IN THE MATTER OF AN ARBITRATION UNDER THE FREE TRADE AGREEMENT BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF KOREA AND THE ARBITRATION RULES OF THE UNITED NATIONS COMMISSION OF INTERNATIONAL TRADE LAW PCA CASE NO. 2018-51 ELLIOTT ASSOCIATES, L.P. Claimant -v- REPUBLIC OF KOREA Respondent _________________________________________________ STATEMENT OF DEFENCE 27 SEPTEMBER 2019 _________________________________ 42-01 Ocean Financial Centre 63 Namdaemun-ro, Sogong-dong, Jung-gu, 10 Collyer Quay Seoul 04532 Singapore 049315 Korea CONTENTS I. INTRODUCTION AND EXECUTIVE SUMMARY ...................................... 1 A. THE CLAIMANT HAS FAILED TO PROVE A VIOLATION OF THE TREATY OR THAT IT IS ENTITLED TO ANY DAMAGES ........................................................ 3 1. EALP assumed the risk of the Merger when it bought Samsung C&T shares .................................................................................... 3 2. The Claimant has withheld most of the details of its investment, but those that are available defeat its claims ........................................................ 4 3. The Claimant’s damages claim is preposterous .............................................. 6 B. THE STRUCTURE OF THIS STATEMENT OF DEFENCE ..................................... 7 II. FACTUAL BACKGROUND ........................................................................... 9 A. THE ROK AND THE NPS ............................................................................ 10 1. The ROK government ................................................................................. 10 2. The NPS ..................................................................................................... 13 B. THE MERGER BETWEEN SAMSUNG C&T AND CHEIL INDUSTRIES ............. 23 1. An overview of the corporate environment in Korea ................................... 23 2. The Samsung Group .................................................................................... 26 3. Market rumours of the Merger in 2014 ........................................................ 31 4. The Elliott Group’s actions in response to the rumours of the Merger ........................................................................................................ 33 5. The formal Merger announcement ............................................................... 34 6. The Elliott Group’s opposition to the Merger and threats of litigation...................................................................................................... 38 7. The NPS’s consideration of the Merger ....................................................... 50 8. The Merger was approved with 88 percent of minority shareholders, including several foreign sovereign funds, voting in favour ......................... 62 C. EALP AND SAMSUNG C&T ENTERED INTO AN UNDISCLOSED SETTLEMENT AGREEMENT TO COMPENSATE EALP FOR THE VALUE OF ITS SHARES .................................................................................................. 65 D. KOREAN COURT PROCEEDINGS REMAIN PENDING ON APPEAL OR REMAND, BUT SEVERAL FINDINGS TO DATE CONTRADICT MUCH OF THE CLAIMANT’S NARRATIVE ............................................................................ 68 1. Criminal proceedings to date (one of which remains on appeal before the Supreme Court and the others of which were recently remanded) have not resolved the question of corruption related to the Merger and are of limited relevance to the claims before this Tribunal ...................................................................................................... 70 2. Civil court proceedings to date (one of which is final) contain rulings that contradict the Claimant’s allegations ......................................... 76 -i- 3. The NPS’s internal audit ............................................................................. 83 III. THRESHOLD ISSUES OF JURISDICTION AND ADMISSIBILITY WARRANT DISMISSAL OF ALL CLAIMS ................ 84 A. THE IMPUGNED ACTS OF THE NPS AND THE ROK DO NOT CONSTITUTE “MEASURES ADOPTED OR MAINTAINED” BY THE ROK, AS REQUIRED BY THE TREATY ............................................................................................... 86 1. A “measure” requires legislative or administrative rule-making or enforcement ................................................................................................ 87 2. The NPS vote in favour of the Merger is not a “measure adopted or maintained” by the ROK ............................................................................. 93 3. The alleged pressure from the Blue House and/or the MHW that the NPS support the Merger is not a “measure adopted or maintained” by the ROK ............................................................................. 95 4. In any event, the alleged measures did not sufficiently relate to the Claimant’s investment to give rise to a Treaty claim.................................... 98 B. THE NPS CONDUCT ON WHICH THE CLAIMANT’S TREATY CLAIM IS BASED CANNOT BE ATTRIBUTED TO THE ROK .......................................... 101 1. Attribution under the Treaty is governed by Article 11.1.3 ........................ 102 2. The NPS’s actions are not attributable to the ROK under Article 11.1.3(a) of the Treaty ................................................................... 105 3. The NPS’s actions are not attributable to the ROK under Article 11.1.3(b) of the Treaty............................................................................... 119 4. The Treaty is lex specialis and displaces ILC Article 8 .............................. 125 C. THE CLAIMANT’S SAMSUNG C&T SHARES DO NOT REPRESENT AN INVESTMENT UNDER THE TREATY ............................................................ 131 1. The Treaty provides specific requirements that must be satisfied to have an “investment” subject to Treaty protection ..................................... 132 2. The Elliott Group’s Swap Contracts do not constitute covered investments subject to Treaty protection .................................................... 134 3. The Samsung C&T shares that the Claimant held are not a covered investment under the Treaty ...................................................................... 154 D. THE CLAIMANT’S INVESTMENT WAS MADE AFTER A DISPUTE HAD ARISEN AND THUS ITS CLAIM REPRESENTS AN ABUSE OF PROCESS ........................ 160 E. THE UNDISCLOSED SETTLEMENT AGREEMENT ALSO EXPOSES THE CLAIMANT’S CLAIMS AS AN ABUSE OF PROCESS........................................ 165 IV. THE CLAIMANT’S CLAIMS ALSO FAIL ON THE MERITS ............... 168 A. THE ROK DID NOT CAUSE THE SAMSUNG C&T/CHEIL MERGER TO BE APPROVED ON THE IMPUGNED TERMS ....................................................... 169 1. The Claimant’s reliance only on the “but for” test to prove causation is wrong; the Claimant must prove proximate causation ............. 171 -ii- 2. The Claimant has failed to prove that the ROK’s alleged wrongful conduct caused the Merger ........................................................................ 176 B. THE ROK DID NOT BREACH THE MINIMUM STANDARD OF TREATMENT REQUIRED UNDER THE TREATY ................................................................ 212 1. The Treaty limits protection to the minimum standard of treatment under international law .............................................................................. 214 2. The alleged acts of the ROK do not violate the minimum standard of treatment under the Treaty .................................................................... 216 3. The Claimant’s knowing assumption of risk does not allow it to blame the ROK for that risk’s having materialised .................................... 224 4. The NPS’s vote in favour of the Merger was not an exercise of sovereign power that could implicate Treaty obligations ........................... 232 V. THE CLAIMANT’S DAMAGES CLAIM IS DEEPLY FLAWED............ 252 A. THE CLAIMANT’S “INTRINSIC VALUE” THEORY IS SUBJECTIVE, INACCURATE AND UNRELIABLE................................................................. 253 1. Samsung C&T’s value is more reliably measured by its share price........... 253 2. EALP cannot show it suffered any damages .............................................. 254 3. The “intrinsic value” theory contradicts economic principles and disregards market reality ........................................................................... 257 B. EVEN IF THE “INTRINSIC VALUE” THEORY WAS NOT BASELESS, THE CLAIMANT WOULD NOT BE ENTITLED TO DAMAGES BECAUSE IT TOOK THE RISK THAT THE MERGER WOULD OCCUR AS IT DID............................ 260 1. An investor is responsible for the consequences of the risks it takes .......... 261 2. The Claimant knowingly took the risk when it bought Samsung C&T shares that the Merger would be approved with the “destructive” Merger Ratio, and must own the consequences .................... 263 C. ACCEPTING ARGUENDO THE CLAIMANT’S CASE, THE ROK DID NOT CAUSE THE DAMAGES FOR WHICH THE CLAIMANT DEMANDS COMPENSATION ........................................................................................ 264 1. The Claimant must show that the alleged acts of the ROK were the proximate cause of its purported damages ................................................. 265 2. The Claimant has failed to prove that the ROK’s alleged wrongful acts proximately caused its purported damages .......................................... 266 3. The Claimant’s alleged loss is also too remote because it