Seoul sees no merit in Lone Star legal action
By Kim Tong-hyung, Kim Jae-won
The government remained firm Thursday in the face of Lone Star Funds’ threat to take it to an international court over the sale of Korea Exchange Bank (KEB). The stance has raised expectations that it will take counteractions once the U.S. buyout fund files arbitration claims.
Lone Star Funds said Wednesday that it will file claims against the government for damages over delays the latter caused in its efforts to sell its stake in KEB.
Officials responded swiftly by forming a taskforce participated in by the Prime Minister’s Office, the Ministries of Strategy and Finance, Foreign Affairs and Trade, and Justice, the Financial Services Commission (FSC) and the National Tax Service (NTS), and the backing of a team of lawyers is all but assured.
“Our case is clear-cut. We handled Lone Star’s selling of KEB properly, with domestic and international laws strictly applied, and it’s up to them to prove that we made a mistake,” said a senior FSC official.
It’s hard to say that Korea has what one would call a wealth of experience in international legal disputes of this kind. Still, senior officials involved in the taskforce expressed confidence of having a stronger case than Lone Star.
The Dallas-based buyout firm was stuck here longer than it wanted not because the government was unwilling to approve a number of prospective buyers for KEB, but rather because the global economy was enduring a period of rockiness, they say. And no, the Korean government has no intentions to be held responsible for what happened after the Lehman Brothers collapse.
No matter the outcome of this fight, it seems certain that the cost of education will be hefty for a country that has a habit of bending the rules for foreign investors upon arrival then enforcing the principles rigidly when they divest.
Lone Star finally got its much-awaited ticket out of Korea early this year when financial regulators gave the go-ahead on its deal with the Hana Financial Group to sell its 51.02 percent stake in KEB for $3.5 billion.
However, it was an exit that took eight years, which qualify as an eternity for ruthlessly-opportunistic private equity firms, with previous talks with KB Kookmin Bank and British banking giant HSBC falling through in 2006 and 2008, respectively.
Lone Star, which bought a 64.6 percent stake in KEB in 2003 for 2.15 trillion won (about $1.8 billion), had to endure plenty of drama in offloading the bank to Hana as well.
The companies and financial regulators got entangled in awkward tango over the sale price and a court ruling that found Lone Star guilty of stock manipulation, while unionist bankers and politicians labeled the Texas firm as a “meoktwi” (eating and fleeing) foreign capital firm making a killing off a once-distressed Korean asset.
In announcing that it’s exploring the possibilities of international arbitration against the government, Lone Star accused regulators here of dragging down its attempts to dispose of its Korean investments. The government’s “unlawful interference” with Lone Star’s rights as the major shareholder of KEB and other Korean companies it acquired resulted in significant losses for the fund’s investors, Lone Star Chairman John Grayken said in a statement.
“The Korean regulators demonstrated an unwillingness to approve a string of prospective buyers of Lone Star’s majority stake in KEB, thereby forcing Lone Star to hold the stake many years longer than necessary and to dramatically reduce the price; and imposed arbitrary, unlawful and confiscatory taxation on the sales of all these investments,” Lone Star said in the statement.
“While we sincerely hope that the South Korean government will engage in good faith discussions to resolve these claims, if the dispute cannot be resolved amicably, Lone Star will file for arbitration. The claims will be heard in an international forum based in Washington, D.C.”