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Elliott warns Korea to pursue no further legal action

Latest $100m ruling expected to affect other pending cases

By Park Han-na

Published : June 21, 2023 - 16:30

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An international court’s decision sentencing South Korea to pay a US hedge fund about $108.5 million in losses caused by the government’s meddling in the 2015 merger of two Samsung units may affect other pending rulings on investor-state dispute cases involving the country.

Elliott Investment Management on Wednesday urged the Korean government to pay the amount to the investor as ordered by the Permanent Court of Arbitration on Tuesday, asserting further legal proceedings would cause more “legal costs and interest at the public's expense.”

The ruling came five years after the suit began, when Elliott sued the Korean government in 2018 for the state-run National Pension Service’s involvement in approving the merger between Samsung C&T and Cheil Industries.

Elliott, a minority stakeholder in Samsung C&T, carried out a shareholder activism campaign to thwart the deal, as it saw that the merger would undervalue the Samsung unit. The investor also claimed that the merger was an unlawful attempt by the founder’s family to consolidate its control of the country’s largest conglomerate.

“The decision shows the harm done to investors (both foreign investors and domestic Korean pension holders) by corrupt relationships between government officials and chaebol -- the same kind of corrupt relationships that the current president and minister of justice have established in cases they have led in their careers as prosecutors,” Elliott said in a statement.

The claim involves a notorious political and business scandal in 2016 which led to prison terms for former President Park Geun-hye and then-Samsung Vice Chairman Lee Jae-yong.

On Wednesday, Korea’s Justice Ministry said that it will consider countermeasures after thoroughly reviewing the ruling.

The latest ruling from the Permanent Court of Arbitration is yet another defeat for the Korean government in international disputes.

A total of 10 investor-state dispute settlement cases, a system through which countries can be sued by foreign investors, have been brought against the Korean government so far.

Of them, five cases, including the Elliott case, have wrapped up while the other five are ongoing.

In August last year, the International Center for Settlement of Investment Disputes ordered the country to cough up $216.5 million to US private equity firm Lone Star Funds. The investor claimed that the nation’s regulator deliberately delayed approval of its initial plan to sell its controlling stake in the now-defunct Korea Exchange Bank at a higher price.

Other cases are pending final sentencing.

New York-based hedge fund Mason Capital also filed suits in 2018 against the Korean government over the 2015 merger between Cheil Industries and Samsung C&T, claiming $175 million in damages for the government’s influence over the decision on the transaction inflicted financial damages on its investors.

The recent verdict on the Elliott case will certainly affect the other cases, experts said.

Given that the Korean Supreme Court previously acknowledged the state intervention by the National Pension Service to approve the merger between two Samsung units, the ruling from the international court appeared to have judged that the Korean government violated the Korea-US Free Trade Agreement, which stipulates that foreign investors should not be discriminated against by domestic investors.

"It is speculated that Mason's case, which is underway on the same issue, will come to a similar conclusion," he told The Korea Herald.

Lawyer Shin Jang-sik shared a similar view.

"The Mason Capital case is similar to the Elliott case. The ruling may expedite legal proceeding (of the Mason case) compared with that of the Elliott case, which took five years," he said during an interview with a local broadcaster.

In 2018, Swiss elevator manufacturer Schindler Group, the second-largest shareholder of Hyundai Elevator, launched a legal suit seeking at least 300 billion won ($232 million) from the Korean government as compensation for damages over its approval of paid-in capital increases for the Korean lift maker from 2013 to 2015.

Schindler claimed the Financial Supervisory Service illegally approved Hyundai’s paid-in capital raise, resulting in financial damages on investors

The Dayyani family -- which owns the Iranian consumer electronics group Entekhab -- filed two investor-state settlement complaints against the Korean government in 2015 and 2022.

The 2015 case, the government was ordered to pay 73 billion won to the Dayyani family for wrongfully interfering in the group’s failed attempt to purchase a majority stake in the bankrupt Daewoo Electronics.

Following the government's delay in paying compensation, citing restrictions on financial transactions due to sanctions against Iran, the Dayyani family filed its second arbitration request in October last year.