Investment Arbitration, Corruption and Illegality: Korea

Guest blog by: Prof Joongi Kim (Yonsei University)

[Ed. note by Luke Nottage: Below is the Abstract for Prof Kim’s chapter on Korea for Teramura, Nottage and Jetin (eds) Corruption and Illegality in Asian Investment Arbitration (forthcoming in Springer’s Asia in Transition series), presented at the UBD conference on 29 May 2023 supported by CAPLUS. There are interesting parallels with the chapter on Japan, but also some significant differences, notably more inbound (and outbound) treaty-based investor-state dispute settlement (ISDS) arbitration cases, fewer treaty provisions expressly urging host states to implement anti-corruption laws, and more / consistent express legality requirements for investments to be covered under Korea’s treaties. Below is also an extract from Prof Kim’s chapter outlining two important linked inbound ISDS cases that were still pending as of 29 May 2023, alleging damages due to bribes under a criminal scheme perpetrated by Korean public officials, including then President Park Geun-Hye (impeached in 2017 and later jailed). I add an update in a Postscript below.]

Abstract: This chapter provides an overview of Korea’s investment treaty regime and its provisions and practice concerning corruption and illegality. It further analyzes how these issues have featured in cases related to Korea and Korean investors. Korea has become a leading exporter and significant importer of foreign direct investment (FDI). To protect and promote inbound and outbound investment, Korea has established one of the most wide-ranging and extensive regime of international investment agreements in the world, primarily through an array of bilateral investment treaties and free trade agreements with investment chapters. However, their provisions related to corruption and illegality are generally not developed. For instance, most Korea’s treaties do not include an explicit requirement for the host states to take measures against corruption. Korean treaties also vary in terms of how they require foreign investments to be made in accordance with host state laws. Korea’s passivity regarding such provisions seems unaffected by foreign investors increasingly commencing arbitrations against Korea recently and Korean investors also becoming more active in bringing outbound claims. While the extent that corruption or illegality features in cases brought by Korean investors remain largely unknown, some of the cases against Korea have corruption and illegality related elements. There is no indication that Korea may become more proactive in terms of corruption provisions, but some signs it is pursuing more and clearer legality provisions. Nevertheless, it is foreseeable that Korea might become more proactive in promoting both types of provisions in future treaties as part of its commitment to transparency.

Mason and Elliott

In 2018, two large U.S. institutional investors of Samsung C&T, a very large listed construction and engineering company, each brought claims against Korea for breach of investment protections under the Korea-US FTA.[1] Both cases did not involve more traditional examples such as where a foreign investor allegedly engaged in corruption or illegal behaviour and State cited the illicit acts as a defence against the claims. The case was also not an example of a State soliciting or extorting bribes from the investor. While corruption was a prominent fact that served as a key factor in the claimants’ claims, corruption was not an issue that was directly associated with the investors themselves. The investors instead based their claims on the harm that they allegedly suffered as a result of corruption between the controlling shareholder and senior government officials. On 30 June 2023, a final award was rendered in Elliott v. Korea whereas an award remains pending for Mason v. Korea where post-hearing briefs were filed in April 2022.[2] According to the Korean Ministry of Justice, out of the USD 770 million that was claimed, the Elliott v. Korea tribunal found Korea liable for USD 54 million plus interest and the claimant’s legal costs.

Both cases arose out of the merger between Samsung C&T and Cheil, at the time, both affiliates within the prominent Samsung Group. Shareholders approved the merger in July 2015. With a stake of 11.21 %, NPS was the largest shareholder of Samsung C&T and, according to the claimants, provided the decisive vote in favour of the merger despite the opposition of various shareholders. Mason held 2.18% and Elliott 7.12 %.

The two foreign shareholders, Mason and Elliott, claimed that they suffered damages due to bribes under a criminal scheme that was perpetrated by Korean public officials, including the then President, the Minister of Health and Welfare, and the Chief Investment Officer of the National Pension Service (NPS). The President was sentenced to 20 years of prison for bribery and other charges.[3] Elliott sought USD 539.8 million, and Mason sought USD 191.4 million in damages plus interest and other relief.

A key part of the case concerned whether the President provided ‘decisive assistance’ to approve the merger as a quid pro quo for receiving bribes from the controlling shareholder of the Samsung Group. The claimants contended that the President received the bribes in exchange for her assistance in getting NPS to approve the merger. The claimants asserted that the President requested the bribe in the form of sponsorship of certain sports organizations and that there was a common understanding that the economic support was in exchange for the President’s help for the controlling shareholder’s succession plan through the merger. 

As a result, the claimants asserted a breach of the minimum standard of treatment because, among other things, Korea’s actions were arbitrary, grossly unfair, unjust, discriminatory, in disregard of due process and proper procedure, and lacked transparency. They argued that Korea’s action violated the International Court of Justice’s Neer judgment standard and that ‘Korea’s corruption, bribery, overt discrimination, and flaunting of its own laws was outrageous’.[4] According to them, Korea had no legitimate interest to vote in favour of the merger.

In reply, Korea argued that the ‘High Court did not find that President provided any assistance to the Merger, let alone that she gave instructions to implement any measures against Mason or any foreign hedge fund’.[5] Korea stressed that the courts held that any quid pro quo relationship and payment of bribes occurred after the President met the controlling shareholder on 25 July 2015, which was after the NPS’s Investment Committee’s decision on 10 July 2015 and the shareholders meeting on 17 July 2015, both to approve merger. Korea asserted that there was no evidence that the bribes were connected with the merger and could have been intended to induce its approval. The claimants also lacked a legally significant connection between Korea’s alleged measures and their investments.[6]

Korea also stated that NPS did have a legitimate interest in supporting the merger because supporting the Samsung Group’s succession process was in the interest of the Korean economy. It did not have as a purpose the expropriation or extraction of value from SC&T’s shareholders. They cited that High Court did not conclude that the merger ‘extracted value from SC&T’s shareholders, much less that the Korean government intended to extract value’.[7] According to Korea, the goal was to instead support the succession process and stabilize the Samsung Group.

The Elliott tribunal [in an award dated 20 June 2023] found that the NPS’s merger vote was the result of the improper influence by the Blue House and the Ministry of Health and Welfare and not of its own independent, professional judgment. More specifically, the Tribunal found that the NPS “did not take its decision independently, based on the commercial merits of the Merger, but acted under the direction and instructions of the MHW and thus effectively as an instrument of the MHW in the implementation of a government policy”.[8] Quoting from Waste Management v Mexico,the State’s conduct was deemed to be “unjust” and amounted to a “will neglect of…duties” and “a pronounced degree of improper action” that breached the minimum standard of treatment required. [9]

Both cases did not involve a situation of a failure to prosecute as was raised in such cases as World Duty Free v. Kenya[10] and Wena v. Egypt.[11] Instead, the claimants relied extensively on the prosecution’s cases and the resulting court awards against the former Korean government officials. The Tribunal even noted the State’s diligent prosecution of those involved and described that “the action taken by the Korean State in this regard is commendable and demonstrates its commitment to the rule of law”.[12]

[1] Mason Capital L.P. and Mason Management LLC v. The Republic of Korea, PCA Case N° 2018-55 (“Mason v. Korea”); Elliott Associates, L.P. v. The Republic of Korea, PCA Case N° 2018-51 (“Elliott v. Korea”).

[2] Mason v. Korea,; Elliott v. Korea, Pursuant to KORUS FTA, the memorials of the parties are available on the PCA’s website, but the factual exhibits, legal authorities, witness statements, and expert reports are not. For updates, see Kim 2023.

[3] The controlling shareholder was also found guilty of bribery. Notably, no evidence existed that the President, Minister or CIO personally benefitted from the payments and the only direct beneficiary was a close confidante of the President. Furthermore, the senior government officials were not found guilty of bribery and the Minster was sentenced to two and a half years for abuse of power and perjury and the CIO was sentenced for two and a half years for occupational breach of trust.

[4] Mason v. Korea, Claimant’s Request for Arbitration and Statement of Claim, para. 73.

[5] Mason v. Korea, Respondent’s Post Hearing Brief, para. 20.

[6] Korea argued, among other things, that the actions of NPS did not have a legally significant connection with the claimants because (i) in exercising its shareholder right to vote on the merger, NPS did not owe any duty to the claimants, (ii) the NPS exercised its shareholder voting rights in the same way as any other Samsung C&T shareholder; (iii) the merger did not impair or expropriate Mason’s rights as an Samsung C&T shareholder; (iv) there was no evidence that Korea and the NPS intended to extract value from Samsung C&T’s shareholders through the merger. Mason v. Korea, Respondent, Post-Hearing Brief, para. 11; Elliott v. Korea, Respondent, Statement of Defense, para. 541.

[7] Mason v. Korea, Respondent, Post-Hearing Brief, para. 14.c).

[8] Elliott v. Korea, Award, para. 623.

[9] Elliott v. Korea, Award, para. 603.

[10] World Duty Free v. Kenya, ICSID Case No. ARB/00/7. [[See further Chapter 4 by Reyes et al, in this volume.]]

[11] Wena Hotels Ltd v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award on Merits (8 Dec. 2000), paras. 82–84.

[12] Elliott v. Korea, Award, para.

[Ed. Postscript: in the Mason case, an award dated 11 April 2024 similarly found that Korea wrongfully interfered with the merger process, awarding around 32 million USD in compensation, plus costs. In summary:

“the tribunal dismissed South Korea’s contentions that only sovereign acts could engage its responsibility, finding no such principle under international law. The arbitrators also noted that while Mason had made the investment in full knowledge of the risk that the merger would come to pass, the investor could not have expected a criminal conspiracy at the highest level of the state.

That conspiracy had been established, the tribunal further found, through several decisions from domestic criminal courts in cases brought against key political figures from the Korean government and the NPS. Accepting that the fund had voted for the merger as the result of interferences from these individuals, against a background of corruption at the top level of Korea’s government, the tribunal concluded that this amounted to a breach of the Minimum Standard of Treatment”

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.