Lone Star Funds has notified the South Korean government of its intention to initiate an arbitration claim in what could become an international lawsuit and mark Korea's first legal action between an investor and the state.
Tha Dallas-based buyout firm asserts that the Korean government interfered with its rights as the major shareholder in Korea Exchange Bank and other Korean companies acquired in the early 2000s, according to a company statement.
Korean regulators were repeatedly unwilling to approve the sale of the firm's majority stake in KEB, “thereby forcing Lone Star to hold the stake many years longer than necessary and to dramatically reduce the price” the firm said in the statement.
The government also engaged in “arbitrary, unlawful and confiscatory taxation on the sales of all these investments”, the firm said.
Lone Star could not be reached for further comment.
Korea's Financial Services Commission released a statement, which was quoted in local media, explaining that the Korean government had dealt with Lone Star’s investments in Korea in a clear and fair way with regard to local regulations and international laws and treaties.
The claim could develop into the Korean government's first legal challenge from an investor, local media reported.
The FSC said in a statement: “The government will closely review the problems raised by Lone Star and actively deal with them.”
In 2003, Lone Star bought 51 percent of KEB and tried several times to exit the investment but regulators only granted it permission to do so in late 2011. Lone Star sparked a public backlash in Korea, largely because many saw the firm making a massive tax-free return on the deal.
In October last year, The Seoul High Court ruled that Lone Star was guilty of manipulating the stock price of KEB during its 2003 acquisition of the business. The firm was fined $21 million by a Seoul court and its former Korea head, Paul Yoo, was sentenced to three years in prison.
In the Lone Star statement, John Grayken, chairman of Lone Star Funds, said, “When Lone Star made these investments, we were optimistic about Korea's ability to recover from the shock of the 1997-98 Asian financial crisis and believed we could rely on the Korean regulatory and tax laws to protect our interests in these investments.”
As Korea emerged from the economic crisis and KEB turned profitable, “financial and tax regulators responded with a series of illegal actions that resulted in billions of euros of damages to Lone Star's investors” Grayken said.
Lone Star Funds has historically attracted a number of public institutional investors, noted Grayken. These include the Los Angeles City Employees’ Retirement System, New York State Teachers’ Retirement System, Canada Pension Plan Investment Board and the Dallas Police and Fire Pension System, according to sister-data service PE Connect.
The image of private equity in Korea has suffered from negative public sentiment. However, the industry is rapidly growing.
Korea pulled in $8.2 billion in private equity investments in 2011, surprisingly the highest amount among all Asian countries, according to a study from the Private Equity Growth Capital Council.