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Lone Star Files Claim Against South Korea

by Mary Swire,, Hong Kong

28 November 2012

Lone Star Funds, the private equity fund based in Dallas, has announced that it has notified the South Korean government of its intention to initiate arbitration proceedings in relation to its losses, including taxation, arising out of the Korean government's interference throughout the sale of its majority shareholding in Korea Exchange Bank (KEB).

Lone Star’s major concern underlying the investor state dispute (ISD) is with regard to the majority stake in KEB it bought for around EUR1bn (USD1.3bn) in 2003 after the1997-98 Asian financial crisis, and which it tried to sell for USD7.3bn to Kookmin Bank in 2006 and HSBC for USD6.3bn in 2008, before it finally accepted only some USD3.5bn in November 2010 from the Hana Financial Group.

All the way through the sale process, Lone Star’s investment was beset by legal disputes and a public backlash over the profit it was making out of the transaction. It has alleged that the South Korean Financial Services Commission (FSC) proved unwilling to approve a series of prospective buyers of the KEB, thereby forcing Lone Star to hold the stake many years longer than necessary, and to accept a much reduced price that caused substantial damage to its investors.

A major element to the claim arises out of what Lone Star has previously called the “arbitrary, unlawful and confiscatory taxation on the sales of (its) investments.” The South Korean government decided to impose a 10% withholding tax on the capital gains from the sales of Lone Star’s investments in the country which were held through a Belgian vehicle, despite the operation of the double tax agreement between Belgium and South Korea.

In addition, Lone Star has recorded that the investment treaty between Belgium and South Korea contains an ISD clause that should protect investors against unlawful government interference with their property rights, and provides for the international arbitration of disputes.

In a joint statement with the FSC, South Korea’s Ministry of Strategy and Finance confirmed that Lone Star had brought the lawsuit to the International Centre for Settlement of Investment Disputes arguing that South Korea violated the South Korea-Belgium investment agreement, but that the government “will aggressively defend itself against Lone Star’s unjust accusations.”

The FSC has previously asserted that it handled Lone Star’s investments according to domestic and international laws and treaties, both transparently and non-discriminately.

TAGS: court | capital gains tax (CGT) | Finance | tax | investment | business | private equity | double tax agreement (DTA) | Belgium | law | equity investment | investment treaty | agreements | withholding tax | Korea, South

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