The headquarters of Samsung Group in southern Seoul. (Yonhap)
SEOUL, June 26 (Korea Bizwire) — South Korea has faced significant setbacks in the Korea v. Elliott Investment Management investor-state dispute settlement (ISDS) case.
According to a press release titled “Decision on the Elliott International Investment Dispute Settlement (ISDS) Case” by the justice ministry on Friday, which provides a summary of the June 20 judgment, South Korea has not been successful in most of the key issues.
ISDS refers to an international arbitration process where foreign investors (individuals) can file claims against investor states (countries).
However, this can only be done if a specific clause is included in the agreement signed between the countries.
The clause states that “if an investor from our country suffers losses due to your country’s violation of the agreement, the investor may file an arbitration for damages against your country.”
The South Korea-U.S. free trade agreement (KORUS FTA) contains such an ISDS clause. This allowed Elliott, a U.S. investor, to file an ISDS claim against South Korea.
The claim made by Elliott was based on the violation of the “minimum standard of treatment” obligation under the KORUS FTA.
The ISDS tribunal determined that South Korea breached this obligation, leading to the awarding of damages to Elliott.
A National Pension Service office in Jeonju, North Jeolla Province. (image: Yonhap)
The Permanent Court of Arbitration (PCA) in The Hague, the Netherlands has granted Elliott, a U.S.-based private equity fund, approximately 130 billion won (US$99.4 million) in compensation.
The tribunal’s analysis highlighted the significant impact of the political scandal case involving former President Park Geun-hye.
By referring to a ruling by the Korean court, the arbitration tribunal concluded that the government had improperly intervened in the voting rights of the national pension fund and that the merger of Samsung C&T and Cheil Industries caused harm to the former’s shareholders.
The tribunal relied on the criminal cases of Moon Hyung-pyo, former health minister and Hong Wan-sun, then head of the National Pension Service (NPS)’s asset management division, both of whom were sentenced to two years and six months in prison for improperly intervening in the voting rights of the national pension fund during the Samsung C&T and Cheil Industries merger.
Furthermore, based on the Supreme Court’s ruling, the tribunal established a causal connection between the improper government intervention and the NPS’s vote in favor of the merger.
This connection resulted in damages to Samsung C&T shareholders.
The tribunal also concluded that the health ministry’s intervention in the NPS’ merger vote constituted an “action” under the Convention, which serves as the foundation for state responsibility.
Although the NPS is not considered an official or legal entity under Korean law, as it manages and administers the national pension fund belonging to the state, it effectively functions as a state entity.
Therefore, its voting behavior is attributable to the Korean government.
The Ministry of Justice (Yonhap)
However, the tribunal did not accept Elliott’s argument that damages should be calculated based on the value of the Samsung C&T shares that would have been realized if the merger had been rejected.
Instead, it agreed with the Korean government’s stance that damages should be calculated based on the actual share price of Samsung C&T shares.
South Korea experienced losses on almost all issues in the case, except for the calculation of Elliott’s damages.
Elliott claimed that the Samsung C&T stock it had purchased had significant “intrinsic value,” and that it would have earned substantial profits if the Korean government had not interfered.
Elliott calculated its damages by deducting the principal investment amount from this “imaginary return,” resulting in a claim of 1 trillion won in South Korean currency.
On this particular point, the tribunal sided with South Korea, deeming Elliott’s calculation unreasonable. In international arbitration, claimants occasionally present excessively inflated damages.
The details of the case will be published on the PCA’s website once the government and Elliott have redacted any confidential information deemed protected.
In July 2018, Elliott filed a US$770 million ISDS claim, alleging that the South Korean government interfered in Samsung’s merger with Cheil Industries in 2015 to coerce the national pension fund into voting in favor of the deal.
Ashley Song (ashley@koreabizwire.com)
