The government won 100% in an investor-state dispute settlement (ISDS) brought by Swiss elevator company Schindler Holding AG (Schindler). The government escaped liability for 320 billion won in damages claimed by Schindler and will be able to recover 9.6 billion won in legal expense spent over eight years of litigation.
Minister Jung Sung-ho of the Ministry of Justice said at a briefing at Government Complex Seoul on the 14th, "At about 2:03 a.m. today, the arbitral tribunal of the Permanent Court of Arbitration (PCA) dismissed all of Schindler's claims."
◇Schindler started as a "white knight"… sought control of Hyundai Elevator
Schindler is the world's No. 2 elevator company. Hyundai Elevator is the No. 1 company by market share in Korea's elevator market. Schindler first appeared as a "white knight" when Chair Hyun Jung-eun fought a management control dispute over Hyundai Group with her husband's uncle, Chung Sang-young, honorary chair of KCC.
In 2006, Schindler became the second-largest shareholder by purchasing a 25.5% equity stake in Hyundai Elevator from KCC. When the possibility of a hostile merger and acquisition (M&A) of Hyundai Elevator arose at the time, Schindler said it would "support Chair Hyun and Hyundai Elevator's board of directors and management." Chair Hyun and Schindler Chair Alfred Schindler even visited Mount Kumgang together.
But afterward, Schindler made several attempts to seize management control of Hyundai Elevator. Korea's elevator market is the world's third largest after China and India.
Hyundai Group clashed with Hyundai Heavy Industries and KCC over control of Hyundai Merchant Marine (now HMM). Chair Hyun mobilized Hyundai Elevator to enter into financial derivative contract agreements with financial investors (FIs). To defend control of Hyundai Merchant Marine by securing friendly equity, the agreements provided to cover losses if the stock price fell below the equity acquisition price.
However, due to a slump in the shipping industry, Hyundai Merchant Marine's stock price plunged, and Hyundai Elevator had to compensate the financial investors for losses amounting to hundreds of billions of won.
In 2014, Schindler filed a shareholder derivative suit of 700 billion won against Chair Hyun, claiming she caused losses to the company. In Mar. 2023, the Supreme Court ordered Chair Hyun to pay 170 billion won to Hyundai Elevator. With delayed interest included, the total comes to 270 billion won.
Immediately after the Supreme Court's final ruling, Schindler applied for compulsory execution against Chair Hyun's equity to seize control of Hyundai Elevator. Chair Hyun avoided losing control by paying all the damages with a loan from M Capital.
Hyundai Elevator generated operating profit from its elevator business but incurred massive losses due to the derivative contracts. It then conducted multiple rights issues to secure needed funds. Schindler did not participate in the rights issues, and its equity ratio fell from 35% in 2012 to 30.9% in 2013. As capital increases continued, it dropped to the mid-15% range by 2022.
In Nov. 2015, Hyundai Elevator issued 205 billion won in convertible bonds through a third-party allotment, and in 2016, it exercised a call option to repurchase 82 billion won worth, or 40% of them, for early redemption. On the same day, it separated only the call option from the convertible bonds and transferred it to Chair Hyun and Hyundai Global for 7.8 billion won. Hyundai Global was a company 100% owned by Chair Hyun's family. Chair Hyun's side also directly exercised part of the convertible bonds to convert them into shares.
◇Schindler challenges Korean authorities' measures on Hyundai Elevator's rights issues and call option transfer
Schindler argued that Hyundai Elevator's rights issues were conducted to defend Chair Hyun's management control, but because the financial supervisory authorities did not properly sanction them, Schindler suffered damage from the dilution of its equity.
Schindler also argued that the 2016 transfer of the call option by Hyundai Elevator was an unfair transaction conducted at a price favorable to Chair Hyun, but because the Korea Fair Trade Commission did not sanction it, the duty to protect investors was violated.
Citing these two issues, Schindler filed an ISDS in 2018. However, the arbitral tribunal determined it was difficult to find that the Republic of Korea's financial and antitrust supervisory measures violated investor protection standards under international investment treaties, and therefore rejected all of Schindler's claims.
The arbitral tribunal found that the actions of the Korea Fair Trade Commission (FTC), the Financial Services Commission (FSC), and the Financial Supervisory Service were within the scope of lawful authority, were not arbitrary or discriminatory, and were taken after sufficient investigation and review. Because the government did not breach the investment treaty, state responsibility under international law could not arise, and thus all of Schindler's compensation claims were dismissed.
◇Jung Sung-ho: "I'm very pleased to share good news amid political turbulence"
The Minister said in a Facebook post that the ruling "blocked attempts to shift private corporate control disputes or private conflicts among shareholders onto state responsibility, thus protecting the nation's finances."
He added, "With the Ministry of Justice's international legal affairs bureau at the center, experts from relevant ministries and the government's outside counsel mounted a meticulous and systematic response, achieving another victory on the international stage after wins in the Lone Star and Elliott cases," noting, "This is the second case in history in which Korea has won entirely among ISDS arbitration cases that proceeded to a hearing on the merits."
Opening the briefing, the Minister said, "Politics are a bit unsettled and people are very worried because of the Iran war, and I'm also very pleased to be able to share good news." The briefing was attended by Seo Jeong-min, director-general for legal affairs at the Ministry of Justice, Cho Ara, head of the international investment disputes division, and Prosecutor Yang Jun-yeol of the division.
BAE, KIM & LEE LLC, which represented the government for eight years, formed a special response team of experts in international arbitration, finance, and antitrust. Attorney Kim Jun-woo (Judicial Research and Training Institute class 34), who led the team, said, "This ruling will be a very important milestone in successfully defending the state's legitimate policy judgments in a major investment dispute."
Last year, BAE, KIM & LEE LLC also helped the government win the lawsuit to set aside the investor-state dispute settlement (ISDS) award brought by U.S. private equity firm Lone Star. Managing partner Lee Jun-gi of BAE, KIM & LEE said, "Contributing to the state's risk management in this Schindler case following the Lone Star ISDS case once again demonstrates our firm's complex crisis response strategy."