hankyoreh

US private equity fund Lone Star’s offices in South Korea. (Hankyoreh archives)

Hana Financial Holdings won a resounding victory in international arbitration on a claim from the US private equity fund Lone Star, which demanded over 1 trillion won (US$840.47 million) in damages for what it described as unreasonable pressure to lower prices in connection to the sale of Korea Exchange Bank (KEB).

While the South Korean government concluded that the ruling would not have a negative effect on an investor-state dispute (ISD) surrounding damages of over 5 trillion won (US$4.2 billion) demanded by Lone Star, observers are watching to see what practical effect it has going forward.

“At the International Court of Arbitration under the International Chamber of Commerce (ICC), we received a complete victory with a ruling to the effect that we bore no responsibility for damages,” Hana Financial said on May 15.

“Lone Star is also obligated to reimburse Hana Financial for all arbitration ruling costs and domestic and international legal costs it has borne to date,” the company said.

Lone Star previously submitted the case for international arbitration in August 2016, claiming that Hana Financial had improperly lowered the KEB sale price during its negotiations to acquire the bank by communicating that financial authorities would only grant easy approval if the price were low. Hana Financial initially signed a contract to pay a purchasing cost of 4.41 trillion won (US$3.71 billion) to acquire Lone Star’s 51.02% stake in KEB; according to Lone Star, the final contract a year later had to be signed for 3.92 trillion won (US$3.29 billion), or around 500 billion won (US$420.2 million) less, amid unfair pressure from Hana Financial to lower the cost. Lone Star initially set its compensation demand at 560 billion won (US$500 million) before increasing it to 1.6 trillion won (US$1.4 trillion) 10 months later.

According to a portion of the ruling shared by Hana Financial for reference purposes, the arbitration court concluded that Lone Star had no basis for its claim, as its decision was based not on any deception on Hana Financial’s part but on its own belief that South Korean authorities would not approve the purchase if the price was not reduced. The court went on to reject the claim that Hana Financial had applied pressure by indicating that no approval would be forthcoming without a price reduction, and to recognize Hana Financial as having engaged in sufficient cooperation and discussions with Lone Star without violating the terms of their contract.

With Lone Star’s claims rejected in their entirety, the next question is the impact the decision will have on its arbitration hearing against the South Korean government. In November 2012, Lone Star lodged a case against the South Korean government with the International Centre for Settlement of Investment Disputes (ICSID), demanding arbitration on a claim for US$4.67 billion in damages for alleged violation of the South Korea-Belgium investment guarantee treaty through improper administrative measures including sale postponement and arbitrary taxation.

“Hana Financial’s 100% victory means that Lone Star’s argument and chain of reasoning were not accepted, which we anticipate will not have a negative impact on the arbitration hearing with the South Korean government,” said Yoon Chang-ho, head of the Financial Services Commission financial industry bureau, in a talk with reporters the same day that was presumed to represent the government’s official position.

At the same time, Yoon cautioned, “In principle, the two trials operate independently, with completely different issues, parties, and legal bases.”

An official with one financial oversight institution said, “While Lone Star apparently claimed that Hana Financial invoked approval by financial authorities in applying pressure to lower the selling price, there was no questioning of the government as a third party in this case, so the factuality could not be objectively established.”

It remains to be seen whether Lone Star accepts the ruling.

“The arbitration rulings operate under a one-hearing system, and my understanding that a party that cannot accept a conclusion may file suit to overturn the arbitration ruling within 30 days through a local court in Singapore,” a Hana Financial source said.

“The overall gist of the ruling and the fact that the court even ordered Lone Star to pay our legal costs is a sign that Lone Star went overboard,” the source added.

By Jung Se-ra and Park Su-ji, staff reporters

Please direct comments or questions to [english@hani.co.kr]