A South Korean high court on Tuesday cleared US 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 judgement, reduces legal uncertainties for Lone Star and raises hopes for UK-based HSBC's purchase of KEB from the US 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 rumours to allow the bank to buy the unit at below-market prices.
But the Seoul High Court threw out the previous judgement, 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 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.
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.