Lone Star: Lone Star case analyzed – Fair and Equitable Treatment (Part 4)

Lone Star’s substantive allegations are comprised of 3 claims that are familiar to NAFTA countries and 2 that are more unique to the Korea-Belgium-Luxembourg Economic Union Bilateral Investment Treaty (“Korea-Belgium BIT”).

The first of the familiar-type claims is the claim under Article 2.2, which are obligations of fair and equitable treatment (“FET”). This provision is substantively identical to NAFTA Article 1105 and it has been one of the most frequently adjudicated provisions in NAFTA Chapter 11 disputes.

(*** I have assumed that the FET obligation in the Korea-Belgium BIT is FET as defined under the customary international law as with the FET obligation in the NAFTA. However, it is possible that the Tribunal would find the FET in the Korea-Belgium BIT as a stand-alone FET obligation***)

Despite the history of extensive adjudication, the obligations for FET remains to be one of the most ambiguous provisions. Partly, it is due to the construct of the provision – fairness and equitableness are in the eye of beholder. It may even be that the broad and flexible investor protection is what the negotiators precisely hoped to achieve.

That said, there are a number of aspects of FET that the tribunals have noted to date that are worthy of an emphasis in relation to Lone Star’s allegations. First, the test of unfairness and inequitableness are high standard test. In other words, an investor’s dissatisfaction alone does not constitute unfairness or inequitableness. How high exactly the standard is has not been resolved – some said that the alleged government action must be so offensive that it can be properly described as “shocking,” while others set the bar lower and found “offensive” actions (without more) to be sufficient.

In addition, unfair or inequitable treatments do not appear to be restricted by any specific list of actions. Rather, the degree of offensiveness of the treatment should be the determining factor. That said, there are certain government actions that are often found to be unfair or inequitable, such as: discrimination; arbitrariness; and breach of reasonable expectations.

Lone Star appears to make a FET claim against 3 distinct government actions: (1) the FSC’s refusal to approve the proposed sale of KEB; (2) the compliance order issued by the FSC; and (3) the NTS’s determination that Lone Star has had a PE in Korea.

The FSC’s Refusal to Approve the Sale of KEB

With respect to the action (1), Lone Star’s allegation is primarily that the FSC should have approved the deal. In other words, the law mandates the FSC to approve the deal within a given period, unless the FSC finds problems with respect to “the potential acquirer and the target subsidiary.”

Despite not knowing precisely what law is at issue (which is not detailed in Lone Star’s NOI), generally, the FSC appears to exercise a broad discretion in doing its job. For example, the “Banking Act” Article 15, subparagraph (5) governs the FSC’s approval of a person’s excess stock holding of a bank. According to this law, the FSC may reject the proposed excess stockholding on the basis of the (lack of) “possibility of contributing to the efficiency and soundness of banking business.” For another example, Article 4 of the Act on the Structural Improvement of the Financial Industry lets the FSC to determine whether a proposed bank merger is aimed “at rationalizing the financial industry and facilitating the restructuring of the financial industry, etc.”

One distinct characteristic of the FSC’s statutory power under these provisions is that the FSC has a policy room to decide whether the cited criteria are met, as these criteria are qualitative in nature (i.e. “efficiency and soundness of banking business” and “rationalization of the financial industry and facilitation of the restructuring of the financial industry”). As such, there is no basis to believe that the FSC was bound to approve the proposed sale of KEB because the cited issues with the deal was limited to Lone Star, the seller.

The FSC’s Compliance Order

With respect to the compliance order, Lone Star does not appear to dispute the fact that the FSC had an authority to issue a compliance order. Instead, it claims that the nature of the non-compliance, i.e. finding of guilt of financial crime, made such compliance impossible.

The assessment of this allegation requires details of the compliance order at issue – what does it say and was the compliance actually impossible? That said, it must be noted that the “compliance order” of the FSC does not inevitably and necessarily require an acquittal from the conviction (i.e. the “compliance” at issue is not a compliance with criminal law). According to the Banking Act Article 16-4, the “compliance order” requires a compliance with the Act Article 15, subparagraph (5). At a high-level, the compliance is achieved if the FSC is satisfied with the shareholder’s excess shareholding after considering the following factors:

  1. The possibility of undermining the soundness of the relevant bank;
  2. The propriety of the scale of assets and the financial standing;
  3. The size of credit granting from the relevant bank; and/or
  4. The possibility of contributing to the efficiency and soundness of banking business.

The implication is that Lone Star could have fulfilled the compliance order, subject to the details of the compliance requested by the FSC. In other words, Lone Star’s allegation that it could not comply with the compliance order due to the guilty verdict in a criminal trial per se is incorrect.

The NTS’s Finding of Permanent Establishment

Lastly, the issue of Lone Star’s capital gains taxes appears to have become moot (for now, at least) as a result of an appeal decision. Earlier in 2013, Korean court decided that Lone Star does not have a permanent establishment in Korea and that it is properly a US tax payer.


It is obvious that no meaningful analysis of the FET claim can be done with information that is currently available.

That said, even the preliminary observations contained in this blog suggests that Lone Star’s allegations are, at their face value, aggressive. Importantly, the FSC’s refusal to approve the sale of KEB and the issuance of the compliance order both appear to be within the proper power of the FSC.

The contention, thus, will be over the process/procedure by which the FSC decided to do what it did. Specifically, the Tribunal will ask questions such as:

  • Was the FSC justified in refusing the sale of KEB? Did it share these justifications with Lone Star and gave them the chance to cure the defects?
  • Why did Lone Star not fulfil the compliance order? Was the compliance order reasonably feasible for Lone Star to achieve?

In addressing these questions, the GOK will have the benefits of high threshold of breach of FET obligation. On the other hand, Lone Star will likely to bring the broader social and political context (eg: alleged anti-foreign-investment sentiment) to light.


Categories: 2013

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