{"id":2201441,"date":"2023-06-21T19:22:37","date_gmt":"2023-06-21T10:22:37","guid":{"rendered":"https:\/\/koreapro.org\/?p=2201441"},"modified":"2023-11-20T17:50:33","modified_gmt":"2023-11-20T08:50:33","slug":"how-us-investors-court-victory-over-south-korea-could-spur-financial-reform","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2023\/06\/how-us-investors-court-victory-over-south-korea-could-spur-financial-reform\/","title":{"rendered":"How US investors\u2019 court victory over South Korea could spur financial reform"},"content":{"rendered":"
The partial victory of Elliott Investment Management (EIM), an American investment management firm, against the South Korean government at an international tribunal in the Hague may herald a broader shift in the country\u2019s corporate governance and investment climate.<\/span><\/p>\n The Permanent Court of Arbitration ruling <\/span>mandates<\/span><\/a> that South Korea disburse roughly $108.5 million in damages and legal fees to EIM, substantially lower than the firm\u2019s original claim of <\/span>$770 million<\/span><\/a>. This claim arose following the contentious <\/span>merger<\/span><\/a> of two Samsung affiliates, Cheil Industries and Samsung C&T, in 2015.<\/span><\/p>\n EIM was a minority shareholder at the time of the merger, with a 7.1% stake in Samsung C&T, and staunchly resisted the move. It argued that the merger aimed to consolidate the influence of Lee Jae-yong, then the vice president of Samsung Electronics, over the conglomerate\u2019s subsidiaries.\u00a0<\/span><\/p>\n Despite EIM\u2019s opposition, the merger proceeded with the endorsement of South Korea\u2019s National Pension Service (NPS). The NPS, with an <\/span>11.21%<\/span><\/a> stake in Samsung C&T \u2014 substantially larger than that of EIM \u2014 was seen as the deciding vote. EIM <\/span>contended<\/span><\/a> that this move violated the <\/span>U.S.-Korea Free Trade Agreement<\/span><\/a>.<\/span><\/p>\n Central to EIM\u2019s argument was the assertion that the merger undervalued Samsung C&T\u2019s shares while inflating those of Cheil Industries. Further, EIM <\/span>accused<\/span><\/a> the South Korean government of acting unfairly by favoring a \u201cdomestic corporate chaebol family over an unpopular foreign investor.\u201d<\/span><\/p>\n Chaebol refers to the massive, predominantly family-run conglomerates that dominate the South Korean business landscape.<\/span><\/p>\n CORPORATE GOVERNANCE<\/b><\/p>\n EIM\u2019s claim highlights underlying issues within South Korea\u2019s corporate governance structure. The power held by conglomerates and the potential for government corruption and interference in corporate matters are key issues. These concerns were thrust into the limelight following the <\/span>impeachment and removal<\/span><\/a> of former South Korean President Park Geun-hye on bribery allegations linked to the merger.<\/span><\/p>\n South Korean prosecutors <\/span>argued<\/span><\/a> in 2017 that Lee Jae-yong and other former Samsung Group executives offered bribes to <\/span>Choi Soon-sil<\/span><\/a>, Park\u2019s longtime confidante.\u00a0<\/span><\/p>\n In exchange, they allegedly received political backing and governmental support for the controversial 2015 merger. Prosecutors asserted that this merger effectively transferred control of the company to Lee from his father at the expense of other shareholders.<\/span><\/p>\n Subsequently, a Seoul court <\/span>sentenced<\/span><\/a> Moon Hyung-pyo, a former minister of health, to 2.5 years in prison for illicitly pushing the NPS to endorse the $8 billion merger. The health ministry oversees the NPS, which held substantial stakes in both companies involved in the merger.<\/span><\/p>\n The South Korean government\u2019s perceived favoritism toward domestic companies, in contrast to foreign investors, raises questions about the country\u2019s investment climate and whether it is fair or transparent.\u00a0<\/span><\/p>\n It\u2019s also not the first case in which outside investors have apparently gotten the raw end of a Korean business deal. Lone Star Funds, a U.S. private equity firm, secured <\/span>$216.5 million<\/span><\/a> in damages from South Korea in 2022 over a similarly contentious deal involving the now-defunct <\/span>Korea Exchange Bank<\/span><\/a> (KEB).<\/span><\/p>\n Lone Star alleged that its 2007 <\/span>plan<\/span><\/a> to offload a controlling stake in KEB to global banking giant HSBC was <\/span>stymied<\/span><\/a> due to delayed approval by Seoul\u2019s financial regulatory authorities. Lone Star acquired the KEB stake for $1.06 billion (1.38 trillion won) in 2003, with plans to sell it to HSBC for approximately $4.6 billion (5.94 trillion won).\u00a0<\/span><\/p>\n However, the firm eventually had to offload it to Seoul-based Hana Financial Group for roughly $3 billion (3.9 trillion won) in 2012. Lone Star argued that the ROK government intentionally stalled approval of the deal, denying the firm \u201cfair and equitable treatment.\u201d<\/span><\/p>\n The Lone Star ruling garnered significant attention in South Korea, primarily due to the alleged involvement of several incumbent high-ranking officials.<\/span><\/p>\n Allegations surfaced in 2022 that Prime Minister Han Duck-soo was <\/span>paid<\/span><\/a> $116,000 (150 million won) between Nov. 2002 and July 2003 while serving as an adviser for South Korean law firm Kim & Chang, which represented Lone Star during that period.<\/span><\/p>\n