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U.S. Private Equity Fund, Lone Star, Sent a Letter to Korean Government Notifying Potential Lawsuit for Damages by KEB Sale Deferment?

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Last week, Korean government announced that it would initiate reviewing process for the approval of KEB sale soon.  Interestingly enough, today it was reported also that before the government’s announcement, Lone Star Fund had sent an official letter to Korean government regarding government’s approval issue on the long-waited sale of Korea Exchange Bank(KEB) from Lone Star Fund to HSBC bank.  Lone Star Fund and HSBC had entered into the stock purchase agreement and the deadline of the agreement is coming on the end of this July.  It was reported that Lone Star Fund stated in that problematic letter that if the Korean government kept delaying the approval, the fund would file a lawsuit domestically and internationally against Korean government for the compensation of damages by the sale’s deferment(here is a news article).

Well, someone, especially western people, can say that there would be no problem in sending a letter to the other party noticing potential legal disputes.  However, it is quite unusual in Korean legal culture that a private enterprise warns the government stating otherwise it would sue the government.  Of course, it is legally acceptable and in some cases a statutory right of a private enterprise, to file a lawsuit against the government, but culturally it is not common to take this kind of open and public action to press the government hard in Korea.

By the way, as a matter of law, the fund would be permitted to file a lawsuit to a Korean court, however the chances are that the fund would not win the case.  Under Korean law, in order for the fund to win the case, the fund must prove there have been an unlawful act of Korean government in delaying the approval.  But, the approval itself is a right, not a obligation, of the government provided by the law and there have been lawsuits affecting the validity of the ownership of KEB by the fund, which have made Korean government hold the approval procedures until the courts make decisions.

However, an actual lawsuit between internationally renowned private equity fund and Korean government regarding private investment transaction in Korea could harm Korea’s credential in international investment and financing markets.  That is what the Korean government might be paying attention to.

© 2008 Wonil Chung, a Korean Corporate Lawyer/Chung & Partners, a Korean Corporate Law Firm.  All rights reserved. Some copyrights, photos, icons, trademarks, trade dress, or other commercial symbols that appear on this post are the property of the respective owners.

Author: chungwi

Korean Licensed Lawyer

2 thoughts on “U.S. Private Equity Fund, Lone Star, Sent a Letter to Korean Government Notifying Potential Lawsuit for Damages by KEB Sale Deferment?

  1. Thanks “NYC Observer” for comments.

    I added a source in the 1st paragraph.

    I used the word “problematic” in a Korean socio-cultural context, rather than legal context. It is quite unusual and actually did provoke some controversies in Korean society, something like “how could the government yield to a foreign investment fund’s threat(or opinion letter)?”. Although the gov. is denying such a criticism, it can be said that the fund’s exceptional letter is making some resistances from “some” Korean people.

    Regarding the actual meaning of the “review”, I have to say how the law provides it. According to the Banking Act of Korea, “the same person shall not hold stocks of a financial institution [such as KEB] in excess of 10/100 of the total number of its issued voting stocks”. However “the same person may hold the stocks for the excess of the limit(i.e. 10%) with approval of the Financial Supervisory Commission”. So it would be more accurate to state the “reviewing process” is of the approval of Stockholding.

    Regarding another issue whether the delay is baseless and/or in bad faith, it is hard to say whether it really is. The reason lies in the current legal uncertainty, I think. There the lawsuits which might have some potential (negative) effects on Lone Star’s KEB acquisition and/or current KEB sale deal are still going on and, as I will deal in a new post, the Korean laws give somewhat broad discretionary power to the government in the approval process. Those will make the Korean court hesitate to admit government’s unlawful acts and/or it’s wilfullness and neglegence thereon, which are required for the Lone Star to prove to get monetry compensation, if the Fund really intends to file a lawsuit.

    Regarding your last comment, yes, currently there is no lawsuit between the fund and the gov. I wrote it assuming the situation where the lawsuit would be actually filed by the Fund. I corrected it properly.

  2. Could you state source for this post? Couldn’t locate original article and would like to know more specific details.

    As for this post, I find it curious that you describe the letter as “problematic” – please explain? Also, it would be more accurate to state that (1) review process is of proposed SALE, and not APPROVAL of it; (2) issue not so much actual delay but fact that such delay may be ultimately baseless and/or in bad faith; and (3) there is POSSIBILITY of lawsuit, not “fact that there IS”(in last paragraph).

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