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Irrespective of sanctions, Lone Star could sell shares to Hana Financial

By 김연세

Published : May 22, 2011 - 21:23

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Financial regulatory officials have floated the possibility that Lone Star Funds could be ordered to sell most of its controlling stake in Korea Exchange Bank under a punitive action.

Such a scenario could raise the issue of whether the Texas-based buyout fund would still be allowed to choose a particular investor, including Hana Financial Group, to dispose of the KEB shares.
The headquarters of Korea Exchange Bank in Seoul (Bloomberg) The headquarters of Korea Exchange Bank in Seoul (Bloomberg)

“I believe Lone Star will be directed to sell shares as a coercive regulatory instruction when the court rules that (the former CEO of) Lone Star Korea engaged in stock manipulation,” an official of the Financial Services Commission said Sunday.

But even in this scenario, it seems that the regulator may not be entitled to order the U.S. fund to hand over its shares to “unspecified” investors on the stock market.

Local banking laws stipulate that the FSC could order ineligible shareholders ― non-financial investors or rule-violators ― to dispose of their stake in a Korean bank within a certain period ― a maximum of six months.

Critics pointed out that the laws do not ban a disqualified shareholder from selling shares to a particular investor. They call for the FSC to actively intervene to eliminate this legal loophole.

They say the laws may enable Lone Star to exclusively trade its shares with Hana Financial Group, calling for financial authorities to confiscate Lone Star’s KEB shares.

They claim that the takeover deal was invalid from the start as the fund has been a non-financial investor barred from owning the controlling stake in a Korean bank, as well as allegedly engaging in fraudulent stock trading.

Some lawyers say that the solution is up to willingness of the regulator. “(Despite the laws), the FSC would be entitled to specify enforced sale terms after initially depriving Lone Star of its right to trade shares,” attorney Lee Dae-soon was quoted by a local newspaper as saying.

Meanwhile, Hana Financial chairman Kim Seung-yu also referred to the argumentative banking laws in his meeting with reporters last Friday.

“I don’t think the financial regulator will be entitled to hand down the stake sale instruction by directing a concrete procedure though the regulatory body may choose to order (enforced) sale,” he said, citing past cases.

Hana Financial has been striving to extend the expiry date of the preliminary contract with Lone Star, which expires on May 24, since the FSC citing the unconcluded court ruling on May 12 and decided to postpone its ruling on the fund’s shareholder eligibility.

Opponents including the KEB union are criticizing the group for struggling toward a deadline extension.

Concerning Hana’s meeting of six standing board directors on Friday to discuss the deal expiration date extension, a local banker said, “It is noteworthy that a major financial group has several rule-violators among its board members.”

The “rule-violators” referred to Hana Financial president & CEO Kim Jong-yeol and Hana Daetoo Securities CEO Kim Ji-wan. This year, both were reprimanded by financial regulators for irregularities.

The group has already been criticized for designating a figure as CEO of KEB amid the situation the FSC has not endorsed the takeover deal.

“There is a possibility that Hana may seek to make a behind-the-scenes contract with Lone Star to placate the fund,” a commercial banker said.

FSC officials said the regulatory body has not officially been informed of anything about the speculated expiry date extension from Hana.

By Kim Yon-se (kys@heraldcorp.com)