The first hearing of Lone Star Fund's investor-state dispute (ISD) case against the South Korean government, valued at about 5 trillion won ($5 billion), will be held at the International Center for Settlement of Investment Disputes (ICSID) in Washington, U.S., on Friday (local time). ISDs have been used by investors from developed countries to sue governments in developing countries since 1987, when Apple's Hong Kong subsidiary took on the Sri Lankan government. 

This is the first time a Korean government has been involved in an ISD. The consequences are far-reaching, so the government has formed a task force led by the Office of the Chief Cabinet Secretary. Lone Star, which acquired KEB Hana Bank after setting up paper companies in Belgium to avoid taxes, is also known to have used paper companies as its claimant, and the government is expected to focus on this point. 

○The first ISD case by the Korean government 

On November 21, 2012, Lone Star filed for arbitration with ICSID. The applicants (Claimants) are LSF-KEB Holdings, Star Holdings, and eight other entities. The entities are domiciled in Luxembourg in one case and Belgium in the other. The Korean government is fighting against a special purpose corporation (SPC) that is a paper company with no real substance. The case number is 'ARB/12/37'. It was the 37th arbitration case filed in 2012. On May 10, 2013, the arbitral tribunal was formed, with three arbitrators nominated by the Korean government and Lone Star. The witness list includes 26 former senior figures from the government and the financial sector, including former Prime Minister Han Deok-soo and former Financial Services Commissioner Jeon Kwang-woo and Kim Seok-dong.


Lonestar claimed $4.679 billion (about 5.1 trillion won) from the South Korean government for two reasons. The first is that the South Korean government intentionally delayed and harmed Lone Star Fund's plans to sell the bank to HSBC. Lone Star claims that this resulted in the sale of KEB to Hana Bank for KRW 3.915 trillion, which was significantly cheaper than when it was negotiating with HSBC. 

The second issue is taxation. Lone Star argues that the NIS's action of taxing the capital gains from the sale of KEB was unfair. Lonestar emphasizes that the entity that acquired and sold the bank is a Belgian-Luxembourg entity and does not have to pay taxes in South Korea because the Korea-Belgium-Luxembourg Investment Agreement prohibits double taxation.

The government counters that the Lonestar subsidiaries are "shell companies" with no substance and are not protected by the investment agreement.

○Govt. slightly more likely to win than investor 

The biggest concern is the outcome of the arbitration. The hearing on taxation is scheduled to take place on June 29, with a conclusion expected in the first half of next year at the earliest. According to the United Nations Conference on Trade and Development (UNCTAD), of the 119 cases decided between 1987 and 2007, 40 were won by investors and 42 by governments. Thirty-seven cases ended in bilateral settlements.  But the results of arbitration claims referred to ICSID from 2010-2012 have been more favorable to governments. Of the 90 cases brought to ICSID, 22 were concluded. Of these, the government won in 12 cases and the investor won in only two. "The biggest hurdle for the Korean government is that under Anglo-American law, the substantive law doctrine of estoppel is widely applied in international arbitration," said Byung-Deok Lim, counsel at Hanbyul Law Firm. "The biggest hurdle for the Korean government is that under Anglo-American law, the substantive law doctrine of estoppel is widely applied in international arbitration."