2013

Lone Star: Lone Star case analyzed – Jurisdiction (Part 3)

In this part of the discussion regarding Korea’s investor-state dispute settlement system, I would like to introduce you – a potential foreign investor – a number of protections that are (and may become) available through the Lone Star case study.

As discussed in my previous blogs, Lone Star’s allegations are based on two events: (1) the fact that Lone Star sold KEB to Hana Bank at KRW 3.9 trillion, and; (2) the fact that Lone Star was taxed for the gains it earned on the sale of KEB.

As a first matter of importance, Lone Star’s claims are based on investor protections provided under the Korea-Belgium-Luxembourg Economic Union Bilateral Investment Treaty (“Korea-Belgium BIT”). There is a tendency to link Lone Star’s dispute with the Korea-US FTA, but this is simply false. Lone Star specifically alleged that Korea breached its international obligations as prescribed in the Korea-Belgium BIT.

Other than this preliminary remark, there are basically six main investor protection obligations that need to be analyzed.

Issue No. 1: Jurisdiction.

The issue of jurisdiction is an issue whether the investor-state dispute settlement system is a proper place for the Lone Star’s allegations. Simply put, I cannot take the Government of Korea to arbitration just because I want to. It takes two to tango in the world of arbitration (unlike national courts).

In this regard, the governments of Korea and Belgium agreed to enter into arbitrations with eligible investors if certain conditions are met. These conditions are set out in the Korea-Belgium BIT Article 8.

One that struck me the most was the prescription (time bar) clause:

“The investor is not entitled to submit a dispute for resolution… if more than five years have elapsed from the date the investor first acquired or should have acquired knowledge of the events giving rise to the dispute.”

Thus, in the context of Lone Star’s case, the cut-off time is likely to be early 2008 (“submission of a dispute” being the submission of Notice of Arbitration {“NOA”}, which must take place at least 6 months after the notification of Notice of Intent to Arbitrate {“NOI”}; and Lone Star submitted its NOI on May 21, 2012).

Simply, if Lone Star was (or should have been) aware of the problems (“events giving rise to the dispute”) before 2008, it’s out of luck. Too bad, but Lone Star sat on the issue for too long.

Putting this time bar provision in the context, the next logical question is whether Lone Star was aware of the basis of its allegations before 2008. So what is the basis of Lone Star’s allegations?

The first are the actions of the Government of Korea relating to the sale of KEB. Lone Star’s allegations, in this regard, appear to be based on two arguments: (1) that the FSC did not approve a number of proposed sales until it is sold to Hana Bank, and; (2) that the FSC stripped away Lone Star’s voting rights of its KEB share, thereby reducing the value it received from Hana Bank in the eventual sale of KEB.

The former appears to be standing on a shaky ground as it relates to the time bar. Lone Star’s sale was delayed once before 2008, in 2006 (the proposed sale to Kookmin Bank and DBS). It was delayed again and again post-2008, but the cited reasons for the delay were the same – the ongoing criminal investigation. Thus, it begs the question: did Lone Star not know of the problems before 2008? If it did not, should it have known them? If the answer is “Yes” to either, this allegation is too late.

The latter is based on an affirmative action taken by the Korean government – the FSC’s compliance order. This took place in late 2011, well after 2008. So surely, this order is within the time bar. However, the alleged effect of the compliance order is a reduction of KEB’s sale price from KRW 4.7 trillion to KRW 3.9 trillion, a KRW 0.8 trillion reduction in price, which translates into around EUR 540 million (Google conversion as of date of this posting). Even if you take this claim at its face value, it is hard to miss the overwhelming difference between this figure and the damages sought by Lone Star, which are “billions of euros.”

Lone Star’s second allegation relates to the capital gains tax withholding. Must like the compliance order, the tax withholding took place in 2012, undeniably post-2008. However, again, the total amount of tax withheld is KRW 431 billion, or EUR 290 million.

Once again, even at their face values, the total damages (sale of KEB and tax withholding) amount to EUR 830 million. It’s a large amount of money, do not get me wrong, but not nearly a billion euro, let alone “billions” of euro.

The difference might stem from Lone Star’s allegation based on the FSC’s delayed approval. Lone Star could be arguing that KEB was undervalued even at KRW 4.7 trillion, the original value agreed by Hana Bank. The problem is, as discussed earlier, that KEB’s sale was put on hold in a number of times before 2008.

A “delay,” by its nature, is difficult to measure – when does a delay start, and when does a delay end? That said, the Korean Government may find it easy to tell the Tribunal this: “they were delayed before for the criminal investigation before 2008, so they knew (or should have known) that any approval process would hit a roadblock while the same criminal investigation is still taking place.”

My next blog will explore further into the issues presented in the Lone Star case.

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