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The Ambivalent Changes In Foreign Investment Market Condition Of South Korea In The Post-IMF Era

Lawrence Lee is a third-year student at the University of Pennsylvania Law School. Prior to attending the law school, he received a PhD from University of California, Los Angeles and a BA from University of California, Berkeley. The author wishes to thank Professor William Burke-White for the valuable guidance provided during the course of writing this Comment.

Introduction

In November 2011, a liberal lawmaker exploded tear gas in front of the speaker’s chair at the National Assembly of South Korea (“Korea”) in a futile attempt to stop the conservative majority party from ratifying the South Korea-U.S. Free Trade Agreement (the “KORUS FTA”).01South Korea Passes U.S. Free-Trade Agreement, Lawmaker Sets off Tear Gas Canister in Protest, FoxNews.com (Nov. 22, 2011), http://www.foxnews.com/world/2011/11/22/south-korea-passes-us-free-trade-agreement-lawmaker-sets-off-tear-gas-canister.html. The “most commercially significant [FTA] in almost two decades,”02Office of the United States Trade Representative, New Opportunities for U.S. Exporters Under the U.S.-Korea Trade Agreement (last visited May 5, 2016), https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta. the KORUS FTA was designed to “liberaliz[e] and expand[] trade and investment between the two countries.03Free Trade Agreement Between the United States of America and the Republic of Korea, June 30, 2007, available at https://ustr.gov/sites/default/files/uploads/agreements/fta/korus/asset_upload_file755_12697.pdf. The single issue the opposing party raised concerned the dispute settlement provision, which, the party contended, “would allow investors to take disputes falling under the agreement’s jurisdiction to a U.S.-influenced international arbitration panel.”04South Korea Passes U.S. Free-Trade Agreement, supra note 2.

This argument reflects the public’s concern over Korea’s uneven bargaining power vis-à-vis economically powerful countries, in contrast with the government’s consistent policy advocating foreign capital market liberalization. The concern, which has often taken the form of hostility towards foreign investors, materialized when Lone Star Funds filed the first-ever investment arbitration action against Korea in 2012 alleging violation of the fair and equitable standard under the BLEU05Belgium-Luxembourg Economic Union. -South Korea Bilateral Investment Agreement (the “BLEU-Korea BIT”).06LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/37. In this case, the petitioner claims that the government caused economic damages by blocking the petitioner’s plan to dispose of its majority shares of a Korean bank due to a pending domestic court case to determine whether the petitioner was initially eligible to acquire the bank. This arbitration not only demonstrates the types of investor behavior the Korean public resents, but also reveals how the public distrust towards foreign investment could in turn encourage questionable government actions vulnerable to potential liabilities.

One of the Four Asian Tigers,07The Four Asian Tigers or Asian Dragons refer to Hong Kong, Singapore, South Korea, and Taiwan, all of which accomplished rapid economic growth between the 1960s and 1990s. South Korea grew from one of the poorest nations to the world’s eleventh largest economy by nominal GDP in about three decades.08See The World Bank, World Development Indicators (last updated May 2, 2016), http://data.worldbank.org/data-catalog/world-development-indicators (charting the nominal GDP among other economic indices by year). This apparent economic prosperity, however, came to an abrupt end when the government sought emergency financial aid from the International Monetary Fund ( “IMF”) to avoid sovereign default during the 1997-98 Asian Financial Crisis ( “Financial Crisis” or “Crisis”). Since then, the government has progressively deregulated foreign investment across nearly all market sectors to keep pace with the world economy. In contrast, the public worries that international investors might reap most of the benefits from the economic recovery in the form of capital gains while the domestic economy continues to suffer due to the “drainage” of national wealth and the unregulated capitalistic market reforms that place domestic mid- to small-sized businesses at heavy disadvantages.

Despite these widespread fears, neither a positive nor negative effect of foreign investment on the Korean domestic economy has been conclusively demonstrated. Furthermore, reliance on foreign investment and market liberalization was inevitable when the nation itself was facing bankruptcy. In fact, although the Crisis at least partially stemmed from the government’s risky foreign investment policy of inducing capital inflows and hazardous investment behaviors of corporate conglomerates, it was in turn solved with the help of outside funds. As such, capital inflows has been a sina qua non to restore and further advance the economy, and the dispute resolution mechanism of the investment treaty, while not perfect, served as an incentive for the government to adopt consistent policy and enforcement measures to effectively police the funds.

Part I of this Comment summarizes the history leading up to the 1997-98 Financial Crisis in Korea. Part II observes the government reforms of foreign investment law as well as the concerns raised by academia and the public about market liberalization, foreign investments, and international investment treaties. Lastly, Part III looks closely into the headlining Lone Star arbitration case to illustrate how the discord between the government policy and the public perception culminated in Korea’s first investment arbitration case. The Comment concludes by revisiting the KORUS FTA and suggesting the arbitration provision is ultimately beneficial.

Part I: A Brief History of the 1997 IMF Crisis in South Korea

From 1991 to 1996, the Korean government adopted a series of steps to achieve capital market liberalization and deregulation in response to the growing currency account deficit and to satisfy the prerequisites for membership in the OECD.09The currency account deficit quadruped to $8.7 billion within a year from 1990 to 1991. See Kim Kihwan, The 1997-98 Korean Financial Crisis: Causes, Policy, Response, and Lesson, presentation at The High-Level Seminar on Crisis Prevention in Emerging Markets 3 (July 2006), https://www.imf.org/external/np/seminars/eng/2006/cpem/pdf/kihwan.pdf (hereafter “Kim”). The relaxation of restrictions on asset and liability management of financial institutions to encourage capital inflows, combined with the increased cap on individual investment and the weak accounting and disclosure standards for short-term borrowing, caused an unprecedented amount of short-term foreign-currency debts.10By 1996, the short-term external debts accounted for 61% of total external debts, 80% of which financed 70% of long-term assets. Id. at 3-5. The total short-term external debts in the amount of $63.8 billion in 1997 dwarfed the $9.1 usable gross foreign reserves. A substantial portion of the short-term foreign-currency debt funded long-term Greenfield investments, resulting in the currency and maturity mismatches often referred to as the double-mismatch problem.11However, some empirical studies challenge the notion that maturity mismatches necessarily lead to capital flights in emerging markets including East Asia. See generally Hoyt Bleakley & Kevin Cowan, Maturity Mismatch and Financial Crises: Evidence from Emerging Market Corporations, 93 J. Dev. Econ. 189 (2010), http://www.frbsf.org/economic-research/files/paper-bleakly.pdf. For example, many chaebol12A “chaebol (재벌/財閥),” is a South Korean business conglomerate, often owned by a single family and characterized by its authoritative and centralized management style. See Dictionary.com, http://www.dictionary.com/browse/chaebol?s=t. High chaebol leverage stemming from preferential access to credit and tax-deduction in connection with debt-related expenses resulted in 500% average debt-equity ratio, which doubles the OECD average. See Kim, supra note 2, at 6. -owned merchant banks borrowed cheap short-term Japanese funds from Hong Kong to finance long-term investment projects.

Meanwhile, the illusion of economic growth with the average annual growth rate of 7-9% in the mid-90s blinded the country with optimism in spite of the risky investment behaviors.13Kim, supra note 2, at 6. Overinvestment in the corporate sector financed by short-term debt rapidly increased nonperforming assets, facilitated by the government’s liberalization policy.14Yoon Je Cho, The Financial Crisis in Korea: Causes and Challenges, Asia Regional Integration Center, https://aric.adb.org/pdf/aem/external/financial_market/Republic_of_Korea/korea_mac.pdf. When the US Treasury, with Robert Rubin newly in charge, decided to make the US dollar stronger in comparison to the Japanese yen in 1997, the dried up flow of Japanese direct investment rapidly instigated currency crises in South Asia, including Hong Kong.15Kim, supra note 2, at 7. Furthermore, in light of the dire condition of the economy and public pressure, the government could no longer bail out chaebols, and a chain of bankruptcy filings among chaebols ensued.

As a result, the South Korean government sought official assistance from the IMF in November 1997, and avoided sovereign default with $57 billion in financial aid from the IMF, other multilateral institutions, and countries. In return, the IMF oversaw a massive market liberalization of the South Korean market, ushering in an unprecedented amount of foreign capital and ensuring similarly extensive protection of foreign investors. With the foreign aid, the economy eventually recovered; however, Korea has consistently shown ambivalence towards foreign investment.

Part II: Post-IMF Changes in Foreign Investment Policy and Concern About Arbitration

Prior to the Crisis, the Korean government took a conservative and selective approach to market liberalization, primarily due to the risks associated with the difference in interest rates, as often was the case in emerging markets.16See Yeon-ho Lee, Capital Liberalization under the IMF Program (title trans. by author, original title: IMF 프로그램 하의 자본자유화) (2007) (last visited May 5, 2016), http://www.archives.go.kr/next/search/listSubjectDescription.do?id=006736. However, in its letter of intent sent to the IMF on December 4, 1997, the government, as part of its comprehensive reform package, promised to accelerate “liberalization of capital account transactions.”17Letter from South Korea to the International Monetary Fund (Dec. 3, 1997), https://www.imf.org/external/np/loi/120397.htm. The solution agreed upon by the government and the IMF for the failed policy of the Kim Yong-Sam administration was to move even further beyond the old developmental state model.18Judith Cherry, Foreign Direct Investment in Post-Crisis Korea: European Investors and “Mismatched Globalization” 81 (2007).

The government indeed made “sweeping reforms in major sectors of the Korean economy that aimed to establish a free market economy based on neoliberal principles and continued the process of bringing Korea’s institutions, systems and regulations into line with international standards.”19Id. The restructurings spanned “a spectrum of corporate and financial sectors and markets, including corporate governance, accounting, banking, monetary policy, foreign exchange, capital markets, bankruptcy law, and financial supervision.”20Jongmoo Jay Choi & Michael G. Papaioannou, Financial Crisis and Risk Management: Reassessing the Asian Financial Crisis in Light of the American Financial Crisis, 5 U. Pa. E. Asia L. Rev. 442, 449 (2010). For example, in addition to removing the foreign investment cap, the government now allows a foreigner to acquire 100% stock of a company without board approval.21See Parliament to Pass Four IMF-Related Bills: Foreign Investment Law and Others to Become Effective Next Week (title trans. by author, original title: 국회 IMF법안 4건의결: 외국인투자법등 내주 시행), Korea Joongang Daily (May 14, 1998), http://news.joins.com/article/3644040 (reporting the National Assembly’s passage of four IMF-related bills on foreign investment law, securities exchange law, banking law, and employment law). Although the new law even allows hostile takeover by a foreigner, no hostile takeovers have occurred because the government is yet to implement relevant regulations, and because of the unfriendly political environment with respect to hostile takeovers. See U.S. Department of State, 2015 Investment Climate Statement – Republic of Korea (May 2011), http://www.state.gov/e/eb/rls/othr/ics/2015/241618.htm (noting FDI in Korea is at times subject to “insufficient regulatory transparency, including inconsistent and sudden changes in interpretation of regulations, high labor costs, an inflexible labor system, and significant economic domination by . . . chaebol”). To keep pace with the securities exchange practices of the world, the government adopted a number of structural reform measures including implementing a fair disclosure standard under the Korean Securities and Exchange Act.22See generally Kwang-Rok Kim, Recent Intensification of Investor Protection in the Korean Securities Market: The Mandatory and Fair Disclosure Systems, 12 Pac. Rim L. & Pol’y J. 653 (2003). As a result of the restructurings and regulatory reforms, a number of chaebols either dissolved or split into smaller groups.23See Choi & Papaioannou, supra note 21, at 448-49 (reporting that three out of ten chaebols—Daewoo, Ssangyong, and Donga—had disappeared and Hyundai Group had split into Hyundai Motors group and two smaller Hyundai groups). Moreover, a number of banks underwent consolidation.24Id. at 449 (“Eight of the ten largest banks either merged or acquired other smaller banks to produce the three largest, and presumably more competitive, banks”).

The impact of the restructurings and reforms has been generally positive.25For more information on the positive effect of market liberalization in general, see generally Peter Blair Henry, Stock Market Liberalization, Economic Reform and Equity Market Prices, 55 J. Fin. 529 (2000). For example, the reforms resulted in overall lower corporate leverage,26See Choi & Papaioannou, supra, note 21, at 448 (noting the average drop in debt-asset ratio for the ten largest Korean corporations dropped from 73.6% in 1997 to 42.5% in 2007). and board independence has had “significant and positive effects on firm performance in post-crisis Korea.”27Jongmoo Jay Choi, Sae Woon Park & Sehyun Yoo, The Value of Outside Directors: Evidence from Corporate Governance Reform in Korea, 42 J. Fin. Quant. Anal. 941 (2000) (providing evidence in support of the positive impact of outside directors and board independence for Korea in the aftermath of the Asian financial crisis). On the other hand, the sweeping reforms also have had allegedly negative side effects. In addition to opening the market to foreign direct investments (“FDI”)28The general beneficial, albeit sector-dependent, impact of FDI on the growth of domestic economies has been demonstrated empirically. For more information on empirical studies on various markets, see generally Brian J. Aitken & Ann E. Harrison, Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela, The Amer. Econ. Rev. 605 (1999), http://siteresources.worldbank.org/INTTRADERESEARCH/Resources/544824-1282767179859/Venezuela.pdf (Venezuela); Abdul Khaliq & Ilan Noy, Foreign Direct Investment and Economic Growth: Empirical Evidence from Sectoral Data in Indonesia, working paper (2007) http://www.economics.hawaii.edu/research/workingpapers/WP_07-26.pdf (Indonesia); Anis Omri, Bassem Kahouli, The Nexus Among Foreign Investment, Domestic Capital and Economic Growth: Empirical Evidence from the MENA Region, 68 Res. in Econ. 257 (Sept. 2014), http://www.sciencedirect.com/science/article/pii/S1090944313000537 (the Middle East and North Africa region). except in a few market sectors, the reform also liberalized foreign portfolio investments (“FPI”) virtually across the board.29See Si-Won Jin, The South Korea-US FTA and Problems of Foreign Investment Structures in South Korea 2 (title trans. by author, original title: 한미 FTA와 우리나라 외국인투자 구조의 문제점) (2005). FPI, which is often speculative and short-term in nature, heavily outbalanced relatively stable and long-term FDI.30Id. at 3, 5. In 2004, FPI accounted for 51.1% of foreign investment, whereas only 21% was FDI. See The Bank of Korea, The 2004 International Investment Position (IIP) Report (2004). Foreign investors began to dominate the Korean capital markets, reaching over 40% ownership of total assets in 2003, which was significantly high compared to the total foreign ownership of other countries at the time, such as the United States (11%) and Japan (19%).31See Jin, supra note 30, at 4-5; see also Philip Bowring & Int’l Herald Tribune, Foreign vs. Local Investment: Who Owns South Korea?, The New York Times (July 20, 2004), http://www.nytimes.com/2004/07/20/opinion/foreign-vs-local-investment-who-owns-south-korea.html?_r=0 (“Foreigners now own most of the commercial crown jewels of South Korea . . . now [accounting] for 44 percent of the total Korea stock market capitalization of around $[166] billion”). While the effect of foreign equity ownership on local markets is a hotly debated topic, empirical studies generally show positive correlations between foreign ownership and company performances. See generally Jongmoo Jay Choi & Sean Sehyun Yoo, Foreign Capital and Local Firms: The Effect of Foreign Ownership and Management on Corporate Performance, paper presented at the Third EMG Conference on Emerging Markets Finance (May 5, 2011), https://www.cass.city.ac.uk/__data/assets/pdf_file/0005/86639/Jongmoo-Jay-Choi.pdf (demonstrating empirically that foreign equity ownership “positively affects firm performance, countering or complementing the negative or insignificant influence of local institutions such as family, institutional investors or business groups”). Cf. Roger D. Huang & Cheng-Yi Shiu, Local Effects of Foreign Ownership in Emerging Financial Market: Evidence from Qualified Foreign Institutional Investors in Taiwan, 38 Fin. Mgmt. 567 (2009) (demonstrating empirically that foreign ownership in Taiwan is positively associated with firm R&D expenditures and contemporaneous and subsequent firm performance).

Scholars worry that an alarmingly high ratio of foreign FPI could hurt the domestic economy.32See Jin, supra note 30 at 7 (listing the potential risks foreign investment might bring to the Korean domestic economy). Among the worries are the risks that only large banks would survive the competition; domestic financial institutions might lose their competitiveness; small businesses and small-loan finance companies would suffer from the profit-driven management style; the risk of capital withdrawal; and serious drainage of national wealth due to a large amount of dividends and capital gains.33Id. The hostile public sentiment34There is a plethora of reports on the local sentiment against foreign investors. See, e.g., Song Jung-A, S Korea FDI: Worth a go?, Beyondbrics (Jun 29, 2012), http://blogs.ft.com/beyond-brics/2012/06/29/s-korea-fdi-worth-a-go/ (noting “some hostile public sentiment toward foreign buyers” remained as of 2012); Stakeholder Speaks out to Koreans: New Foreign Investor Chastens SK Corp., New York Times (Apr. 29, 2003); Hae Won Choi, Foreign Investors Induce Anxiety in South Korea, Wall Street Journal (updated May 11, 2005), https://www.wsj.com/articles/SB111576824485329797. Similar sentiments are found in other countries. See The Bad Guy? Private Equity: As the Economy Reels, German Politicians Blame Foreign Investors, Business Week (May 16, 2005); China: A Revolt Against Foreign Investors, Business Week (July 10, 2006); Ellen Sheng, Private Equity Faces Tough Road in Asia, Wall Street Journal (Jan. 25, 2010), http://blogs.wsj.com/deals/2010/01/25/private-equity-faces-tough-road-in-asia/. toward foreign investors partially stems from these risks. Seoul-based civic group SpecWatch Korea has “criticized foreign investors including Lone Star for pursuing an ‘eat-and-flee’ strategy of buying companies and selling them quickly, pocketing big profits.”35See Seonjin Cha, Hana Financial Pushes KEB Completion After Lone Star Ruling, Bloomberg (Oct. 7, 2011), http://www.bloomberg.com/news/articles/2011-10-06/lone-star-found-guilty-of-stock-manipulation-in-south-korea-yoo-gets-jail. Henry Seggerman, president of New York-based International Investment Advisers has said that “[p]ublic sentiment is hostile toward profitable overseas investment, not supportive overseas investment.” Id. Others have called such a short-term investment strategy “company hunting.”36In-Pyo Hwang, Lone Star, We Just Can’t Let It Go! (title trans. by author, original title: 론스타, 그냥 보낼 순 없다!), Economy Insight (Feb. 1, 2012), http://www.economyinsight.co.kr/news/quickViewArticleView.html?idxno=1146. As a result, scholars and factions of liberal politicians maintained that signing an investment treaty would further hurt the Korean economy because the treaty would intrinsically favor the stronger and bigger nation, particularly through the dispute resolution mechanism.37South Korea Passes U.S. Free-Trade Agreement, supra note 2.

Such concern is not unique to Korea. Many NGOs and academics around the world opine that the dispute mechanisms in international investment treaties tend to be “bias[ed] in favour of allowing claims and awarding damages against governments.”38Gus Van Harten, Investment Treaty Arbitration and Public Law 152-85 (2007). Some organizations go so far as to equate signing a BIT with accepting “to be sued by the devil in hell.”39Pia Eberhardt & Cecilia Olivet, Corporate Eur. Observatory & Transnational Inst., Profiting from Injustice: How Law Firms, Arbitrators and Financiers Are Fuelling an Investment Arbitration Boom 11 (2012), available at http://corporateeurope.org/sites/default/files/publications/profiting-from-injustice.pdf. See also Mahnaz Malik, The Legal Monster that Lets Companies Sue Countries, The Guardian (Nov. 4, 2011), http://www.theguardian.com/commentisfree/2011/nov/04/bilateral-investment-treaties (calling a BIT a “legal monster”); Gus Van Harten et al., Public Statement on the International Investment Regime, at P 8 (Aug. 31, 2010), http://alainet.org/active/40578&lang=es (arguing that a BIT “is not a fair, independent, and balanced method for the resolution of investment disputes and therefore should not be relied on for this purpose.”). On the other hand, domestic courts tend to be biased in favor of the government.40See William W. Park, Arbitrator Integrity: The Transient and the Permanent, 46 San Diego L. Rev. 629, 658-59 (2009) (identifying concerns about perceived partiality of having national court judges adjudicate disputes involving the state). See also Claudia Priem, International Investment Treaty Arbitration As A Potential Check for Domestic Courts Refusing Enforcement of Foreign Arbitration Awards, 10 N.Y.U. J.L. & Bus. 189 (2013) (noting that domestic courts are reluctant to enforce a foreign arbitral award). Moreover, the nexus between the state’s developmental status and the outcome of an arbitration case has not been empirically substantiated.41Susan D. Franck, Conflating Politics and Development? Examining Investment Treaty Arbitration Outcomes, 55 Va. J. Int’l L. 13, 17-18 (2014) (finding no link between outcome and a state respondent’s development status).

Despite the public hostility towards foreign investors, the government continues its attempt to attract foreign investment. Former President Kim Dae-jung, a liberal president who led the post-IMF economic reform, underscored that the old attitude of negative national sentiment towards foreign capital would have to change.42Cherry, supra note 19, at 82. President Park Geun-Hye also “made deregulation and openness to foreign investment a cornerstone of her domestic economic policy.”43Jonathan Cheng, Lone Star Case Revives Questions About Investment in Korea, The Wall Street Journal (May 14, 2015), http://www.wsj.com/articles/lone-star-case-revives-questions-about-investment-in-korea-1431609387. Furthermore, Kim Seok-dong, the Chairmen of the Financial Services Commission, denied the notion that Seoul discriminates against foreign investors, citing many success stories written by foreign investors.44Kanga Kong, Korean Regulator Draws Lessons from Lone Star, The Wall Street Journal (Feb. 9, 2012), http://www.wsj.com/articles/SB10001424052970204642604577212732283361696. See also Cheng, supra note 44 (pointing to many foreign firms that have successfully entered into investments in Korea at a profit).

Part III: The Lone Star Case

In December 2012, LSF-KEB Holdings SCA, one of Lone Star Funds’ Belgian subsidiaries, and its affiliates (collectively “Lone Star”) instituted an arbitration suit against the Korean government in the International Centre for Settlement of Investment Disputes (“ICSID”). Lone Star avers that the government’s delayed approval and discriminatory tax imposition in connection with Lone Star’s disposition of its majority share of Korea Exchange Bank (“KEB”) resulted in economic damage of 2.4 trillion won.45LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/37. http://m.hyundaenews.com/a.html?uid=2034. Lone Star Funds, the parent company of the petitioners, is a private equity firm based in Dallas that invests globally in real estate, equity, credit, and other financial assets.46Lone Star Funds, About Lone Star, http://www.lonestarfunds.com/about-us (last visited Apr. 18, 2016). First entering into the Korean market in the early 2000s, Lone Star took advantage of Korea’s depressed assets and quickly became among the biggest foreign investors in the post-IMF era. Lone Star acquired KEB for 1.38 trillion won (approximately $1.2 billion) in September 2003 when FDI in Korea was at a record high. The acquisition was implemented through a Belgian Subsidiary presumably to take advantage of favorable provisions under the BLEU-Korea BIT and the Income Tax Treaty. This is the first ICSID case South Korea was a party to since it joined the Washington Convention in 1967.

Lone Star asserts two main claims, both of which fall under the purview of the BIT. The first relates to the delayed sale of KEB due to an allegedly irrelevant governmental investigation and trials. As a result of this delay, Lone Star missed the crucial timing to sell KEB before the KEB share price fell during the global financial crisis in 2008. The pending trials further lowered the KEB stock price. Lone Star also claims that as a Belgian company LSF-KEB Holding SCA should not have been had a tax imposed in connection with Lone Star’s sale of KEB. This second claim relates to the government’s inconsistent interpretation of Lone Star’s nationality.

The first claim turns on the multilayered issue of whether Lone Star was eligible to acquire KEB in 2003 in the first place. The separation of banking and commerce doctrine47The separation of banking and commerce first came into existence as a piece of Depression-era financial legislation that remained intact when the Gramm-Leach-Bliley Act, passed in 1999, allowed unprecedented freedom to U.S. banks. See generally John Krainer, The Separation of Banking and Commerce, FRBSF Econ. Rev. (2000) (discussing the federal government’s hesitation to allow banks and companies to affiliate). In Korea, this doctrine is embedded in three separate statutes: the Monopoly Regulation and Fair Trade Act, the Banking Act, and the Financial Holding Companies Act. prohibits any non-bank commercial entities from acquiring or owning more than 4% of the total outstanding voting stocks of a financial institution.48The Banking Act of 1988, as amended (2002), art. 16-2(1) , available at https://www.imolin.org/doc/amlid/Republic_of_Korea/Banking_Act_1998.pdf (“No non-financial business operator . . . may hold more than 4/100 of the total number of outstanding voting stocks of a bank (15/100 in case of a local bank) . . . .”). The Act has been amended numerous times, but the provision remains intact at the time of writing this Comment. See The Banking Act of 1988, as amended (2013). If the business-operator shareholder obtains an approval by the Financial Supervisory Commission (the “FSC,” or the “Commission”), it can increase its ownership limit to 10%.49Id. at art. 16-2(2). The purpose of this doctrine is to minimize corruption, which was prevalent in the pre-IMF era, by preventing business entities from gaining insider knowledge stemming from their controlling-shareholder status. Non-business-operator shareholders can normally own up to 10% of the outstanding shares,50Id. at art. 15(1). and in excess of the limit with the approval of the FSC.51Id. at art. 15(3). The Commission has the power to order any shareholder not in compliance with said provisions to immediately sell the shares.52Id. at art. 16-2(5). Moreover, Article 7(1) of the Foreign Investment Promotion Act requires a foreign investor’s stock purchase to be reviewed by the Minister of Commerce, Industry and Energy.53The Foreign Investment Promotion Act art. 7(1) (listing the circumstances under which a foreign investor must report to the Minister of Commerce, Industry and Energy).

In the wake of the Crisis, the government nationalized KEB by acquiring 100% ownership in order to save the bank from collapsing, and then sold a majority stake in the bank to Lone Star.54See Choi & Papaioannou, supra note 21, at 449 (describing the specific government intervention in connection with large-scale financial consolidations). While the decision to sell Korea’s fifth largest bank to a foreign entity by government intervention was unavoidable given the lack of clear alternatives,55Id. (noting that unlike the general hostility against nationalization of a bank in the U.S., “the interim government takeover of banks went quite smoothly”). there remained the questions of whether Lone Star was a non-bank business operator ineligible to become a majority shareholder and whether the government thereby violated Article 16-2(1) of the Banking Act, which applies to both domestic and foreign entities.56The Banking Act of 1988 art. 16-2(1) (“A non-financial business operator . . . may not hold more than 4/100 of the total number of issued voting stocks of a financial institution.). See also Jeonghwan Lee, How Is Vogo Fund Different from Lone Star (title trans. by author, original title: 보고펀드와 론스타는 어떻게 다를까), Mediatoday (Oct. 10, 2007), http://www.mediatoday.co.kr/?mod=news&act=articleView&idxno=61283 (emphasizing that the crux of the Lone Star dispute is not whether the investment is domestic or foreign). When it was revealed that one of the Lone Star subsidiaries in question had owned a Japanese golf resort worth 4 trillion won (approximately $3.5 billion), the public began to question the FSC’s faithful review process of Lone Star’s eligibility.57See Hwang, supra note 37.

However, even if Lone Star was not a bank in a traditional sense, it could still become the majority shareholder of KEB if the target bank was in financial distress.58See S. Nathan Park, What’s at Stake: South Korea vs. Lone Star Funds, Wall Street Journal (Jun. 29, 2015), http://blogs.wsj.com/korearealtime/2015/06/29/whats-at-stake-south-korea-vs-lone-star-funds/. Pursuant to the Enforcement Decree of the Banking Act Article 8(2), the FSC can approve a non-bank entity to acquire shares of a bank in excess of the ownership-limit under Article 8-2(1) of the Banking Act, “where deemed that there exist such exceptional circumstances as the reorganization of insolvent financial institutions.”59Enforcement Decree of the Banking Act art. 8(2), available at http://newworld.moleg.go.kr/World/EastAsia/KR/law/23832?orderOption=ABC&astSeq=1021. The statutory source of the enforcement decree comes from Article 15(5) of the Banking Act, which provides that matters related to approving acquisition of shares of a bank beyond the ownership limitations “shall be determined by the Presidential Decree in consideration” of various factors. The Banking Act, art. 15(5). Since 2002, Lone Star had been considering the acquisition of KEB, which began recovering from its financial distress in early 2003 indicating it would not need any outside help.60Park, supra note 59. The recovery is demonstrated by KEB’s BIS rate, which increased from 6.79% in 1998 to 8.48% in May 2003. See Moon-Seong Kim, Korea Exchange Bank BIS Manipulation: Lone Star Acquisition Approved (title trans. by author, original title: 외환은행 BIS 조작, 론스타 인수 승인), Hankyoreh (Sept. 27, 2005), http://www.hani.co.kr/arti/economy/economy_general/67080.html. The rate suddenly dropped to 6.2% later the same year immediately before Lone Star acquired KEB, thus fomenting the public’s suspicion that the bank had manipulated the rates in order to improperly sell the shares to the foreign non-bank private equity fund. Id. The financial regulators nevertheless determined that KEB required capital infusion, and Lone Star acquired KEB for 1.38 trillion won (approximately $1.2 billion).61Park, supra note 59. However, the quick turnaround by KEB (doubling its valuation by 2005) aroused suspicions among the public that KEB might not have been distressed when sold to Lone Star.62Id. The suspicion that the bank and the private equity firm might have manipulated the records later developed into hostility, prompting several branches of the government, including the Bureau of Audits and Investigations (“BAI”) and the Supreme Prosecutor’s Office (“SPO”), to investigate the KEB- Lone Star transaction.

With respect to the BAI’s accusation that Lone Star and KEB conspired to manipulate the stock price to make the bank appear distressed, the Supreme Court of Korea found that the defendants were not guilty. The SPO, on the other hand, alleged Lone Star and KEB had purposefully leaked false information in connection with KEB’s acquisition of its own credit card affiliate Korea Exchange Bank Credit Service (“KEBCS”). The High Court of Seoul found Paul Yoo, the head of Lone Star Advisors Korea, and Lone Star’s Belgian subsidiary to be guilty of stock manipulation to drive the purchase price down on October 7, 2011, sentencing Yoo to five years imprisonment and fining Lone Star and KEB each 25 billion won ($26.5 million).63Laura Santini, Lone Star Verdict Complicates Sale of Korean Bank to HSBC, Wall Street Journal (Feb. 4, 2008), http://www.wsj.com/articles/SB10001424052970204642604577212732283361696. A different source indicates that KEB was found not guilty. See Seonjin Cha, Hana Financial Pushes KEB Completion After Lone Star Ruling, Bloomberg (Oct. 7, 2011), http://www.bloomberg.com/news/articles/2011-10-06/lone-star-found-guilty-of-stock-manipulation-in-south-korea-yoo-gets-jail. The decision again aroused suspicions as to whether Lone Star had been a legitimate KEB shareholder to begin with.

With the outcome of this ultimate question pending, the financial regulators responsible for approving transfers of controlling shares in a bank blocked Lone Star’s numerous attempts to sell its controlling shares of KEB to HSBC in 2007, pursuant to a theory that Lone Star’s wrongfully obtained shares could be unwound. Amidst the legal disputes and the turbulence of global financial system in 2008, HSBC backed out of the $6 billion deal and KEB’s value was significantly depressed. As part of the KEBCS decision, the government ordered Lone Star to sell its shares in KEB pursuant to article 16-2(5) of the Banking Act, and Lone Star was forced to sell the depressed KEB shares to Hana Financial Group (“HFG”) for about 3.9 trillion won ($2.8 billion) on February 9, 2012. Prior to this disposition, the regulators had also disallowed HFG, which attempted to acquire KEB around the same time HSBC and Lone Star were negotiating, from purchasing the KEB shares.64Cha, supra note 36. The fact that Lone Star still made 2.5 trillion won ($2.2 billion) profit after tax from the disposal of its KEB shares enraged the public.65Id. (quoting Yu Won Il, a Creative Korea Party lawmaker who said the “[p]ublic will never understand if after being convicted of criminal stock manipulation, Lone Star takes a huge premium from this stake sale”). At the same time, the case dissuaded other potential foreign investors from acquiring Korean companies, and overseas takeover fell from $8.1 billion to $3.6 billion in 2005.66Santini, supra note 45 (“The case is extremely negative for any prospective strategic investors.”)

The second issue deals with whether the government’s imposition of capital-gain taxes related to Lone Star’s sales of its KEB and other shares violated the BLEU-Korea BIT and other tax treaties.67Isabella Steger, Lone Star Begins Arbitration with South Korea, Wall Street Journal (Nov. 22, 2012), http://www.wsj.com/articles/SB10001424127887324352004578134653915418628. In connection with Lone Star’s various capital gains, the Korean National Tax Services (“NTS”) made three different determinations of Lone Star’s nationality despite Lone Star’s corporate structure remaining essentially the same: (1) a U.S. entity; (2) a U.S./Bermuda entity with a presence in Korea, which is considered a Korean entity for purposes of tax treaties; and (3) unclear, but not a Korean entity.68Park, supra note 59.

The Lone Star Belgian subsidiaries notified the government of their intention to bring arbitration before the ICSID pursuant to the BLEU-South Korea BIT, claiming that the Korean government deprived them of fair and equitable treatment and other protections guaranteed under the BIT.69Id. Lone Star argued that the trial could not constitute a basis on which Korea’s financial regulators delayed the approval of the sale, because the actual unwinding was unlikely, and regulators only had the authority to assess the fitness of the buyer of a bank and not the seller.70Id. With regards to the tax issue, Lone Star contended that the NTS applied inconsistent standards for the purpose of extracting the maximum amount of taxes from Lone Star, thereby violating the BLEU-Korea BIT and a tax treaty between Korea and Belgium.71Steger, supra note 68.

The fair and equitable treatment (“FET”) standard is often the focal point of ICSID cases due to its broad language compared to other protections such as most-favored-nation or national treatment.72See Vaughan Lowe, Changing Dimensions of International Investment Law, working paper, at 77 (Mar. 2007). When the case commenced, the original 1974 BLEU-Korea BIT had been terminated and the new BIT had been in force since 2011. Because the dispute is between the investor and the host state, the original contracts between private parties are irrelevant, and any stabilization clause in the private contracts would not affect the choice between the original and the new BIT. The difference in the language dealing with the FET standard is crucial. Under the original BIT, which was signed when international investment law was still in its infancy, the FET standard referred only to exchange rates in connection with transfers.73The BLEU-KOR BIT of 1974 art. 6(3) (“. . . the rates [of exchange in connection with the transfers referred to in Articles 4 and 5] shall be fair and equitable, taking into account the usual levies and charges which may be imposed on exchange operations.”). The new BIT, comporting with the subsequently drafted US Model BIT, widened the FET standards using broader language such as “at all times” and “full and continuous protection and security.”74The BLEU-KOR BIT of 2006 Art 2.2. Such broad language potentially threatens the government’s ability to defend itself.

Moreover, well-developed ICSID precedents on the issue have expanded over the years, since the narrow interpretation of the FET provision in Neer v. Mexico in the early 20th century.75L.F.H. Neer and Pauline Neer (U.S.A.) v. United Mexican States, 4 R.I.A.A. 60 (1926). Tecmed v. Mexico epitomizes the Tribunal’s wide vision of the FET. Interpreting the narrow minimum standard set forth in the original Mexico-Spain BIT of 1995,76The Mexico-Spain BIT of 1995, art. 4(a) “Each Contracting Party will guarantee in its territory fair and equitable treatment, according to International Law, for the investments made by investors of the other Contracting Party.”). the Tribunal focused on the foreign investor’s expectation towards the host state to “act in a consistent manner, free from ambiguity and totally transparently.”77Tecnicas Medioambientales Tecmed S.A. v. The Unived Mexican States, ICSID Case No. ARB (AF)/00/2, Award of the Tribunal, ¶ 154 (May 29, 2003), http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C3785/DC4872_En.pdf. The rationale is to enable investors to know with clarity before they plan their investment.78Id. The Tribunal also set the standard as “what a reasonable and unbiased observer would consider fair and equitable,”79Id. at ¶ 166. which is highly permissive compared to the “bad faith . . . wilful neglect of duty” language of the earlier international minimum standard.80Neer v. Mexico, supra note 76 (setting the minimum standard as “shocks, or at least surprises, a sense of juridical property”). Whereas in a U.S. court “reasonableness” would involve factual questions to be decided by a jury, the three-person arbitration panel at an ICSID proceeding will inevitably rely on their own experience and position to determine the appropriate level of reasonableness.

Thus, the question turns on how to the Tribunal would view the “reasonableness” standard. The Korean government seems to have shown inconsistency in interpreting its own domestic law when it dealt with Lone Star. The financial regulators, which approved the original Lone Star-KEB acquisition, later turned around and delayed approving subsequent sales under the theory that the original acquisition could be unwound. The regulators had no authority, Lone Star maintains, to review a seller. As such, the government can be said to have failed to provide Lone Star with enough opportunities to review the law in violation of the Tecmed standard. Moreover, the NTS has interpreted Lone Star’s nationality in three different ways, even though the corporate structure remained virtually intact. On the other hand, the financial regulators delayed its approval to both Lone Star and HFG, thus treating nationals and foreigners consistently in that regard. Of course, Lone Star might point out that HFG’s proposed transaction itself involved a foreigner, i.e., Lone Star, further buttressing the theory of the government’s discriminatory treatment of a foreign investor

More importantly, the recently decided Fraport v. Phillipines refused to extend protection to an investor that violated a domestic law similar to the ownership cap requirement in the Lone Star case.81Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/11/12 (Dec. 10, 2014). Under Philippines law, a foreigner cannot attain a controlling ownership (over 49%) of an airport facility. The German investor violated the law by surreptitiously acquiring 60% of the shares by involving a national. Here, if the Tribunal acknowledges the legitimate reason the government had in delaying the approval of KEB ownership change, the government still has a strong defense. However, the unclear role of the financial regulators, and the NFS’s inconsistent interpretation of Lone Star’s nationality, weaken the government’s case. Regardless of the outcome, the case reveals how the government, despite its neoliberal policy and radical legal reforms, still needs to adopt better measures on how the policy and law are enforced by various agencies and enforcement divisions.

Conclusion

The Lone Star case marks an “an epilogue to a decade long sale dispute that also raised concerns about Seoul’s openness to private-equity deals.”82Jonathan Cheng, Lone Star Case Revives Questions About Investment in Korea, Wall Street Journal (May 14, 2015), http://www.wsj.com/articles/lone-star-case-revives-questions-about-investment-in-korea-1431609387. The arbitration also refocuses attention on what Korea has done in recent years to regain its appeal as a destination for foreign capital that was tarnished during Lone Star’s multiple attempts to sell KEB.83Id. Despite the negative short-term impact the arbitration could have on future foreign investment and possibly the Korean economy, it will also provide an extra incentive for the government to guarantee consistent enforcement of its policy to nationals and foreign investors alike.

The controversial arbitration provision in the KORUS FTA may prove to be another double-edged sword. Denying investors’ the right to vindicate themselves at a competent international forum in the event they are mistreated by the government of the host state, as some continue to argue, would have heavily discouraged capital inflows. Despite the massive restructurings during the decade following the Crisis, there is still room to grow with respect to the policy governing foreign investment.84See Bang Nam Jeon, From the 1997-98 Asian Financial Crisis to the 2008-09 Global Economic Crisis: Lessons from Korea’s Experience, 5 E. Asia L. Rev. 103, 130-34 (2010) (discussing the vulnerability Korea still faces). The pressing issue is to promote a more capable government which can deal with foreign investors who will act with self-interest, rather than showing hostility towards foreign investors. And the arbitration mechanism can serve an external incentive for the government.

References   [ + ]

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02. Office of the United States Trade Representative, New Opportunities for U.S. Exporters Under the U.S.-Korea Trade Agreement (last visited May 5, 2016), https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta.
03. Free Trade Agreement Between the United States of America and the Republic of Korea, June 30, 2007, available at https://ustr.gov/sites/default/files/uploads/agreements/fta/korus/asset_upload_file755_12697.pdf.
04. South Korea Passes U.S. Free-Trade Agreement, supra note 2.
05. Belgium-Luxembourg Economic Union.
06. LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/37.
07. The Four Asian Tigers or Asian Dragons refer to Hong Kong, Singapore, South Korea, and Taiwan, all of which accomplished rapid economic growth between the 1960s and 1990s.
08. See The World Bank, World Development Indicators (last updated May 2, 2016), http://data.worldbank.org/data-catalog/world-development-indicators (charting the nominal GDP among other economic indices by year).
09. The currency account deficit quadruped to $8.7 billion within a year from 1990 to 1991. See Kim Kihwan, The 1997-98 Korean Financial Crisis: Causes, Policy, Response, and Lesson, presentation at The High-Level Seminar on Crisis Prevention in Emerging Markets 3 (July 2006), https://www.imf.org/external/np/seminars/eng/2006/cpem/pdf/kihwan.pdf (hereafter “Kim”).
10. By 1996, the short-term external debts accounted for 61% of total external debts, 80% of which financed 70% of long-term assets. Id. at 3-5. The total short-term external debts in the amount of $63.8 billion in 1997 dwarfed the $9.1 usable gross foreign reserves.
11. However, some empirical studies challenge the notion that maturity mismatches necessarily lead to capital flights in emerging markets including East Asia. See generally Hoyt Bleakley & Kevin Cowan, Maturity Mismatch and Financial Crises: Evidence from Emerging Market Corporations, 93 J. Dev. Econ. 189 (2010), http://www.frbsf.org/economic-research/files/paper-bleakly.pdf.
12. A “chaebol (재벌/財閥),” is a South Korean business conglomerate, often owned by a single family and characterized by its authoritative and centralized management style. See Dictionary.com, http://www.dictionary.com/browse/chaebol?s=t. High chaebol leverage stemming from preferential access to credit and tax-deduction in connection with debt-related expenses resulted in 500% average debt-equity ratio, which doubles the OECD average. See Kim, supra note 2, at 6.
13. Kim, supra note 2, at 6.
14. Yoon Je Cho, The Financial Crisis in Korea: Causes and Challenges, Asia Regional Integration Center, https://aric.adb.org/pdf/aem/external/financial_market/Republic_of_Korea/korea_mac.pdf.
15. Kim, supra note 2, at 7.
16. See Yeon-ho Lee, Capital Liberalization under the IMF Program (title trans. by author, original title: IMF 프로그램 하의 자본자유화) (2007) (last visited May 5, 2016), http://www.archives.go.kr/next/search/listSubjectDescription.do?id=006736.
17. Letter from South Korea to the International Monetary Fund (Dec. 3, 1997), https://www.imf.org/external/np/loi/120397.htm.
18. Judith Cherry, Foreign Direct Investment in Post-Crisis Korea: European Investors and “Mismatched Globalization” 81 (2007).
19. Id.
20. Jongmoo Jay Choi & Michael G. Papaioannou, Financial Crisis and Risk Management: Reassessing the Asian Financial Crisis in Light of the American Financial Crisis, 5 U. Pa. E. Asia L. Rev. 442, 449 (2010).
21. See Parliament to Pass Four IMF-Related Bills: Foreign Investment Law and Others to Become Effective Next Week (title trans. by author, original title: 국회 IMF법안 4건의결: 외국인투자법등 내주 시행), Korea Joongang Daily (May 14, 1998), http://news.joins.com/article/3644040 (reporting the National Assembly’s passage of four IMF-related bills on foreign investment law, securities exchange law, banking law, and employment law). Although the new law even allows hostile takeover by a foreigner, no hostile takeovers have occurred because the government is yet to implement relevant regulations, and because of the unfriendly political environment with respect to hostile takeovers. See U.S. Department of State, 2015 Investment Climate Statement – Republic of Korea (May 2011), http://www.state.gov/e/eb/rls/othr/ics/2015/241618.htm (noting FDI in Korea is at times subject to “insufficient regulatory transparency, including inconsistent and sudden changes in interpretation of regulations, high labor costs, an inflexible labor system, and significant economic domination by . . . chaebol”).
22. See generally Kwang-Rok Kim, Recent Intensification of Investor Protection in the Korean Securities Market: The Mandatory and Fair Disclosure Systems, 12 Pac. Rim L. & Pol’y J. 653 (2003).
23. See Choi & Papaioannou, supra note 21, at 448-49 (reporting that three out of ten chaebols—Daewoo, Ssangyong, and Donga—had disappeared and Hyundai Group had split into Hyundai Motors group and two smaller Hyundai groups).
24. Id. at 449 (“Eight of the ten largest banks either merged or acquired other smaller banks to produce the three largest, and presumably more competitive, banks”).
25. For more information on the positive effect of market liberalization in general, see generally Peter Blair Henry, Stock Market Liberalization, Economic Reform and Equity Market Prices, 55 J. Fin. 529 (2000).
26. See Choi & Papaioannou, supra, note 21, at 448 (noting the average drop in debt-asset ratio for the ten largest Korean corporations dropped from 73.6% in 1997 to 42.5% in 2007).
27. Jongmoo Jay Choi, Sae Woon Park & Sehyun Yoo, The Value of Outside Directors: Evidence from Corporate Governance Reform in Korea, 42 J. Fin. Quant. Anal. 941 (2000) (providing evidence in support of the positive impact of outside directors and board independence for Korea in the aftermath of the Asian financial crisis).
28. The general beneficial, albeit sector-dependent, impact of FDI on the growth of domestic economies has been demonstrated empirically. For more information on empirical studies on various markets, see generally Brian J. Aitken & Ann E. Harrison, Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela, The Amer. Econ. Rev. 605 (1999), http://siteresources.worldbank.org/INTTRADERESEARCH/Resources/544824-1282767179859/Venezuela.pdf (Venezuela); Abdul Khaliq & Ilan Noy, Foreign Direct Investment and Economic Growth: Empirical Evidence from Sectoral Data in Indonesia, working paper (2007) http://www.economics.hawaii.edu/research/workingpapers/WP_07-26.pdf (Indonesia); Anis Omri, Bassem Kahouli, The Nexus Among Foreign Investment, Domestic Capital and Economic Growth: Empirical Evidence from the MENA Region, 68 Res. in Econ. 257 (Sept. 2014), http://www.sciencedirect.com/science/article/pii/S1090944313000537 (the Middle East and North Africa region).
29. See Si-Won Jin, The South Korea-US FTA and Problems of Foreign Investment Structures in South Korea 2 (title trans. by author, original title: 한미 FTA와 우리나라 외국인투자 구조의 문제점) (2005).
30. Id. at 3, 5. In 2004, FPI accounted for 51.1% of foreign investment, whereas only 21% was FDI. See The Bank of Korea, The 2004 International Investment Position (IIP) Report (2004).
31. See Jin, supra note 30, at 4-5; see also Philip Bowring & Int’l Herald Tribune, Foreign vs. Local Investment: Who Owns South Korea?, The New York Times (July 20, 2004), http://www.nytimes.com/2004/07/20/opinion/foreign-vs-local-investment-who-owns-south-korea.html?_r=0 (“Foreigners now own most of the commercial crown jewels of South Korea . . . now [accounting] for 44 percent of the total Korea stock market capitalization of around $[166] billion”). While the effect of foreign equity ownership on local markets is a hotly debated topic, empirical studies generally show positive correlations between foreign ownership and company performances. See generally Jongmoo Jay Choi & Sean Sehyun Yoo, Foreign Capital and Local Firms: The Effect of Foreign Ownership and Management on Corporate Performance, paper presented at the Third EMG Conference on Emerging Markets Finance (May 5, 2011), https://www.cass.city.ac.uk/__data/assets/pdf_file/0005/86639/Jongmoo-Jay-Choi.pdf (demonstrating empirically that foreign equity ownership “positively affects firm performance, countering or complementing the negative or insignificant influence of local institutions such as family, institutional investors or business groups”). Cf. Roger D. Huang & Cheng-Yi Shiu, Local Effects of Foreign Ownership in Emerging Financial Market: Evidence from Qualified Foreign Institutional Investors in Taiwan, 38 Fin. Mgmt. 567 (2009) (demonstrating empirically that foreign ownership in Taiwan is positively associated with firm R&D expenditures and contemporaneous and subsequent firm performance).
32. See Jin, supra note 30 at 7 (listing the potential risks foreign investment might bring to the Korean domestic economy).
33. Id.
34. There is a plethora of reports on the local sentiment against foreign investors. See, e.g., Song Jung-A, S Korea FDI: Worth a go?, Beyondbrics (Jun 29, 2012), http://blogs.ft.com/beyond-brics/2012/06/29/s-korea-fdi-worth-a-go/ (noting “some hostile public sentiment toward foreign buyers” remained as of 2012); Stakeholder Speaks out to Koreans: New Foreign Investor Chastens SK Corp., New York Times (Apr. 29, 2003); Hae Won Choi, Foreign Investors Induce Anxiety in South Korea, Wall Street Journal (updated May 11, 2005), https://www.wsj.com/articles/SB111576824485329797. Similar sentiments are found in other countries. See The Bad Guy? Private Equity: As the Economy Reels, German Politicians Blame Foreign Investors, Business Week (May 16, 2005); China: A Revolt Against Foreign Investors, Business Week (July 10, 2006); Ellen Sheng, Private Equity Faces Tough Road in Asia, Wall Street Journal (Jan. 25, 2010), http://blogs.wsj.com/deals/2010/01/25/private-equity-faces-tough-road-in-asia/.
35. See Seonjin Cha, Hana Financial Pushes KEB Completion After Lone Star Ruling, Bloomberg (Oct. 7, 2011), http://www.bloomberg.com/news/articles/2011-10-06/lone-star-found-guilty-of-stock-manipulation-in-south-korea-yoo-gets-jail. Henry Seggerman, president of New York-based International Investment Advisers has said that “[p]ublic sentiment is hostile toward profitable overseas investment, not supportive overseas investment.” Id.
36. In-Pyo Hwang, Lone Star, We Just Can’t Let It Go! (title trans. by author, original title: 론스타, 그냥 보낼 순 없다!), Economy Insight (Feb. 1, 2012), http://www.economyinsight.co.kr/news/quickViewArticleView.html?idxno=1146.
37. South Korea Passes U.S. Free-Trade Agreement, supra note 2.
38. Gus Van Harten, Investment Treaty Arbitration and Public Law 152-85 (2007).
39. Pia Eberhardt & Cecilia Olivet, Corporate Eur. Observatory & Transnational Inst., Profiting from Injustice: How Law Firms, Arbitrators and Financiers Are Fuelling an Investment Arbitration Boom 11 (2012), available at http://corporateeurope.org/sites/default/files/publications/profiting-from-injustice.pdf. See also Mahnaz Malik, The Legal Monster that Lets Companies Sue Countries, The Guardian (Nov. 4, 2011), http://www.theguardian.com/commentisfree/2011/nov/04/bilateral-investment-treaties (calling a BIT a “legal monster”); Gus Van Harten et al., Public Statement on the International Investment Regime, at P 8 (Aug. 31, 2010), http://alainet.org/active/40578&lang=es (arguing that a BIT “is not a fair, independent, and balanced method for the resolution of investment disputes and therefore should not be relied on for this purpose.”).
40. See William W. Park, Arbitrator Integrity: The Transient and the Permanent, 46 San Diego L. Rev. 629, 658-59 (2009) (identifying concerns about perceived partiality of having national court judges adjudicate disputes involving the state). See also Claudia Priem, International Investment Treaty Arbitration As A Potential Check for Domestic Courts Refusing Enforcement of Foreign Arbitration Awards, 10 N.Y.U. J.L. & Bus. 189 (2013) (noting that domestic courts are reluctant to enforce a foreign arbitral award).
41. Susan D. Franck, Conflating Politics and Development? Examining Investment Treaty Arbitration Outcomes, 55 Va. J. Int’l L. 13, 17-18 (2014) (finding no link between outcome and a state respondent’s development status).
42. Cherry, supra note 19, at 82.
43. Jonathan Cheng, Lone Star Case Revives Questions About Investment in Korea, The Wall Street Journal (May 14, 2015), http://www.wsj.com/articles/lone-star-case-revives-questions-about-investment-in-korea-1431609387.
44. Kanga Kong, Korean Regulator Draws Lessons from Lone Star, The Wall Street Journal (Feb. 9, 2012), http://www.wsj.com/articles/SB10001424052970204642604577212732283361696. See also Cheng, supra note 44 (pointing to many foreign firms that have successfully entered into investments in Korea at a profit).
45. LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/37. http://m.hyundaenews.com/a.html?uid=2034.
46. Lone Star Funds, About Lone Star, http://www.lonestarfunds.com/about-us (last visited Apr. 18, 2016).
47. The separation of banking and commerce first came into existence as a piece of Depression-era financial legislation that remained intact when the Gramm-Leach-Bliley Act, passed in 1999, allowed unprecedented freedom to U.S. banks. See generally John Krainer, The Separation of Banking and Commerce, FRBSF Econ. Rev. (2000) (discussing the federal government’s hesitation to allow banks and companies to affiliate). In Korea, this doctrine is embedded in three separate statutes: the Monopoly Regulation and Fair Trade Act, the Banking Act, and the Financial Holding Companies Act.
48. The Banking Act of 1988, as amended (2002), art. 16-2(1) , available at https://www.imolin.org/doc/amlid/Republic_of_Korea/Banking_Act_1998.pdf (“No non-financial business operator . . . may hold more than 4/100 of the total number of outstanding voting stocks of a bank (15/100 in case of a local bank) . . . .”). The Act has been amended numerous times, but the provision remains intact at the time of writing this Comment. See The Banking Act of 1988, as amended (2013).
49. Id. at art. 16-2(2).
50. Id. at art. 15(1).
51. Id. at art. 15(3).
52. Id. at art. 16-2(5).
53. The Foreign Investment Promotion Act art. 7(1) (listing the circumstances under which a foreign investor must report to the Minister of Commerce, Industry and Energy).
54. See Choi & Papaioannou, supra note 21, at 449 (describing the specific government intervention in connection with large-scale financial consolidations).
55. Id. (noting that unlike the general hostility against nationalization of a bank in the U.S., “the interim government takeover of banks went quite smoothly”).
56. The Banking Act of 1988 art. 16-2(1) (“A non-financial business operator . . . may not hold more than 4/100 of the total number of issued voting stocks of a financial institution.). See also Jeonghwan Lee, How Is Vogo Fund Different from Lone Star (title trans. by author, original title: 보고펀드와 론스타는 어떻게 다를까), Mediatoday (Oct. 10, 2007), http://www.mediatoday.co.kr/?mod=news&act=articleView&idxno=61283 (emphasizing that the crux of the Lone Star dispute is not whether the investment is domestic or foreign).
57. See Hwang, supra note 37.
58. See S. Nathan Park, What’s at Stake: South Korea vs. Lone Star Funds, Wall Street Journal (Jun. 29, 2015), http://blogs.wsj.com/korearealtime/2015/06/29/whats-at-stake-south-korea-vs-lone-star-funds/.
59. Enforcement Decree of the Banking Act art. 8(2), available at http://newworld.moleg.go.kr/World/EastAsia/KR/law/23832?orderOption=ABC&astSeq=1021. The statutory source of the enforcement decree comes from Article 15(5) of the Banking Act, which provides that matters related to approving acquisition of shares of a bank beyond the ownership limitations “shall be determined by the Presidential Decree in consideration” of various factors. The Banking Act, art. 15(5).
60. Park, supra note 59. The recovery is demonstrated by KEB’s BIS rate, which increased from 6.79% in 1998 to 8.48% in May 2003. See Moon-Seong Kim, Korea Exchange Bank BIS Manipulation: Lone Star Acquisition Approved (title trans. by author, original title: 외환은행 BIS 조작, 론스타 인수 승인), Hankyoreh (Sept. 27, 2005), http://www.hani.co.kr/arti/economy/economy_general/67080.html. The rate suddenly dropped to 6.2% later the same year immediately before Lone Star acquired KEB, thus fomenting the public’s suspicion that the bank had manipulated the rates in order to improperly sell the shares to the foreign non-bank private equity fund. Id.
61. Park, supra note 59.
62. Id.
63. Laura Santini, Lone Star Verdict Complicates Sale of Korean Bank to HSBC, Wall Street Journal (Feb. 4, 2008), http://www.wsj.com/articles/SB10001424052970204642604577212732283361696. A different source indicates that KEB was found not guilty. See Seonjin Cha, Hana Financial Pushes KEB Completion After Lone Star Ruling, Bloomberg (Oct. 7, 2011), http://www.bloomberg.com/news/articles/2011-10-06/lone-star-found-guilty-of-stock-manipulation-in-south-korea-yoo-gets-jail.
64. Cha, supra note 36.
65. Id. (quoting Yu Won Il, a Creative Korea Party lawmaker who said the “[p]ublic will never understand if after being convicted of criminal stock manipulation, Lone Star takes a huge premium from this stake sale”).
66. Santini, supra note 45 (“The case is extremely negative for any prospective strategic investors.”)
67. Isabella Steger, Lone Star Begins Arbitration with South Korea, Wall Street Journal (Nov. 22, 2012), http://www.wsj.com/articles/SB10001424127887324352004578134653915418628.
68. Park, supra note 59.
69. Id.
70. Id.
71. Steger, supra note 68.
72. See Vaughan Lowe, Changing Dimensions of International Investment Law, working paper, at 77 (Mar. 2007).
73. The BLEU-KOR BIT of 1974 art. 6(3) (“. . . the rates [of exchange in connection with the transfers referred to in Articles 4 and 5] shall be fair and equitable, taking into account the usual levies and charges which may be imposed on exchange operations.”).
74. The BLEU-KOR BIT of 2006 Art 2.2.
75. L.F.H. Neer and Pauline Neer (U.S.A.) v. United Mexican States, 4 R.I.A.A. 60 (1926).
76. The Mexico-Spain BIT of 1995, art. 4(a) “Each Contracting Party will guarantee in its territory fair and equitable treatment, according to International Law, for the investments made by investors of the other Contracting Party.”).
77. Tecnicas Medioambientales Tecmed S.A. v. The Unived Mexican States, ICSID Case No. ARB (AF)/00/2, Award of the Tribunal, ¶ 154 (May 29, 2003), http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C3785/DC4872_En.pdf.
78. Id.
79. Id. at ¶ 166.
80. Neer v. Mexico, supra note 76 (setting the minimum standard as “shocks, or at least surprises, a sense of juridical property”).
81. Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/11/12 (Dec. 10, 2014).
82. Jonathan Cheng, Lone Star Case Revives Questions About Investment in Korea, Wall Street Journal (May 14, 2015), http://www.wsj.com/articles/lone-star-case-revives-questions-about-investment-in-korea-1431609387.
83. Id.
84. See Bang Nam Jeon, From the 1997-98 Asian Financial Crisis to the 2008-09 Global Economic Crisis: Lessons from Korea’s Experience, 5 E. Asia L. Rev. 103, 130-34 (2010) (discussing the vulnerability Korea still faces).

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