Lone Star suit against Korea stirs debate

Lone Star Funds last week filed for international arbitration against the South Korean government, charging that it violated the bilateral investment treaty between South Korea and Belgium/Luxembourg during the time Lone Star was invested in Korea Exchange Bank, according to a company statement.

Lone Star is a US-based firm, but its investment in KEB came through a Belgium treaty.

In response, Korean officials said the government “intends to commit its energies fully to the arbitration going ahead, actively demonstrating the illegitimacy of Lone Star’s argument before the international court of arbitration”, according to local reports.

Lone Star's legal action is the culmination of its controversial nine-year investment in KEB beginning in 2003, as PE Asia reported earlier. After several scrapped exit attempts and an increasingly adversarial relationship with the Korean government, Lone Star was found guilty of stock price manipulation in October 2011. 

Around the same time, Korean regulators permitted the firm to exit the investment and Lone Star did not appeal the ruling. The firm finally sold its stake in KEB to Hana Financial Group in February 2012.

In May, Lone Star announced its intention to take legal action.

“Though we sought discussions with the South Korean government following our May 2012 notice, an amicable resolution to this dispute has not been possible,” said Michael Thomson, general counsel of Lone Star Funds, in the statement. “Given our duties to our investors, we are obliged to proceed to arbitration with the claims set out in our notice.”

The international arbitration claim, South Korea’s first investor-state dispute (ISD), has stirred public debate and has been used to oppose the Korea-US Free Trade Agreement that took effect in March.

Local media had mixed reactions to the legal action. 

The Hankyoreh newspaper quoted a legal expert specialising in trade as saying the lawsuit opened national economic policies to international interference: “In addition to the concerns about similar lawsuits to come, it also shows how the South Korean government now has to consider the possibility of investor-state disputes when formulating its national policy.”

However, the Korea Joongang Daily noted that Lone Star’s legal action underscored the importance of playing by international rules. “The ISD serves to protect investors and prevent abuse of investment treaties and we will likely to see its service much more due to reciprocal investments in globalised world.”