Lonestar dispute underscores key lessons for Korean finance

The Lone Star case was once widely viewed as a potential “time bomb” for South Korea’s political scene at year-end. The government faced the possibility of paying about ₩320 billion (roughly $240 million) under an international investment dispute (ISDS) arbitration ruling over the 2022 sale of Korea Exchange Bank to the U.S.-based private equity firm Lone Star.

Fortunately, the government won its annulment request last month. Had it lost, taxpayers could have been liable for a substantial sum, and political disputes over responsibility would have been inevitable. Before the 2022 ruling, financial authorities warned that the political arena would be rife with talk of state audits, National Assembly investigations, and prosecutorial inquiries. Officials even remotely connected to the Lone Star issue largely remained silent, claiming ignorance.

After the government secured the victory, Prime Minister Kim Min-seok hailed it as a “significant achievement,” while former People Power Party leader Han Dong-hoon awkwardly noted that he had been justice minister when the annulment request was filed.

The South Korean government’s victory in the lengthy legal battle deserves recognition. However, the lessons from the 22-year dispute must not be forgotten. A second Lone Star scenario could emerge at any time, and the government is unlikely to confidently claim it is fully prepared to prevail in another ISDS case.

Criticism that Lone Star “ripped off” the country remains sharp. In August 2003, Lone Star acquired a 51 percent stake in Korea Exchange Bank for ₩1.3834 trillion ($1.17 billion), becoming the largest shareholder. In January 2012, it sold the bank to Hana Financial Group for about ₩4 trillion ($3.36 billion), earning a substantial profit before exiting the Korean market. Since then, regulatory measures have been introduced to prevent similar cases. Systems now allow professional institutional investors, including pension funds, to participate in private equity investments and oversee them. The government has also strengthened assessments of major shareholders’ qualifications.

Nonetheless, critics say more measures are needed. The National Assembly has proposed bills that would require private equity funds to hold acquired shares for longer periods and limit the leverage they can use in buyouts. While private equity can have positive effects on corporate management, additional safeguards are still needed to prevent predatory practices.

There is also lingering regret that the government did not rigorously determine whether Lone Star qualified as an “industrial capital” entity when reviewing the acquisition 22 years ago. Had it done so, the problematic encounter with Lone Star might have been avoided. At the time, banking law prohibited industrial capital with assets of ₩2 trillion or more in nonfinancial sectors from holding more than 10 percent of a bank’s shares, or 4 percent of voting shares. Lone Star, however, owned companies in Japan that operated golf courses and wedding halls. Authorities approved the acquisition, citing severe vulnerabilities at Korea Exchange Bank and recognizing exceptions in the banking law enforcement decree. Nevertheless, the debate over Lone Star’s industrial capital status never subsided.

The lasting impact of the Lone Star case is partly due to the dispute’s prolonged nature, but communication failures during the sale process also played a significant role. Had authorities clearly explained the decision-making process to prevent unnecessary misunderstandings, public anxiety might have been reduced. South Korean financial firms would also benefit from reflecting on the past 22 years. Even though Korea Exchange Bank avoided becoming a target of Lone Star, criticisms urging a shift away from a loan-centric business model continue to resurface.