At this point, I only have the Lone Star’s version of the story as reported in its Notice of Intent to Arbitrate (“NOI”) submitted In May 2012, which is found at here . In this blog, I will summarize the key facts and allegations made available by the company on the NOI.
The company firstly takes an issue with series of failed attempts to sell KEB and the eventual sale of KEB at what is alleges to be a discounted price. The details relating to this issue are as follows:
- In September 2003, the Financial Supervisory Commission (“FSC”) approved Lone Star’s acquisition of KEB;
- In November 2003, Lone Star merged KEB with KEB’s failing credit card arm, KEBCS;
- In May 2006, Lone Star agreed to sell its stake in KEB to Kookmin Bank for KRW 6.3 trillion. However, the FSC did not approve the transaction due to a number of regulatory and criminal investigations relating to Lone Star’s acquisition of KEBCS;
- In June 2007, Lone Star sold 13.6% of KEB’s shares on the open market;
- In late 2007, HSBC expressed its interest to buy Lone Star’s remaining shares of KEB for KRW 6 trillion. However, by September 2008, the FSC did not provide the requisite approval for the sale. The reason cited was an ongoing criminal/regulatory investigation. The deal fell down as a result;
- In December 2010, there was a sale agreement of KEB between Lone Star and Hana Bank for KRW 4.7 trillion, pending the FSC approval. The FSC did not approve of the transaction due to the ongoing investigation;
- In March 2011, a Lone Star executive/officer was found guilty by the Supreme Court for manipulating the stock price of KEBCS when it was merged with KEB;
- In October 2011, Lone Star was found vicariously liable for its executive/officer’s wrongdoing;
- Throughout late 2010 to late 2011, including the period after the completion of the investigation, the FSC did not approve the Lone Star’s sale of KEB to Hana Bank. Instead, the FSC issued a compliance order following the finding of vicarious liability in November 2011, which had an effect of stripping Lone Star’s voting rights in excess of 10% of KEB’s shares;
- In December 2011, Lone Star agreed to sell KEB to Hana Bank for KRW 3.9 trillion, a KRW 0.8 reduction from the original sales value of KRW 4.7 trillion;
- In January 2012, the FSC approved the sale.
Secondly, the company takes an issue with Korean authority’s assessment of taxes. The details with respect to this issue are as follows:
- In 2005, the NTS assessed KRW 112 billion in capital gains tax in connection with the sale of Star Tower;
- Under the Korea-Belgium Tax Treaty, the capital gains earned by a Belgian investor in Korea is to be taxed by the Belgian authorities, not Korean;
- Although the NTS found that the investor did not have a permanent establishment (“PE”) in Korea, it found that that the ostensible Belgian investor was not a true investor. As a result, the NTS assessed the taxes against Lone Star partnerships located in the US and Bermuda, who indirectly owned Star Tower through the Belgian investor. Notably, Korea-US Tax Treaty did not apply because Star Tower was in real estate business;
- In 2007, Lone Star incurred capital gains on sales of its other assets, which allegedly had similar ownership structure as the Star Tower. However, the NTS found these assets to be PEs in Korea. According to the Lone Star’s theory, the NTS found so because these assets were not in real estate business, and as a result, they will be exempted from Korean tax under the Korea-US Tax Treaty;
- In 2012, the NTS ordered Hana Bank to withhold taxes of KRW 431 billion against capital gains earned by Lone Star in its sale of KEB. Lone Star alleges that the withholding order was issued only if the NTS determines the seller to be a PE.
Based on these facts, Lone Star alleges that the Government of Korea breached the following obligations under the Korea-Belgium-Luxembourg Economic Union bilateral investment treaty:
- Article 2.2: Obligations of fair and equitable treatment, and full and continuous protection and security;
- Article 2.3: Prohibition of impairment by arbitrary and discriminatory measures the operation, management, maintenance, use, enjoyment or disposal of investments;
- Articles 3.1 and 3.2: Obligations of treatment no less favourable than that accorded to investments and returns of Korean investors or investors of any third state, and that accorded to Korean investors or investors of any third state;
- Article 5: Prohibition of uncompensated expropriation; and
- Article 6: Obligation to guarantee to investors the free transfer of their investments and returns.