A South Korean high court on Tuesday
cleared U.S. private equity house Lone Star of manipulating the
stock price of a former credit card firm, removing an obstacle
to HSBC's $6.3 billion deal to buy control of Korea Exchange
Bank.
The verdict, rejecting an earlier judgment, reduces legal
uncertainties for Lone Star (LS.UL) and raises hopes for
UK-based HSBC's (HSBA.L) purchase of KEB (004940.KS) from the
U.S. company, a deal seen as a major test of South Korea's
openness to foreign investors.
While the stock price manipulation case is the only legal
issue involving Lone Star directly, former government officials
and executives of KEB still face allegations that Lone Star's
2003 purchase of KEB was illegal. A verdict on that case is
expected by the end of the year.
"The main case is whether or not Lone Star bought KEB on
the cheap in collusion with various government officials. That
hasn't been resolved," said Peter Tebbutt, a director of Fitch
Ratings in Hong Kong.
"It is a good sign. It may indicate that the courts are
leaning towards their (Lone Star's) way."
The South Korean government has remained cautious about the
KEB sale given the legal troubles surrounding the investment
firm.
President Lee Myung-bak also has been grappling for more
than a month with daily street protests against his policies,
raising speculation that the Lone Star-HSBC () deal
would be unlikely to win regulatory approval by a deadline that
was extended to July 31 by Lone Star and HSBC.
A lower court in February found both Lone Star and the head
of Lone Star's South Korean operations, Paul Yoo, guilty of
driving down the share price of KEB's former credit card unit
by spreading rumors to allow the bank to buy the unit at
below-market prices.
But the Seoul High Court threw out the previous judgment,
saying that Lone Star's 2003 announcement of a possible capital
write-down of the KEB card firm was not giving out false
information, but was rather one option it was considering for
the card unit.
"There is no evidence to prove Lone Star guilty of stock
manipulation," Koh Eui-young, judge of the Seoul High Court
said in a court ruling.
Shares in KEB fell 2.1 percent to close at 14,100 won,
underperforming the benchmark index's (.KS11) 0.3 percent fall,
reflecting lingering caution over the fate of HSBC's
acquisition. HSBC's Hong Kong-listed shares ended 0.57 percent
lower at HK$123 each.
PROSECUTORS TO APPEAL
Lone Star said in a statement it was "very gratified" by
the ruling. Its chairman, John Grayken, said: "We maintained
our innocence throughout this process, and are pleased today to
have the court's confirmation. We hope that now we can all put
this behind us and get back to business."
HSBC reiterated the bank's previous statement that it was
committed to buying KEB and waiting for regulatory approval.
HSBC early this month threatened to drop out of the deal
unless regulatory approval was given by its offer deadline of
July 31.
"Korea remains an important market for us and we hope for a
positive outcome from our bid for at least 51 percent of KEB,"
an HSBC spokesman in London said.
"We will remain respectful of the process in Korea."
KEB also welcomed the ruling.
But the country's financial regulator, the Financial
Services Commission, said in a statement it was not appropriate
to go ahead with the sale process for KEB while legal
proceedings were ongoing.
Prosecutors will appeal the decision, a prosecutor said
following the ruling.
That may convince officials to hold off on approving the
deal until a supreme court decision and lead HSBC to pull out
to look for other opportunities.
The High Court also handed down a suspended two and a
half-year jail term for Lone Star's Yoo on separate charges of
negligence of duties in Lone Star's other investment deals in
South Korea. Yoo was cleared of the stock price manipulation
charge.
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(Additional reporting by Park Ju-min, Rhee So-eui, Park
Jung-youn and Jon Herskovitz in SEOUL and Steve Slater in
LONDON; Editing by Jonathan Hopfner, Louise Heavens and Keiron
Henderson)
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- HSBC says pulls out of $6.3 billion KEB deal (Reuters)
- HSBC says committed to KEB, but can’t wait forever (Reuters)