“A good ending makes everything good as well,” or so goes an old saying in Hebrew. The raucous relationship between the Korean government and Lone Star, a Texas-based private equity fund, perhaps shows the converse is also true: A bad ending makes everything ugly. With the PEF’s delivery of a “notice of intent” to the Korean government under the Korea-Belgium Investment Promotion Treaty on May 22, the relationship is now heading to a point of no return. Perhaps it has already crossed it. 

In the notice, Lone Star expressed its intention to initiate an investment arbitration proceeding under the treaty alleging Seoul’s violation of the treaty provisions. The two agencies implicated in the notice are the Financial Services Commission, the nation’s financial watchdog, and the National Taxation Service, the nation’s tax authority.

Lone Star claims that it has suffered financial losses because of the FSC’s “unwillingness to approve a string of prospective buyers of the fund’s majority stake in the Korea Exchange Bank,” and the NTS’ arbitrary taxation on the sales of the investment. As the entire universe of claims of Lone Star has not been disclosed yet and as the merit of the claims will only be confirmed by a prospective investment tribunal, it is still too early to tell how the story will unfold.

In a sense, this latest episode makes us aware that the chapter of the 1997 financial crisis has not been closed yet. It was October 2003 that the U.S. fund acquired the controlling share of the KEB from Germany’s Commerzbank which had purchased the KEB shares in August 1998 in a fire sale in the wake of the 1997 financial crisis. For its part, Lone Star attempted to sell its shares to other banks in 2006 and 2008, but the deals fell through. A deal was finally sealed in this past January with Hana Financial Group with the sales price of $3.45 billion. The U.S. fund now blames the FSC for the two botched sales which may have offered a higher sales price. Again, the situation is murky and conflicting stories are being presented.

With the delivery of the notice of intent, the clock starts ticking for a 6-month cooling off period. It is still possible that the two disputing parties agree to settle during the period, but often times the filing of a notice of intent itself reflects that the efforts to settle have already been exhausted or that a possibility of an amicable solution does not look so promising. In practice, the six-month waiting period is like the two race cars revving their engines on the starting line waiting for the green signal. As fate would have it, if the dispute fails to be resolved during this 6-month window, the dispute then moves on to the formal dispute settlement proceeding, which means real action will take place in late November this year. It may then continue for the next two to three years. This evolution will force Korea to encounter its first international investment dispute ever.

In part hardened by the relentless national debates on investment disputes since last fall, the government agencies seem to show no signs of panic, which is in stark contrast to the situation in 1996 when Seoul encountered its first international dispute settlement proceeding on the trade front. The interviews of the FSC officials include mentions of a vigorous defense and business as usual. Considering the future implications of the first dispute, the Seoul government will have no other choice but to participate in the proceeding until the end. If Lone Star’s underlying intent was to threaten and wait for Seoul to budge, that would be misreading the crystal ball. Seoul’s general litigation-averse tendency doesn’t apply to an investment dispute at this particular juncture. Anyone who has read the Korean press since last fall would know that the government has only one choice in the area of an investment dispute, at least for the time being: Defend its case to the best of its ability and see what happens.

The fact that the Dallas-based fund used the Korea-Belgium investment treaty, originally signed in 1974 and revised in 2006, as a vehicle to drive its claim provides some food for thought. Multinational corporations, existing in multiple jurisdictions at the same time, have multiple treaty vehicles ready to go, and pick one that suits the road best. Focusing on a treaty with a particular country does not always extend a shield against this hassle: An armada of vehicles may still be available to these corporations from other treaties with other countries. Well, a company’s pursuit of the best forum available is nothing to blame. It only means a responding government’s defense becomes that much more difficult.

Lone Star’s 8-year stint in Korea has already brought a plethora of legal issues. An investment dispute will top them all.

By Lee Jae-min

Lee Jae-min is a professor of law at the School of Law, Hanyang University, in Seoul. Formerly he practiced law as an associate attorney with Willkie Farr & Gallagher LLP. ― Ed.