South Korea Must Pay Lone Star Funds More Than $216 Million in Decadelong Case


SEOUL—The South Korean government must pay $216.5 million to a U.S. private-equity company, Lone Star Funds, relating to a decadelong legal dispute over the sale of a South Korean bank.

Wednesday’s ruling was the culmination of a long-running legal saga that pitted a foreign investor against the South Korean government. The case centered on Dallas-based Lone Star’s claim that its attempted sale of an ownership stake in the now-defunct Korea Exchange Bank— once South Korea’s fifth-largest bank—had been delayed by the Seoul government. Lone Star had previously argued that efforts to sell the KEB stake had been impeded by a series of South Korean legal and regulatory challenges.

Lone Star had filed the “investor-state” case in 2012 and originally sought $4.68 billion in compensation for lost profit and taxes. The dispute was handled by the World Bank-led International Center for Settlement of Investment Disputes, or ICSID, which oversees arbitration cases involving governments and investors. 

A Lone Star spokesperson said the company was pleased that the tribunal vindicated its fundamental claim, but it was disappointed at the size of the award, “which fails to fully compensate Lone Star and its investors for losses” that resulted from the Korean government’s conduct. The ICSID hasn’t shared the ruling publicly.

On Wednesday, South Korea’s Justice Ministry expressed regret at the international tribunal’s ruling and said it would actively work to dispute the decision. South Korea must also pay backdated and compounded interest—calculated from the one-month U.S. Treasury rate—on the damages amount. Both parties will have 120 days to file an application for annulment, according to the ICSID convention rules.

The South Korean government had previously denied all allegations that it acted improperly, and claimed it doesn’t discriminate against foreign investors. “We stand by our position that the approval process for Lone Star’s sale of KEB was conducted in a fair and equitable manner,” said South Korean Justice Minister

Han Dong-hoon

in a briefing.

Lone Star acquired a controlling stake in KEB for around $1.2 billion in 2003 when the bank was in poor financial shape, mirroring the country’s broader economic weakness following the Asian financial crisis. In 1997, South Korea had received a $55 billion bailout from the International Monetary Fund, its largest-ever rescue package at the time.

Once Lone Star wanted to sell off its KEB stake in subsequent years, the U.S. private-equity company stood to pocket billions of dollars in profit. That led to widespread South Korean backlash because of perceptions that a foreign investor would capitalize from the country’s weakest moment. 

Lone Star made multiple attempts to sell its KEB stake, including in 2008 to

HSBC Holdings PLC.

That same year, the former head of Lone Star’s South Korea unit was found guilty of stock-price manipulation relating to KEB’s credit-card unit. 

Lone Star eventually received regulatory approval to sell its KEB stake to South Korea’s Hana Financial Group Inc. in 2012 for 3.9 trillion won, or around $3.5 billion at the time.

South Korea’s financial regulator violated its duty of fair and equitable treatment as it didn’t have the jurisdiction to delay Lone Star’s attempted KEB sale in 2008, the ICSID ruled, according to the South Korea Justice Ministry. The ICSID, according to the ministry’s Korean-language summary, recognized that the regulator’s delay was linked to the criminal conviction of Lone Star’s former Korea head.

Lone Star argued that it had been pressured by the South Korean government to lower the 2012 selling price to Hana by around $433 million. The damages of $216.5 million represent roughly half of that amount, according to the Justice Ministry’s description of the ICSID ruling. 

Additionally, Lone Star had challenged South Korea’s tax rules, referring to an investment treaty between South Korea and Belgium—where Lone Star had based some of its operations. The tax-payment orders were compliant with global standards and not discriminatory, the ICSID ruled, according to South Korea’s Justice Ministry. 

Write to Jiyoung Sohn at jiyoung.sohn@wsj.com

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