Stanimir A. Alexandrov PLLC
1501 K Street N.W., Suite C-072
Washington, D.C. 20005
Tel: +1 202 736 8186
Sidley Austin LLP
1501 K Street, N.W.
Washington, D.C. 20005
United States of America
Tel: +1 202 736 8000
7th Floor, Tower 8,
7 Jongro 5 gil, Jongro-gu,
Republic of Korea
Tel: +82 2 6226 7700
Arnold & Porter, LLP
Suites 3808-3811, CITIC Square
1168 Nanjing Xi Rd
Shanghai, China 200041
Tel: +86 21 2208 3680
Arnold & Porter, LLP
Three Embarcadero Center, 10th floor
San Francisco, California 94111 -4042
United States of America
Tel: +1 415 471 3359
Arnold & Porter, LLP
601 Massachusetts Ave, NW
Washington, DC 20001-3743
United States of America
Tel: +1 202 942 6634
Bae, Kim & Lee
133 Teheran-ro, Gangnam-gu
Republic of Korea
Tel: +82 2 3404 7587
Professor Zachary Douglas QC
Rue Général-Dufour 15
1204 Geneva, Switzerland
Tel: +41 22 310 6875
Toby Landau QC
Professor Zachary Douglas QC
Stanimir A. Alexandrov
Stanimir A. Alexandrov PLLC
Sidley Austin LLP
John M. Kim
Eun Nyung Lee
Jae Hyuk Chang
Anton A. Ware
Arnold & Porter LLP
Kap-You (Kevin) Kim
John P. Bang
Yoojoung Kangsunhee Cho
Bae, Kim & Lee LLC
11.15.1 This Agreement and the documents to be entered into pursuant to it, save as expressly referred to therein, shall be governed by and construed in accordance with Laws of the Republic of Korea.
11.15.2 Any and all disputes arising out of, relating to or in connection with this Agreement shall be submitted to the Court of Arbitration of the International Chamber of Commerce and shall be finally settled through binding arbitration under the rules of the Court of Arbitration of the International Chamber of Commerce. The arbitration shall be conducted before a panel of three arbitrators. Each of the Seller and the Purchaser shall nominate one arbitrator each and attempt to agree on a third arbitrator who shall serve as the Chairman. If no agreement on the third arbitrator can be reached within (30) days of the confirmation of the second arbitrator, then the Chairman shall be appointed by the Court of Arbitration of the International Chamber of Commerce. The seat of the arbitration shall be in Singapore, and the arbitral proceedings shall be in the English language. All the parties irrevocably submit to the non-exclusive jurisdiction of the courts of Singapore to support and assist the arbitration process pursuant to this clause 11.15.2, including if necessary the grant of interlocutory relief pending the outcome of that process.
(i) Declare that Hana breached Clause 6.3.2 of the SPA; and
(ii) Declare that Hana violated the following provisions of the Korean Civil Code:
a) Article 110, such that the December Amended and Restated SPA of December 3, 2011, is voidable and rescinded based on fraud and duress;
b) Article 750, such that Hana is liable for damages because of its tortious conduct of fraud and duress;
c) Article 109, such that the December Amended and Restated SPA of December 3, 2011, is voidable and rescinded based on mistake;
d) Article 104, such that the December Amended and Restated SPA of December 3, 2011, is null and void as an unfair juridical act; and
e) Articles 148 and 150, such that the conditions to the July Amended SPA are deemed fulfilled following Hana’s wrongful interference to avoid its contractual obligation.
(iii) Award to Lone Star, based on any or all of the above claims, damages and/or restitution as indicated above including for:
a) the lost sale proceeds, which amount to approximately US$ 586 million;
b) appropriate interest based on the express terms of the SPA (10%); and
c) a tax gross-up to compensate Lone Star for Belgian and Korean taxes that it would not have paid on capital gains but will be obligated to pay on ordinary income on any award from this Tribunal.
(iv) Award to Lone Star the costs and fees of this arbitration.
(I) DISMISSES all of Claimant’s claims in their entirety;
(II) ORDERS Claimant to reimburse Respondent all costs, including all fees and/or expenses of the arbitral tribunal, attorneys, expert(s), and witness(es), and the administrative fees of the International Chamber of Commerce;
(III) DECLARES the final award to be immediately enforceable; and
(IV) AWARDS Respondent any other relief deemed just and reasonable.
We had attended the same high school and had a cordial relationship. I met with him to congratulate him on his appointment to the chairmanship of the FSC and to exchange the Lunar New Year’s greetings. During this meeting, we discussed recent events in the financial industry, and in this context I briefly mentioned Hana’s pending application before the FSC.16
On 1 February 2011, the FSC sought supplemental materials from Hana concerning Hana’s (i) business plan for KEB, post-merger, and (ii) financing of the transaction. This request was shared with Lone Star, and after submitting these materials to the FSC on 10 March 2011, Hana duly informed Lone Star of this request. On 10 March 2011, the [Fair Trade Commission] approved the transaction, and the FSC was expected to approve the transaction during the FSC Commission’s meeting scheduled for 16 March 2011.17
Since requirements for approving inclusion [into subsidiary] are appropriateness and soundness of the business plan of the subsidiary, financial status and management soundness of the financial holding company, and anti-competitiveness, etc., whether seller violated requirement of eligibility as shareholder holding shares in excess of limit is not relevant.27
Hana’s view was that the issue of Lone Star’s disqualification was separate from Hana’s Application, not least because Lone Star had not yet been convicted. I tried to convince the FSC Chairman to take the same view. During my meeting with the FSC Chairman, he indicated that the FSC was undertaking a legal review of the situation and that the final decision on Hana’s Application was for the FSC to make, which it would do in due course. The FSC Chairman mentioned that the FSC was under a lot of public and political pressure at the time. However, it was clear to me that if the pressure were to be reduced then he would not be opposed to working toward finalizing the approval of the transaction. Hence I inferred from our conversation that he would need the Parties’ help in overcoming the hurdles he faced. However, the FSC Chairman did not suggest - and I did not think it appropriate to ask - what the Parties could do in this regard.37
[The Chairman of the FSC] is, he is really willing to do something to approve this transaction. But he also in need of, in a sense, assistance or help from us, uh, to wisely overcome the hurdles that he is facing with, especially related to the public blame, or political blame that he might come up with when he approved this deal.50
But what they view really stressful and important for them not to both of us is the political blame or public blame. And understanding that especially KEB... uh... uh... labor union, what they are right now insisting every day, three hours, two hours, in front of FSC and even Hana bank head office. They sing songs and... It’s real headache. And one of their strong argument is why not FSC declare Lone Star is not eligible.51
- As [decision] is delayed, the dividend that Lone Star will receive will compound like snowball
- No method to stop "eat and run"
- Weakening of international competitiveness of banks, damage to Korea’s international credibility and ‘Yang-ho Byeon Syndrome’ should stop at this point62 [this apparently is a reference to delaying a policy decision for fear of being held accountable63].
With respect to the Supreme Court’s reversal and remand of lower court’s decision in the KEBCS Stock Price Manipulation case, we have engaged in the review of the legal principles as to the eligibility of Lone Star Fund IV as a major shareholder of KEB (e.g., as a shareholder holding KEB shares in excess of limit).
As a result of such review, the outside legal experts are currently giving conflicting opinions on Lone Star Fund’s eligibility as a major shareholder.
Given that there are conflicting opinions among outside legal experts as to Lone Star’s eligibility as a major shareholder of KEB and also given that judicial proceedings are underway, it is, at this point in time, difficult to make a final determination as to the Lone Star’s eligibility as a major shareholder.
Taking into account the foregoing circumstances, we decided to wait and see the progress status of the ongoing judicial proceedings among others in making the final determination of whether to approve Hana Financial Group’s ("HFG") application for inclusion of KEB in its subsidiaries’ group.67
The biggest pressure came from the National Assembly. The minority party members of the National Policy Committee warned, "if the Financial Services Commission allows Lone Star to get away with unreasonably high profits without any penalty, the National Assembly will hold a hearing to hold the FSC to account, and request an audit on the FSC to the Board of Audit and Inspection of Korea and file a complaint with the prosecution." The members of the majority party, who SD Kim expected to defend him from the offensive of the minority patties, just stood by, and some of them even sided with the minority parties. Chung Wa Dae consistently distanced itself from the issue, emphasizing its "non-intervention principle."
SD Kim’s allies continued to decrease within the government. An increasing number of government officials began to express their concern, "this issue could be a ‘gate’ in the last phase of this administration. The FSC would completely lose its authority and power if it is concurrently attacked by the National Assembly, Board of Audit and Inspection of Korea, and the Prosecution." Working-level officials were reluctant to make a decision, saying, "the interpretations on the legal principles provided by outside law firms are totally in disagreement." The "Yang-Ho Byun Syndrome" has kicked up again...
According to legal advice and review opinions, based on the good faith obligations between contractual parties, even if a compulsory sale order is issued during the 6-month extension period, there are no legal grounds to change the current terms of the agreement.80
As I explained to you, FSC views a combined package of 5% purchase and a share-backed loan as an effective transfer of KEB ownership (of course, neither of us agree with their groundless interpretation), therefore, FSC is against the idea of Hana’s loan to Lone Star. If we choose to do only a sharebacked loan, FSC’s argument would lose its ground and I cautiously predict we would be able to extend a loan to you. This may not give a powerful signal to regulators as we intended, it could be an inevitable choice we can make under the current circumstance.82
Now, [the FSC] have "warned" Hana not to buy any shares, not even 5%. They believe that they might be criticized politically/by the labor union/public opinion if Hana takes a position that comes with some control, such as the board seat. They know they have no authority to stop this, so have made this warning verbally. Hana believes that they are very serious about this.
The Deputy Chairman of the FSS communicated this verbally to Mr. Yoon, who is working with Hana. Yoon used to be the CEO of IBK and also used to be an FSS committee member. Yoon was told by the Deputy Chairman of the FSS that if Hana will give them "assurance" that Hana will not pursue any share sale, they will allow the Korean Won loan. The assurance would have to be verbal, as they know they’re asking for something they’re not allowed to ask for.87
Byoungho mentioned that immediately after the KEB dividend was approved, a mid management guy from the FSS called Mr. Bae (spelling?) at Hana’s holding company and asked him what change in Hana’s pricing of KEB would result from the dividend. Mr. Bae explained that we were still in negotiation so no definitive answer.
The FSS guy then said that Hana should negotiate a price that is 14,250 less, dollar for dollar, the dividend paid. Mr. Bae was taken a bit by surprise that the regulator would be discussing their pricing. Apparently, the regulators are afraid that they’ll be blamed for Lone Star taking this dividend as a result of their delay, and are hoping that they can say that the dividend didn’t result in Lone Star getting more money.88
The primary reason for the changes (and [Hana’s] concern) is the recent negative political sentiment and media coverage related to Lone Star and the large 2nd quarter dividend amount declared by KEB. With an objective to close the deal as smoothly as possible going forward by mitigating such negative political and media pressure, and because HFG anticipates that the FSC will be looking to verify that the final purchase price takes into consideration the large 2nd Quarter KEB dividend, HFG would like to make very clear in the 2nd Amendment that a purchase price adjustment has been made.89
Rises and falls of share price in the short term would not influence the intrinsic value of a company. Upon extension of the agreement, the purchase price was calculated based on the book value of KEB.93
22 At the time, hundreds of people gathered around
23 the offices—my office, and FSC office, they were always
24 standing in front of the building with pickets, and there
25 were times where I would not be able to actually go out of
1 the entrance of the building.
2 And the reporters, whenever there were issues,
3 they came to me asking questions; and, in order to mollify,
4 you know, their concern, I have responded by saying that
5 even the price could adjusted. There could be that
6 possibility. But, in our mind, basically we wanted the
7 whole process to go as smoothly as possible and ASAP as
However, even if financial authorities grant final approval, there is no guarantee that this will be granted before the end of November, which is the deadline of negotiations between Hana and Lone Star. Therefore, Hana is preparing for the possibility of renegotiations. Hana Chairman Seung-Yu Kim recently stated, "The agreement (with Lone Star) will be extended if necessary."
It has also been reported that Hana is preparing for additional negotiations on the share price with Lone Star in the event that a sale order is issued against Lone Star.
The share purchase agreement was entered into in November 2010 at KRW 14,250 per share based on a comprehensive analysis of KEB’s intrinsic value, market value, profitmaking capacity, synergy effects after acquisition, premium for management rights, etc.
- Objectively compared with the past M&A cases of KEB, HFG’s acquisition price is lower in both relative and absolute terms.
- Currently, the low price of KEB’s shares is due to the drop in the share price caused by the announcement of acquisition and the general downward effect on the market caused by factors such as the credit rating downgrade of the US, etc.
- With regard to price adjustment, we are closely monitoring the current economic conditions and stock market and if it is determined that the fall in the stock price is not temporary but a long-term trend, we may discuss with Lone Star if necessary.
- However, since the parties have contradicting positions and perceptions regarding price, it is not certain yet as to whether the price can be lowered. If the price can be lowered, it can help with the approval of the supervisory authority.108
I am thinking that the FSC will only approve the FIFO transaction once they issue a forced sales order and will not do so beforehand... The FSC seems likely to find some reason to delay action on the transaction until after the contract expires to force (completely inappropriately) some price negotiation. Their delay could be either through a long corrective action period or something else—such as "legal review" of what conditions should or should not be attached to the forced sale order.
What I was trying to say was with the assumption that they will not approve any transaction until a forced sale order is given, a lengthy corrective action period would mean Lone Star is simply likely to hold the shares in January.112
9 Q. But the fact that you had those other potential
10 options would create uncertainty as to whether Hana would
11 be able to succeed in renegotiating its deal with you; right?
12 A. Correct.
13 Q. And the market would not like that uncertainty,
14 meaning that Hana's share price would come under pressure;
16 A. Right.
17 Q. And that would be risky for Hana and would
18 undermine their leverage to seek a lower price; correct?
19 A. Correct.
25 Q. If Hana approached you about a price reduction,
1 you had the option of holding firm, refusing to
2 renegotiate, and forcing Hana to decide whether to take
3 this risk of terminating the Contract; correct?
4 A. Yeah, but there--our decision would have been simple,
5 which we wouldn't have renegotiated the price with contract,
6 with Hana. There was no reason to. We know they wanted to
7 close the deal. We know that there were significant costs to
8 them if they didn't close the deal.
9 The only reason that we would negotiate the price of
10 the Contract prior to the expiration of the lock-up period was
11 if they could assure us—they could—that the FSC Chairman
12 would tell them that you get approval. It was the only reason.116
If a compulsory sale order is issued to Lone Star, then the most likely scenario is that all of the private equity firm’s shares in KEB will be sold to Hana Financial Group (HFG), which had already entered into the agreement to acquire the bank. Still, however, there is one hurdle to the KEB sale: the sale price.
The existing unit price set to be paid by HFG to acquire KEB has been considerably criticized for being too high—which is why, to acquire KEB, HFG needs to go through the last difficult stage of renegotiating the unit acquisition price with Lone Star.117
Whilst the issuance of the preliminary order today in advance of the October 19th FSC meeting gives the appearance of moving forward expeditiously, the overall process has enough steps and open-ended timing to stretch well beyond the end of November and current expiration of the HFG [Hana] deal. The challenge of their approving a deal by end-November is exacerbated by the limited calendar of regularly scheduled upcoming FSC meetings before the end of November—the only two are on 2nd and 16th. The next regular meeting after November 16th is December 7th. Because of today’s action and the next step being after October 25th, I understand that there is nothing further about Lone Star or HFG on the agenda at the upcoming FSC meeting on October 19th.119
We also again emphasize that the FSC has expressed no basis for continuing to delay its review of Hana Financial Group's application filed on December 13, 2010 for the FSC's approval on acquisition of KEB as a subsidiary pursuant to the Financial Holding Companies Act, and thus we respectfully urge the FSC to promptly process that application.124
The FSC has asked Hana to approach us to renegotiate the price of our contract downward. The fsa realize they should approve the deal, but dont want to be criticized for allowing Lone Star to make too much profit.
I told him that the FSA should request this directly to us rather than going through Hana. He said that the FSA could not propose this to us since the request is improper because it is not within their scope to set the price. He said that is why they ate doing it through Hana verbally rather than in writing.
He said that chairman kim was told this directly by the FSA.126
Dear Mr. Grayken,
It's been a year since we first signed the SPA and I hope we could close the transaction soon with amicable relationship. As we expect FSC's sale order notification to be made in next week, I am writing to you to share my view on the current situation and necessary actions for a coordinated closing of our transaction.
It is regrettable that the Seoul High Court's final verdict was not in favor of you, and FSC has subsequently given you a fulfilling order with a short remedy period. However, I believe this is a gesture by FSC that they would like to resolve the situation as soon as possible, if they could find a way without being blamed.
After the court verdict, there are increasing voices that a punitive measures should be applied to Lone Star. It is not only KEB labor union, but NGOs/civil activists and politicians who argue for a punitive forced sale by Lone Star. Some politicians have claimed that the existing contract should be nullified and National Assembly should pass a new law for punitive sale measures. They claimed that Lone Star was in-eligible in its original purchase of KEB and reaps excessive premium from the current market price.
Moreover, Mr. Sohn, a head of the opposition party, publicly declared at the KEB labor union rally last Sunday that the current contract between Hana and Lone Star should be invalidated and his party would strongly urge the government to make a punitive sale order. Considering political situations in Korea (i.e., recent loss of Seoul Mayor position by the ruling party, National Assembly election in April next year, Presidential election in December next year, etc), I believe that we would face increasing stronger political resistance, unless we strive to expedite the closing of our transaction.
Despite an increasing demand for a punitive sale order, Hana has persuaded FSC that such an order would not be applicable in this situation. But, even if a normal sale order is made by FSC, we are required to submit a new contract, as the existing contract was not entered in accordance with the sale order. In submitting a new contract, we should find a way to alleviate political pressure on FSC in approving the transaction, especially by reflecting market valuation and turbulent financial industry. Otherwise. FSC can not be expected to proceed to an approval with the existing contract.
I believe it would be mutually beneficial if we could close the transaction at the earliest possible time by doing so. I appreciate your cooperation to date and hope that we both do our best to complete the last part of our transaction.
Chairman & CEO
Hana Financial Group128
11 Q. And then in the last sentence you say:
12 "Otherwise, FSC cannot be expected to proceed to an
13 approval with the existing contract." Right?
14 A. That's how it is written. And, as I
15 mentioned earlier, this was part of our tactic to
16 begin price negotiation.
17 Q. So, it's not a true statement that the FSC
18 cannot be expected to proceed to an approval with the
19 existing contract; is that right?
20 A. That’s right.129
10 A. What good would that have done? Our lawyers had
11 been advising us that [the FSC] had been operating illegally for
13 Q. Okay. So, you already--you already had a very
14 clear view of what was going on at the time with the FSC;
16 A. It was very simple, all right? They had--after
17 we decided not to appeal, their pretense that the legal
18 issues were holding them up were over. They could have
19 very easily then approved the Contract with Hana, and we
20 would have been--our deal would have been done, and we
21 would have complied with their Sale Order. They used this
22 new contract as an excuse to delay. That seems obvious to
24 Q. And the "they" you're talking about there is the
25 FSC; correct? The FSC used this new Contract as an excuse?
1 A. That's correct.132
8 Q. Now, would you agree with me that Hana Chairman
9 Kim does not say in this e-mail that the FSC had told Hana
10 that the FSC would approve Hana's Application only if Hana
11 convinced Lone Star to accept a price reduction?
12 A. He doesn't say that here, but I know that's what
14 He's going to try to protect the FSC because the
15 FSC knows that, if they're explicit about that, that
16 they're going to get sued by us, but I know that they're
17 telling him directly what has to be done for them to take
19 Q. You know that?
20 A. I know it.
21 Q. Based on your long experience of seeing how the
22 FSC was handling these applications over the years;
23 correct? It was obvious to you?
24 A. Yeah, it's obvious to me. Plus, again, the
25 pretense that they had been using for so long has now
1 disappeared. It's gone. So, now they can approve, and
2 there is a contract. They can stamp it "approved" and it's
3 over with, but they refuse.
4 Q. And at the time, you believed the reason they
5 were delaying or refusing approval was because the FSC was
6 worried about the political reaction; right?
7 A. That's correct.
8 Q. So, Hana Chairman Kim's e-mail expresses the idea
9 that a price reduction would alleviate that political
10 pressure that the FSC was feeling; right?
11 A. Right.
12 Q. And at the time the public was focused on the
13 level of profit that Lone Star stood to gain on this deal;
15 A. One of the things that they were focused on, yes.
16 Q. So, the theory behind Hana Chairman Kim's idea
17 that reducing the price would take some of the heat off of
18 the FSC is that it would give the FSC political cover to
19 approve the Transaction; right?
20 A. Yes. I believe that's what the FSC was telling
21 him, that's correct.
22 Q. And that made sense to you at the time; right?
23 It was consistent with how you believed the regulators had
24 operated in Korea, based on your own experience in losing
25 the HSBC deal; right?
1 A. That's right.133
Guys, I had another talk with Byoungho Kim of Hana Bank this morning. He didn't have any different information than yesterday. He reiterated that the FSA was pushing them to reduce the price. He said that Hana was happy that it was a good price and is anxious to close the deal as it is, and their request for a reduction is only because of the FSA demands. I'll let you know if I hear anything else.134
Guys, Byoungho Kim from Hana Bank called me last night. He repeated what he said last time: that the FSC was pressuring them to renegotiate a lower price to "give them an excuse" to approve the deal. I, of course, told him that the sale order should be excuse enough. Nothing different from last time.135
During that meeting, the FSC Chairman maintained, as he had before, that it was for the FSC Commission to make a decision on Hana’s Application and that he was not in a position to confirm whether the FSC would approve the transaction before 30 November 2011. This response from the FSC Chairman did not give me any reason to change my view that approval before 30 November 2011 was highly unlikely at that point.138
[B]asically, SD (FSC) Kim wants to move forward with the sale to HFG, but feels he can’t do so without some price reduction to take the heat off them. And interestingly, SY (HFG) Kim is lobbying SD (FSC) Kim to order the sale on a shortened basis, so as to strengthen HFG’s hand in the anticipated upcoming price renegotiation. It seems we are making them both nervous by our refusal to discuss a price reduction. Finally, the advisers all are of the view that this deal needs to get approved this year; as we go into a major election year, the odds increase significantly of them being even less willing to do anything controversial, so the risks go up of them simply sitting on this if we don’t get the deal done this year.141
19 Q. Okay. Now, you state in your e-mail that Lone
20 Star's belief at this time was that the FSC Chairman wants
21 to move forward but feels he can't do so without some price
22 reduction to take the heat off of the FSC; right?
23 A. That's right.
24 Q. And your discussions with these various advisors
25 fundamentally corroborated that belief; correct?
1 A. Right.142
SEOUL, Nov. 10 (Yonhap) — South Korea's financial regulator is carefully mulling what steps it should take to move forward on the sale of Lone Star Funds' controlling stake in Korea Exchange Bank (KEB) amid growing public demand for punitive measures against the U.S. firm's exit from the country, watchers said Thursday.
However, after issuing a prior notice to Lone Star ahead of the actual sale order on Oct. 31, the FSC has stayed mum on the issue, fueling speculation that it is facing a dilemma.
Politicians and activists have been mustering support for a punitive measure, arguing that the regulator should first re-evaluate whether Lone Star is a financial or non-financial investor based on the size of the buyout firm's non-financial assets.
They said that under local banking law, Lone Star should be classified as a non-financial investor, which would nullify the buyout firm's agreement with Hana Financial and strip it of its shares that exceed a 4 percent stake.
On Tuesday, KEB's unionized workers filed an injunction with the country's constitutional court, asking the top court to stop the FSC from ordering Lone Star's stake sale before its status is clarified.
"The FSC should first rule whether Lone Star is a financial or non-financial investor. If they go ahead with the sale order without such a process, it would be going against fairness to give special benefits to the firm," said a KEB labor union official.
In what is deemed as a populist move ahead of next year's elections, politicians from both the ruling and opposition parties have also been drumming up support for punitive actions.
"It is not too late to issue a sale order after verifying whether Lone Star is a non-financial investor. (The gain of) a management premium should be prevented at the least," Grand National Party chief Hong Joon-pyo said in a Twitter message, echoing Democratic Party leader Sohn Hak-kyu's earlier call for punitive action.
A punitive measure would include attaching conditions to Lone Star's stake sale, such as ordering a bourse sale, a move which would block the U.S. buyout fund from pocketing gains from its deal with Hana Financial.
Under Lone Star's pending deal with Hana Financial which was signed in November 2010, the U.S. buyout fund is expected to pocket more than twice the money it spent on purchasing KEB stocks.148
10 Q. I see. So, just to help us to understand the
11 context at the time, so Kim & Chang had other lawyers or
12 consultants who had the contacts and the ability to have
13 discussions with the regulators; whatever information they
14 were gleaning, they would feed to DY Kim, and because he
15 was your contact, he would then relay some impression of
16 that to you. Is that--
17 A. That's a fair description, yeah.
18 Q. Did DY Kim ever describe in more detail who at
19 the regulators they were speaking with?
20 A. No, and rarely would they, and I don't remember
21 any specifics around this.
22 Q. But as far as you can recall, the information
23 that was being relayed to you from Kim & Chang was
24 consistent with the information you were receiving from
24 consistent with the information you were receiving from
1 A. Yes.150
Dear Mr. Grayken,
I am writing to you to express my concerns on the current situation adversely affecting the progress of our transaction, and would like to seek your understanding and support to bring the closing of our transaction.
As we are approaching to the last step toward the closing of our transaction, we are facing substantial hostility not only from the people who have been against the transaction but from those who believe they could take advantage of this situation by opposing to the transaction. These people endeavors to do anything to make the situation politically sensitive and increase legal uncertainties. Most recently, KEB labor union has filed an injunction request to Constitutional Court and argued that FSC should review Lone Star's status as Financial Business Operator first before making a sale order. To make the situation worse, now some members of the ruling patty, including Mr. JP Hong who is a head of the party, have started to sympathize with arguments, as they are competing against the opposition party to win support from the public for the upcoming elections.
As I have written to you in my previous e-mail, we would face increasing political risks, unless we strive to expedite the closing of our transaction. Considering current political dynamics and election schedules, we think December would be tire last window for us to close the transaction.
In expediting the closing, I believe that we would need to lower the price to KRW******/share (about **% from the current contract price of KRW13,390/share), so that we could contain political pressure and get the process proceed. Compared to the total proceeds of the original agreement of the last year, total proceeds with a new price, together with 2011 1H dividend, would not be significantly different.
While this may not be perfectly satisfactory to you, I would like to make it clear that I am not taking a position to negotiate a price in the interests of Hana and regard this as our final efforts to win the approval. Even if the transaction is closed at a lower price than originally agreed, I would be personally blamed for collaborating with Lone Star's exit but I am ready to face such criticism.
I sincerely hope that we could reach an agreement, and that you could understand the necessity of it. I fully understand how difficult it would be on your side to make such a decision and equally feel my responsibility to deliver the closing of our transaction. It has not been as smooth as we wished, however, I appreciate your cooperation to date and promise you that I would put my utmost efforts to bring the mutually beneficial outcome in an expedited manner.151
- Explained the need for price adjustment based on political circumstances and public opinion, etc. around the time of the sale order and Hana made a proposal for price adjustment (KRW 11,190/share).
- Chairman Grayken made it clear that it was not acceptable since "Hana’s proposal meant a burden of USD 400 million or more simply due to public opinion and political circumstances, and not only are there no legal grounds, there is no justification to convince investors in LS fund."
- LS would rather stick to the existing agreement and take legal measures if approval is delayed or find another buyer. LS claims that there is a way to keep control of the Board of Directors and dividends even if voting rights are restricted (considering stock return to investors).
- We explained that, given the current market situation and possible political changes, early closing is most important and that all other alternatives are less feasible considering time and economic costs (including fine), etc.154
ELLIS: [...] And the regulator has, has specifically told him to reduce the price. Is that...
BYOUNGHO: I think, I think... They are implicitly saying. Because they’re really care, careful about the legal...
BYOUNGHO: Framework. So they really are very careful in saying that. But we, we, we clearly know that, that’s their objective.
ELLIS: That the regulator’s objective...
ELLIS: And the regulator wants us to take a lower price because they feel like that makes the people happy?
BYOUNGHO: That makes not, not, not that way, but opposite way for them to protect themselves. They, they do not think that whatever price they approve, they will get blamed, too. So actually from that perspective, they are taking the risk. Because I believe that’s because of our Chairman Kim. Chairman Kim has real good connection with the regulators, especially the head of FSC. And persuaded and persuaded and persuaded that he will take, he, Chairman Kim himself, Seung-Yu Kim will take all the blame after the deal is being closed. While you have to give the approval - twice. And I think that was persuaded. But with a condition, which is the justification; justification that the regulators should have to protect themselves at least.156
ELLIS: He makes Chairman Kim, he must have had the discussion with Kim Seok Dong.
BYOUNGHO: I believe so. But I don’t think he explicitly talked over this specific number with him. ‘Cause that’s probably the area that the regulators may like to avoid. Because the price, right?
ELLIS: Because it... but it’s illegal for them to even be having this discussion.
BYOUNGHO: They will find other excuses if they think that... if really, the price is the heart of the matter, then I think not the price. They will find other excuses for them to have to delay the approval process. I am sure about it because that’s what they did to us in March. So...157
[A]djust to KRW 11,190, but make a post adjustment for increases in the stock price for a certain period of time and grant dividend rights for the period until closing.
(e.g., additional payment applying a multiple of 1.5 to the greater of the increase of the stock price of Hana and that of KEB in the following three years, dividend of about KRW 3OO)160
BYOUNGHO: Ah. You once told me that it’s a negotiation between Lone Star and regulators, not with Hana. I think that’s right. At the end of the day, we have to negotiate with the regulators. But it is fortunate that they will not negotiate with your [phonetic] sell.
BYOUNGHO: So whether us...
ELLIS: Because what they’re doing is illegal. And they don’t mind if you know they’re doing, they’re conducting illegal activity. They don’t want us to know.
BYOUNGHO: That is, that is why there is no proof that they are asking price reduction.
BYOUNGHO: That is why. They are ver- very careful. They really do not want to be, uh, so that’s the difficulty that we have.
ELLIS: So, so you think they know they’re breaking the law. But they’re just, because of that they’re careful not to leave evidence.
BYOUNGHO: That, that may be true. But that’s my own speculation.161
Lone Star has been notified that, in view of the political climate in Korea, the changes to the legal status of Lone Star after the execution of the SPA Amendment and the recent changes to the environment of the financial markets, there is a need to change some of the terms and conditions of the SPA (including the proposal to reduce the existing purchase price), and HFG is promoting discussions thereon.164
A significant time has lapsed since the submission of the application by the Hana Financial Group, and there has been a significant change to the factual background relating to the requirements* for the addition of KEB, due to the increased uncertainties in the domestic and overseas economic environments.
Lone Star has lost its major shareholder status due to the guilty verdict on the share price manipulation case, which limits Lone Star's voting rights with respect to those shares held in excess of the prescribed limit (i.e., 41.02% out of 51.02% held by Lone Star) as of October 25, 2011.
Considering the changes taking place to the circumstances, it is viewed that it is difficult to proceed with the approval process based on the previously submitted application for the addition of subsidiary.
Accordingly, the FSC has resolved to notify the Hana Financial Group to submit a fresh application concerning the addition of subsidiary, taking into account the changes to the circumstances.167
Simply put, the FSC wants Hana to submit a new application reflecting the circumstantial changes over time as the acquisition process has been delayed for more than one year, which is, in fact, a message to "lower the purchase price." A high-ranking official of the FSC said, "KEB’s stock price has significantly dropped, which is why we think the purchase price agreed on the current agreement (KRW 4.4059 trillion) is too high," adding, "we will wait and see as Hana Financial Group said that they would lower the price."168
Lone Star lost its eligibility as a major shareholder due to guilty verdict of stock price manipulation against Lone Star. Of the KEB shares held by Lone Star (51.02%), the voting rights of shares held in excess of the limits (41.02%) came to be restricted. HFG also sent an official letter to FSC notifying that there is an ongoing renegotiation with regard to the share sale and purchase agreement with Lone Star.170
- The FSC’s decision is worthy of high praise from the perspective that it overcame the so-called ‘Byeon Yang-Ho’ syndrome and showed the will to resolve issues in accordance with laws and principles at a difficult time when issues related to external and internal risk factors are building up, such as the European fiscal crisis, mutual savings banks, household debt, etc.
- Especially, it is praiseworthy that the financial authorities did not render an extrajudicial decision, such as a so-called ‘punitive’ sale order, based on political logic or sentiment against foreign capital and made its decision based on transparent legal procedures.171
Price negotiation regarding shares held by Lone Star is a private agreement with a counterparty and should be respected as long as it is proceeded within the framework of legal order.172
- Therefore, the purchase price is determined by the parties to the sale and purchase based on their own interests and strategies, and it is problematic if a third party argues only based on the current share price.173
The FSC is pressuring HFG to reduce the purchase price by having HFG reapply for approval to acquire KEB as a subsidiary, the original application of which was previously submitted.
The FSC essentially alluded that they would not approve the acquisition of subsidiary if there was the risk that acquiring KEB would harm HFG’s financial soundness. As such, in actuality, it is interpreted that the FSC is requiring HFG and Lone Star to reduce the purchase price for KEB.
At the press meeting held on November 18 after deciding to issue the compulsory sale order for Lone Star to sell the shares in KEB, Standing Commissioner Suk-Joon Lee of the FSC stated that "it is being reported that HFG and Lone Star are renegotiating. Once the negotiations are settled, the circumstances will change greatly."
Commissioner Lee added that "once a new application is submitted, we will review based on such document," and further adding that "the financial soundness of HFG will be reviewed and the price will also be a factor."
A member of the bank circles interpret that "the FSC is indirectly using the soundness of HFG’s financials as a way to place pressure on HFG and Lone Star to lower the purchase price for KEB" and that "feeling burdens from the ‘eat and run’ controversy arising from issuing a simple sale order, the FSC is creating safety mechanisms to keep the situation in check."175
CHAIRMAN KIM: [...] But the problem is in, which is not real, you know, contract between two private parties. They, their argument is uh, you know, most of their politicians, politicians think about this is forced sell-buy. Due to verdict. So that’s why our agreement should be changed; but not by FSS or Blue House. Because right by ruling party, you know, some of the ruling party and National Assembly. And they advised to Blue House and also advised to FSS, and...
CHAIRMAN KIM: More frankly...
CHAIRMAN KIM: They told me, we should reduce at least 20% of the, you know, our contracted price, which is under 11,000 won per share. So I can’t do that, no way. They would not accept this proposal at all. I tried to push it, and, and they still told me under 11,000 won per share, so that’s why, no, no, no, did you say 11, under 11, 11, 900. It was my proposal. Well, if you insist under 11,000 won share, I can try to push it and 11,900. That’s the only way I can, you know contact with Lone Star people, no other way I told them.
ELLIS SHORT: So they specifically told you the price they wanted you...
CHAIRMAN KIM: Not FSS. It was not FSS. Well, I met many congressmen, many national...
MICHAEL THOMSON: These are National Assemblymen, you’re talking about?
CHAIRMAN KIM: Yeah.
ELLIS SHORT: Okay.
CHAIRMAN KIM: You know, ruling party leader, Mr. Hong, you know, he’s my college junior. And opposition party leader, Mr. Sohn is my high school junior. I know every-everybody, you know. I’ve known them more than 10 years, 20 years. So I try to contact one by one - not collectively. But well, some of them tell me, "Well, we should reduce by minimum of 1 trillion — can’t think of any, any numbers. You know, 1 trillion won, or somebody 2 trillion won. Well, but somebody know about these issues. They told me the price should be under 11,000 won per share...176
JOHN GRAYKEN: I mean, okay, Chairman Kim, thank you. Let me just see if I can understand that we, uh, following the verdict, pursuant to Korean law and precedent, the, uh, repercussions of a guilty verdict are that we have to pay a fine, which we did pay... and we’re under an order to sell the bank within a certain period of time: 6 months. Um, but there’s nothing under th- in the law or in precedent which would impose punitive measures.
CHAIRMAN KIM: No.
JOHN GRAYKEN: Nothing.
CHAIRMAN KIM: Nothing.
JOHN GRAYKEN: Despite that, the people in the General Assembly have come to your and say that, that the, in order to satisfy public sentiment, the price has to be reduced. That’s what they said?
CHAIRMAN KIM: Uh-huh.
JOHN GRAYKEN: But it’s actually not their decision.
CHAIRMAN KIM: No.
JOHN GRAYKEN: To approve the deal or not.
CHAIRMAN KIM: Yes.
JOHN GRAYKEN: If it is the FSC’s decision.
CHAIRMAN KIM: It’s true. It’s true.
JOHN GRAYKEN: So, what does the FSC say?
CHAIRMAN KIM: But even though FSC didn’t say anything until now, but the FSC might put off their decision, put on their decision. Because, uh, you know, even both party leader, you know, ruling party leader — Mr. Hong - and uh, opposition, opposition party leader Mr. Sohn, you know, agree to, you know, FSC Chairman should step down...
JOHN GRAYKEN: Well Chairman...Okay. Let me, let me ask you this, a simple question, which is, you’re asking us for something. You’re saying to change the contract. Reduce the price by 500 billion won. And so I have to ask you a simple question, which is: if we do that, what assurances can you give me that the FSC is going to approve this deal? Why should we, why should we do this without something in return?
CHAIRMAN KIM: Well, if we decide the price, I’ll give you assurance within one or two days.
JOHN GRAYKEN: So you have, have you discussed this price reduction with the FSC?
CHAIRMAN KIM: Not really, but uh, I do have a feeling. I do have you know many dialogues with FSC. But I have a feeling, I told them 1 trillion won reduction. I told them, "He’s kidding. No way." I talked to, you know, FSC people. One trillion reduction, no way.177
JOHN GRAYKEN: Have they asked you to reduce it?
CHAIRMAN KIM: No. They didn’t say anything. But the, you know, you... They told me, I should, you know, recognize the political part- two parties’, you know, reaction on this deal.
JOHN GRAYKEN: They said that?
CHAIRMAN KIM: Yeah.
JOHN GRAYKEN: They said that their, that this is important to them?
CHAIRMAN KIM: Uh huh. That’s why two parties, you know, all these Chairman of the FSS should step down.
JOHN GRAYKEN: And both of those parties want the price reduced today? So the FSC has basically told you that they need the, they need the price reduced as well?
JOHN GRAYKEN: That’s right?
JOHN GRAYKEN: Hmm. But they didn’t say...
CHAIRMAN KIM: So that’s why I met with...
JOHN GRAYKEN: But they didn’t say how much?
CHAIRMAN KIM: Many, many, you know, National Assembly men, rather than, you know bureaucrats
JOHN GRAYKEN: So you can’t tell us then, if we, if we, uh, agree to a price reduction?
CHAIRMAN KIM: Well...
JOHN GRAYKEN: That the deal will be approved?
CHAIRMAN KIM: Well, I can assure you within tomorrow because FS Ch- FS Chairman is coming to London tomorrow night. But he’s on the way back to Seoul. He just stop over London.180
18 You have to remember now, we have been under
19 contract with this man for a year. When we signed it a
20 year ago, he assured us he could get it approved. His
21 personal assurance isn't worth anything anymore. We know
22 that. The FSC is controlling this. Okay? His personal
23 assurance is not worth anything anymore. We've had a year
24 of that. He needs to talk to the FSC Chairman personally,
25 and the FSC Chairman has to personally commit. Based on
1 that, we'll go forward--or not.182
9 Q. Is it your testimony that you understood that
10 Hana Chairman Kim was promising to have an illegal
11 discussion with the FSC Chairman on your behalf?
12 A. Look, as I told you before, my view is the FSC
13 was operating illegally for years regarding this deal and
14 that we wanted to get approved, and Chairman Kim was simply
15 going to find out from them whether or not they would
16 approve this deal, if this was enough punishment for us to
17 take, and if they would approve this deal based on this
18 price. It's as simple as that.183
JOHN GRAYKEN: Let me... Okay, let me just try again to understand what it is you’re, you’re asking. You’re asking us to reduce the price to 11,900. And what you’re saying...
CHAIRMAN KIM: There, there is no reason at all, why 11,900 as I told
you. [Laughing] They told me, 11,000. So I told them...
JOHN GRAYKEN: The politicians told you 11,000.
CHAIRMAN KIM: So I told them: "11 is 11. 11-9..."
JOHN GRAYKEN: But at 11,900, is it your judgment that the FSC is going to do this? At 11,900?
CHAIRMAN KIM: I try. But I can do it.
JOHN GRAYKEN: You think you can do it.
CHAIRMAN KIM: Yeah.
JOHN GRAYKEN: And you will know when?
CHAIRMAN KIM: By tomorrow or by early Monday. I’ll be back tomorrow. Fortunately, I can meet, you know FS Chairman at the airport today. He’s coming 4:30 in the afternoon from Turkey, and... I suppose to meet him tomorrow.
JOHN GRAYKEN: Alright, tomorrow.
CHAIRMAN KIM: Tomorrow. Tomorrow. Not today. Tomorrow184
During our brief call, I recall informing the FSC Chairman that the Parties were close to reaching an agreement to extend the SPA and asked when we might expect the SPA to be approved. The FSC Chairman replied by saying, as he had previously said, that the FSC Commission would decide Hana’s Application in due course. However, I did not infer from the FSC Chairman’s words or his tone any negative signal about the timing or outcome of the approval, and on that basis I felt comfortable reiterating my personal assurance to Mr. Grayken that Hana would be able to obtain approval at the reduced price. After the call, I asked Mr. Hyeonkee Bae to write to Lone Star asking for a follow-up meeting between Mr. John Grayken and me to be arranged on 26 November 2011.187
9 [Q.] Something must have changed in terms of the
10 reaction by the FSC Chairman to your question between
11 November 2nd and November 25. What was it?
12 A. So, basically, on November the 2nd, when we met,
13 we had not--the Parties had not yet arrived at a new price
14 negotiation. It was before that point in time.
15 And on November 25th, when we had the call, the
16 Parties have, meaning myself with Grayken, have reached a
17 negotiated and have arrived at the new price. That is
19 THE WITNESS: My question was, as I have
20 testified previously, the two parties are now soon to
21 arrive at a new Contract. Then, if we submit a new
22 Application, we will be able to get approval before end of
23 December. That was the question asked.191
10 Q. Is it your testimony, Chairman Kim, that the FSC
11 Chairman understood that the extended SPA would involve a
12 new price reduction, even though you didn't say that?
13 A. I can conjecture that he would have thought that
14 that aspect would have been included.192
3 PRESIDENT DOUGLAS: And you testified today that
4 it would have been clear to him that the new Contract that
5 you talked about would have included a price reduction,
6 even if that wasn't said expressly.
7 THE WITNESS: But he did not say the price, nor
8 did he ask me for what the price was. I would think that
9 he had the feeling that I would have taken care of reducing
10 the pricing now, based on my judgment.193
14 THE WITNESS: Because FSC had to make its
15 Decision amidst the backdrop of a significant pressure in
16 terms of political from the civic organizations, from the
17 labor unions, NGOs, so they had to make a decision within
18 this pressure market environment, so it would be difficult
19 for me to give you a confirmed answer at this point.
20 PRESIDENT DOUGLAS: Could I take it from the
21 answer that you just gave that the FSC was, therefore, very
22 interested in the price reduction?
23 THE WITNESS: Although they were not directly
24 involved in this topic of price, I would presume that they
25 would have had interest at what price this deal was going
1 to happen.194
Byoungho left London tonight due to his another schedule, while Chairman Kim and I stay in London for tomorrow's meeting with FSC Chairman.
By the way, tonight two chairmen had a long conversation about our meeting result over the phone call, which made it unnecessary for them to meet each other at the airport.
Chairman Kim want to meet with you tomorrow in order to explain the responses from FSC Chairman and discuss about the subsequent issues.197
As it turned out, he spoke to the FSC Chairman on the phone, and he called for a meeting with me.
I met him the next day at the Peninsula Hotel in London. It's a private meeting, just the two of us, and he told me that he had spoken to the FSC Chairman about it, and that the price reduction was acceptable, it was enough for the FSC to approve the deal, and that they would do it if we would contract for it.
I told him that we would do that, we shook hands, and that was the end of the meeting, and I left.201
The purpose of the meeting was
8 to discuss his conversation with the FSC Chairman. He
9 related to me that he had discussed the price reduction
10 with him and that, based on that, the FSC Chairman was
11 going to move to approve the deal. I clearly remember
13 Q. You clearly remember him using those words?
14 A. I clearly remember him telling me that he had
15 spoke to the FSC Chairman, and the FSC Chairman was going
16 to approve the deal based on the price reduction. Yes. I
17 clearly remember that. We wouldn't have shaken hands and
18 the deal would not proceeded had I not heard that.202
19 PRESIDENT DOUGLAS: I think the last question:
20 Given, again, everything you know now and with the benefit
21 of hindsight, do you think that Chairman Kim did actually
22 discuss the share price with the FSC and that the FSC did
23 give an indication that the reduction would be acceptable?
24 THE WITNESS: I'm certain of it. I'm certain of
25 it. I mean--again, he was desperate to get this deal done.
1 He needed to get this deal done for the reasons I've
2 already cited.
3 Had he lied to me and then they didn't approve
4 it, we never would have done business with him again. He
5 never would have had a chance to buy this bank. The stakes
6 were much too high for him. He knew what he needed to do.
7 He wanted to do it, too. He needed the assurance. He
8 needed that, and so did we, and that's what we got.203
6 A. On the 26th, in our conversation, I clearly
7 said, on the previous day, that I would try to get an
8 assurance, I will get an assurance, but the next day
9 when we had a meeting about the assurance, it was
10 mentioned as a means to decrease the price, and I was already satisfied that the
11 price was decreased by $500 million. So, the next day, since I didn't
12 really have a conversation with Chairman Kim [of the FSC]
13 specifically about the price at all, in my feeling, this is what I said. I definitely did not say that I got an assurance. What I said the next day was, in my
20 feeling, if he worked this way, then it would happen. That is what I said. I don’t know if Mr. Grayken took this to mean that I got an assurance, but since I did not get any such assurance, I said, in my feeling, if we do it this way, it can happen easily.204
23 Q. Chairman Kim, did you tell Mr. Grayken that the
24 FSC would approve the deal at the reduced price?
25 A. No, because Mr. Grayken at that time, his
1 interest was not about the price.206
John, I hope all is well with you. I think it would be helpful for me to talk to Chairman Kim. I need a better picture of what is happening in Korea. I have a good relationship with him and he might give me his real reading of what is going to happen and when. He also might share assurance he has been given.210
13 A. They were directing Hana. The FSC was directing
14 Hana. They were telling them how to negotiate.
15 Q. And you know that how?
16 A. Well, the people at Hana had told us that a
17 number of times. We knew that the FSC was withholding, had
18 been withholding approval of this deal for many years. We
19 knew that was the key in getting this bank sold.
20 The FSC was always controlling this Transaction.
21 That's obvious from the record.
22 Years had gone by where applications were pending
23 with banks that were qualified to buy this bank, and the
24 FSC had not acted.
25 Q. So, you're referring to the fact that the FSC had
1 delayed and not acted with respect to the Kookmin
2 Transaction; is that right?
3 A. And the HSBC Transaction.
4 Q. And the FSC had delayed and not acted on the HSBC
5 Transaction; correct?
6 A. That's correct.
7 Q. So, this was over a period of many years that you
8 had this experience with the FSC; correct?
9 A. That's right.
10 Q. And, as a result of that experience, you formed
11 the belief that the FSC was delaying approval of these
12 sales for improper reasons; correct?
13 A. That's correct.
14 Q. And you had that belief before Hana ever even
15 came into the picture; right? Because we're talking about
16 events going back to 2007, 2006, 2008, Hana comes into the
17 picture in 2010; right?
18 A. That's right.
19 Q. So, this is a belief that you held before you had
20 heard anything from Hana; correct?
21 A. That's correct.221
3 ARBITRATOR LANDAU: So, as far as your
4 understanding goes, was there any prospect that the FSC
5 would have approved this, absent a reduction in price?
6 THE WITNESS: None.
7 ARBITRATOR LANDAU: And that's something which—
8 THE WITNESS: No way.223
1 PRESIDENT DOUGLAS: Just to make the position
2 absolutely clear, and given everything you know today about
3 the situation, do you think that the FSC would have
4 approved the Transaction without a price reduction?
5 THE WITNESS: No, I don't.224
10 Q. Now, you mentioned that you were involved with
11 this KEB investment from the beginning all the way to the
12 bitter end. Lone Star acquired its shareholding in KEB in
13 2003; correct?
14 A. That's correct.
15 Q. And the first attempt to sell was to Kookmin Bank
16 in 2006; is that right?
17 A. That's correct, too.
18 Q. And after the sale to Kookmin failed, Lone Star
19 tried to sell its stake in KEB to HSBC in the 2007-2008
20 time period; is that right?
21 A. Correct.
22 Q. Now, both efforts to sell KEB first to Kookmin
23 and then to HSBC collapsed waiting for the FSC to approve
24 the Purchasers; correct?
25 A. Correct.
1 Q. And the problem, as you understood it at the
2 time, was that the FSC feared public criticism and
3 political push-back that they would face if they were to
4 approve a purchase of Lone Star's KEB Shares that resulted
5 in significant profits for Lone Star; is that right?
6 A. That's right.
7 Q. And you believed that this fear of public
8 criticism and political push-back had, in your words,
9 "completely paralyzed the FSC"; is that right?
10 A. Yes.
11 Q. You also believed that the FSC became afflicted,
12 if you will, with that same sort of paralysis in 2011 in
13 the context of Lone Star's attempts to sell its shares to
14 Hana; correct?
15 A. Yes, following the Supreme Court reversal of the
17 Q. After the March 10, 2011, Supreme Court Decision;
19 A. Correct.227
7 Q. Okay. So, you had other avenues of information
8 that were telling you that the FSC was unwilling to approve
9 Hana's Application for political reasons; right?
10 A. That's correct.
11 Q. Okay. And you also state in Paragraph 22 that,
12 of course, we also believed that the FSC had stalled the
13 HSBC sale for the same reasons; that is, the political
14 reasons. Correct?
15 A. That's right.
16 Q. So, you had this belief going back to 2008 that
17 the FSC was paralyzed by fear of public and political
18 opposition; right?
19 A. Correct.
20 Q. And we're now in 2011, and after the Supreme
21 Court Decision, this same paralysis has re-emerged; right?
22 A. Yes.
23 Q. And what you were hearing from Hana in 2011 about
24 the reasons for the FSC's delays was consistent with what
25 you already believed, which was that the FSC was stalling
1 for political reasons; right?
2 A. That's right.
3 Q. And it was also consistent from information that
4 you were obtaining from other independent sources?
5 A. It was consistent, yes.
6 Q. So, you were not relying solely on what Hana told
7 you about the FSC's actions and likely actions; correct?
8 A. Not solely, that's right.228
18 PRESIDENT DOUGLAS: But in your testimony in
19 relation to this point, you said that at that time you
20 weren't that surprised because you thought everything was
21 coordinated with the Government—
22 THE WITNESS: Yes.
23 PRESIDENT DOUGLAS: —I think were your words.
24 That's what you thought then.
25 What do you think now?
1 THE WITNESS: It wasn't so orchestrated. Based
2 on the testimony of the Hana officials in the ICSID
21 So, it's really--I still have a hard time
22 believing it, I will be honest with you because we were so
23 much of the view throughout, before Hana and through Hana,
24 that the Government itself was saying, you know, "We just
25 can't do this without some cover, something that gives us
1 some cover," as we've all testified about. So, I honestly
2 have a little bit--I have trouble letting go of that
3 notion, but the testimony is inconsistent with that.230
20 THE WITNESS: So, rather than the FSC, you have to
21 look at the other stakeholders. I'm not just talking about
22 Hana, but also there is KEB and other civic groups,
19 whether all these stakeholders, interested parties, it
20 would be up to whether they can agree on it.
21 But, once again, this is strictly my personal
22 feeling. If you say $100 million, I think that's about KRW
23 500 per share, maybe less than KRW 500 per share. And so,
24 with that nominal decrease of about 200 or 300, then I
25 would think that that would actually trigger a fiercer
1 opposition from the civic groups or from the political
3 So, my thoughts are that, so due to such
4 pressure, it's my view that it would have been difficult
5 for FSC to make an easy decision. Even at 11,900, the
6 civic groups, the press--although they don't have any
7 direct bearing on this Transaction--I mean, it's not a
8 price that they are satisfied with.
9 As I said yesterday, even for me, I couldn't
10 actually walk out the front entrance door. The front foyer
11 was always packed with demonstrators, so whenever I had to
12 leave the premise, I would go behind--I would go below the
13 basement floor and get in the car and go out the building.
14 So, at the time, the whole environment was not a
15 peaceful environment at all, as you would think today.231
Article 17 of the FHCA
(1) Any financial holding company that intends to obtain approval under Article 16 shall meet the following requirements:
1. The business plan of a company included as a subsidiary, etc. shall be appropriate and sound;
2. The financial standing and business management of such financial holding company and its subsidiary, etc. shall be sound;
3. 'The swap ratio of stocks shall be appropriate in the event that a company is included as a subsidiary, etc. through such stock swap.238
Article 13 of the Enforcement Decree of the FHCA
1. The business plan under Article 17(1) 1 of the Act shall meet each of the following requirements:
(1) The business plan is required to be appropriate for the continuous operation of business and maintenance of sound management of a financial holding company and company subject to incorporation, and the estimated financial statements and prospects for profits shall be feasible in light of the business plan;
(2) The method of procurement of funds, such as the money needed for advancement of the business plan, is required to be appropriate;
(3) The business plan must not violate acts and subordinate statutes and nor disrupt the sound order on the financial market;
(4) Where a foreign corporation to be incorporated as a subsidiary intends to control a lower-tier subsidiary or the foreign subsidiary intends to newly incorporate a lower-tier subsidiary, such lower-tier subsidiary must not be a domestic financial institution; and
(5) The business plan must not substantially restrict competition on relevant markets.
2. Detailed criteria for the soundness of financial standing and business management conditions under Article 17(1) 2 of the Act as mentioned in the following subparagraphs:
(1) The equity capital of a financial holding company, etc. and company subject to incorporation is required to meet the criteria for capital adequacy determined and announced by the Financial Services Commission under subparagraph 1 of Article 28; and
(2) The business management conditions of a financial holding company, etc. and company subject to incorporation are required to be sound as discovered from an assessment of soundness of business management of the financial holding company, etc. and company subject to incorporation conducted under conditions determined and announced by the Financial Services Commission
20 PRESIDENT DOUGLAS: Can you recall at what point
21 in time in this process you became convinced that, for the
22 political reasons that you've discussed, you were going to
23 have to take a hit--in other words, you are going to have
24 to perhaps reduce the share price? At what point in time
25 in this continuum did you come to that view?
1 THE WITNESS: Really not until the end. I mean,
2 we were, I guess, naively hopeful that once we decided not
3 to appeal Paul Yoo's conviction that this pretense that
4 they were using for so long regarding the legal issues,
5 once that was gone, that--and we paid the appropriate fine
6 or did whatever we had to do, that they would approve that
7 deal. We were hopeful of that.
8 And, in fact, everybody was pretty sure once the
9 Supreme Court remanded it back to the High Court in March,
10 we were pretty sure--everybody was pretty sure that meant
11 it's going to get--there's going to be a conviction,
12 there's going to be a reversal of the acquittal. But we
13 didn't do anything. Hana didn't do anything, we didn't do
14 anything, because we were hopeful that if there was an
15 acquittal and we didn't appeal that they'd go ahead and
16 approve the deal. They'd say: "Okay, now we can approve
17 it. We'll fine them, and we'll approve the deal." But it
18 didn't--it didn't happen. They came back and wanted more.245
2 [W]ithin two to three weeks later that the feedback we were
3 getting from all corners, really, was that, no, there was
4 going to be an insistence that the price be--that we be
5 punished in some way, and really the only way to do that is
6 to give us less money, so Hana was the vehicle for that to
7 reduce the price in the Contract.246
17 [Q.] At that time, were you concerned that if Lone
18 Star had not agreed to amend the SPA and reduce the price,
19 Hana would have walked away from the deal after the lock-up
20 period expired on November 30th?
21 A. No, I wasn't.
22 I knew how important this deal was to Hana.
23 Chairman Kim had told me several times that this was
24 transformative for Hana Bank, and this was going to be the
25 last deal that he did in a long line of M&A transactions.
1 He had told us numerous times that he was
2 prepared to close the bank at the original contract price.
3 And, of course, Hana had committed to their investors.
4 They'd issued debt. They'd issued equity. And so I was
5 quite confident that they wanted to close this deal.251
Taking of Necessary Action. Each of the parties agrees to do or cause to be done all things required to be done by such patty (and, in the case of the Seller, to use all reasonable efforts, including without limitation the exercise of its Voting and Procurement Rights, to cause the Company to do all things required to be done by the Company) under applicable Laws to consummate the Transactions as soon as reasonably practicable, Including using its best efforts to obtain all Required Regulatory Approvals applicable to it (and, in the case of the Seller, using all reasonable efforts, including without limitation the exercise of its Voting and Procurement Rights, to cause the Company to obtain the Company Required Regulatory Approvals), and to cooperate with one another and the Company in taking all necessary actions with respect to the foregoing. Each of the parties agrees that all requests and enquiries from any Governmental Authority which relate to Required Regulatory Approvals shall be dealt with by the parties in consultation with each other and each party shad promptly co-operate with such Governmental Authority and provide all necessary Information and assistance reasonably required by such Governmental Authority upon being requested to do so by another party or by the Company.254
[...] Hana argues that Lone Star never complained previously that Hana’s attempts to obtain FSC approval were inadequate. This is wholly irrelevant... Hana’s executives informed Lone Star at the time, based on their discussions with the FSC, that the FSC planned to withhold approval until Lone Star agreed to a price reduction to give the FSC political cover. Lone Star thus believed at the time that Hana was working diligently, as the SPA required, toward FSC approval. Only when Hana’s executives testified years later, during the ICSID Arbitration, that their contemporaneous statements were false did Lone Star understand the extent of Hana’s deception. The record reflects that clear causal chain.262
Rather than cooperate with Lone Star in an effort to earn FSC approval, Hana, according to its executives’ testimony in the ICSID Arbitration, intentionally deceived Lone Star into believing that the FSC had expressed to Hana that approval was only possible with a price reduction. Hana did so in order to secure a US$ 500 million price reduction for itself. Under oath, Hana executives claimed that, despite what they had told Lone Star at the time, they had not communicated directly with the FSC and that their contemporaneous statements were instead part of a negotiation strategy to drive down the sales price. Lone Star would not have agreed to a price reduction had Hana not intentionally deceived Lone Star into believing that a price reduction was a condition to FSC approval, and that the FSC would approve based on the agreed price cut.268
First and foremost, there could be no adequate consultation unless Hana faithfully conveyed what the FSC had said in its meetings and communications with Hana. The parties could not deliberate over any given FSC request if Hana did not provide Lone Star with a truthful account of Hana’s and the FSC’s analysis of the situation. Instead, Hana’s executives bed.271
Lone Star has been notified that, in view of the political climate in Korea, the changes to the legal status of Lone Star after the execution of the SPA Amendment and the recent changes to the environment of the financial markets, there is a need to change some of the terms and conditions of the SPA (including the proposal to reduce the existing purchase price), and HFG is promoting discussions thereon.275