in Belgium.
Accordingly, the tribunal acknowledged 50 percent comparative negligence of Lone Star Funds and recognized only half of the discounted sales price 216.5 million dollars as the compensation. All Lone Star Funds arguments over delayed sales and unreasonable taxation over sales of KEB stake to HSBC were dismissed.
During the briefing at the Justice Ministry of the Gwacheon Government Office, Justice Minister Han Dong-hoon said that it is difficult to accept the tribunal ruling and added that the Korean government shall engage in active measures of applying for annulment and others to prevent any leakage of the general public’s precious tax paid. If the Korean government submits an annulment application within 120 days against the ruling, the Annulation Committee will be formed within the ICSID to review whether to annul the ruling.
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