South Korea Secures Full Annulment in Lone Star Funds Arbitration, Avoids $216.5 Million Payout

Decisive Ruling by ICSID Annulment Committee

The Republic of Korea has secured a decisive legal victory against the U.S. private equity firm Lone Star Funds, with an annulment committee of the International Centre for Settlement of Investment Disputes (ICSID), a World Bank arbitration tribunal, ruling in favor of South Korea on Tuesday, November 18, 2025. This ruling completely nullifies a previous August 2022 decision that had ordered South Korea to pay $216.5 million in damages, plus interest, to Lone Star Funds. The total liability, including interest, had amounted to approximately 400 billion won (around $273.2 million).

Prime Minister Kim Min-seok, in an emergency briefing, hailed the decision as 'a significant achievement in protecting public finances and taxpayer money' and stated that it 'affirms Korea's sovereign right to financial regulation'. The annulment committee also ordered Lone Star Funds to reimburse the Korean government approximately 7.3 billion won (between $4.98 million and $5 million) in legal expenses within 30 days.

Background of the Protracted Dispute

The legal battle originated in November 2012 when Lone Star Funds initiated an Investor-State Dispute Settlement (ISDS) case against the South Korean government. The firm claimed that the Korean government had unfairly interfered in its attempt to sell its stake in Korea Exchange Bank (KEB), leading to alleged losses of $4.68 billion.

• 2003: Lone Star Funds acquired a 51% stake in KEB for 1.38 trillion won.
• 2012: The firm sold KEB to Hana Financial Group for 3.92 trillion won.
• The dispute was further complicated by public criticism regarding the 'bargain' sale of a major financial institution and allegations of stock manipulation involving KEB's credit card unit, as well as tax issues.

Grounds for Annulment

South Korea's successful annulment hinged on arguments that the original 2022 ICSID tribunal ruling contained severe procedural flaws. Specifically, the Korean government contended that the tribunal had improperly relied on an International Chamber of Commerce (ICC) arbitration award between Lone Star and Hana Financial Group. South Korea argued that it was not a party to this ICC proceeding and was therefore deprived of its right to present arguments and cross-examine witnesses, constituting a 'fundamental violation of procedural rules' and a 'serious departure from due process'.

A Rare Outcome in International Arbitration

The complete annulment of an ICSID award is an exceptionally rare occurrence. According to ICSID data, out of 503 rulings between 1972 and 2025, only 25 cases had their annulment applications accepted, and among these, only 8 cases resulted in a complete annulment. This represents a mere 1.6% probability of such an outcome. This victory marks a significant precedent and reinforces international confidence in Korea's regulatory and legal processes, as stated by Prime Minister Kim Min-seok.