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Acquisition and sale/transfer of the Nation’s shareholding in the Covid-19 crisis

It is no secret to anyone that the private sector has been one of the most affected ones due to the difficult economic consequences of the Economic, Social and Ecological Emergency declared by the Colombian Government. In fact, in accordance with a report issued by the Superintendence of Companies dated April 30th, 2020 [1] Superintendencia de Sociedades. 30 de abril de 2020. "Actualización del Impacto de la Coyuntura del Coronavirus en la Economía Colombiana" , it is estimated that between 17.8% and 37% of companies might be at risk of insolvency.

In that context, on June 4th, 2020, the National Government issued Decree 811 of 2020 (the "Decree"), which sets forth measures related to the investment and sale/transfer of the State’s shareholding in Colombian companies. The purpose of the Decree is to provide measures to protect employment and provide companies with financing to stabilize their economic situation. These measures may be divided into two sets of provisions: (i) those that seek to relieve the financial situation of the companies through the purchase of stock ownership by the Nation; and (ii) those that set forth special requirements for the sale or transfer of the State's shareholding in companies listed on the stock exchange market –privatization–.

(i) Acquisition of shareholding by the Nation as an economic relief

A. Purchase of the shareholding:

The Ministry of Finance and Public Credit (through the Emergency Mitigation Fund -FOME- for its name in Spanish) may acquire, on behalf of the Nation, shareholding in private or mixed capital companies that carry out activities of national interest.

From a broad interpretation of the Decree, it is possible to conclude that there are two requirements for the companies that would like to have access to this benefit:

  1. They should carry out activities of national interest (which has not been defined by the National Government yet);
  2. They should be in an unstable economic situation (this requirement has not been explicitly stablished in the text of Decree, however, it can be construed from it, taking into account that it was issued for the purpose of stabilizing the economic situation of companies).

Note that the acquisition of shareholding by the Nation does not mean that the nature of the company will therefore change. This is a special and transitory regime, which seeks companies to continue to be considered as of private or mixed capital in nature, whatever the case may be. Furthermore, the application of this regime does not mean that the labor, tax, and pension obligations will turn to be the Nation’s obligations, as they will continue to be obligations of the companies that are receiving the investment.

B. Transfer or sale of shareholding of the Nation

The Decree also sets forth specific rules for selling stock owed by the Nation. For this, it is worth highlighting that the Decree is clear when assuring this transfer will not be equivalent to a privatization, since this is also an exceptional strategy adopted by the Nation to prevent the economic crisis from increasing. The requirements to activate this mechanism are summarized as follows: 

  1. If the Nation has acquired a minority shareholding in the company, it can be requested to the shareholders or private owners either:
  • To guarantee that they are going to repurchase the Nation’s shareholding within an agreed period of time; or
  • To sell, along with the Nation’s shareholding, at least the number of shares needed to control the company, in order to ease the sale.
  1. On the other hand, if the shareholding acquired by the Nation is not a minority holding, it will be necessary to implement a “transfer program”, which must contain, among others, the conditions and payment method of the share’s price, as well as the other aspects required for the proper execution of the program.
  2. If the shareholding was acquired in a company listed on the stock exchange, hammer operations (those executed through public auctions with a special bidding procedure [2] Financial Superintendence of Colombia. Glosary: https://www.superfinanciera.gov.co/jsp/Glosario/user/main/letra/M/f/0/c/0 ), must be carried out in accordance with the stock exchanges regulations and the rules set forth by Colombia’s Financial Superintendence.
  3. In addition, publicity and free participation in those transactions must be observed.

Although this first part of the Decree may be considered as a bailout for companies that, if not for this benefit, would not be able to continue operating, the truth is that the lack of clearness in the conditions to be a part of this program, might result in many companies -that really need the help- to be excluded from its application. The foregoing, mainly because the program could tend to benefit structured and consolidated companies, which may guarantee the repurchase or sale of the shares, which are not necessarily the ones that need the same level of assistance from the Colombian government.

Something similar happened in the United States in 2008, with the Troubled Asset Relief Program [3] Despite the 245.000 million dollars investment was recovered, TARP was highly criticized, since when it was operating, it left behind companies in need, to support only those financially stronger, which promoted a “bad behavior on the part of banks”. https://www.usnews.com/news/slideshows/five-reasons-why-tarp-was-a-failure?slide=5 , in which, the State invested money without foreseeing whether it could be recovered, and, although it was recovered, its management and credibility were highly questioned.

Therefore, the Government should take into account all of those risks and outline the requirements and rules applicable to this new regime to fairly take place.

(ii) Special provisions for the sale or transfer of the State’ shareholding in companies listed on the stock exchange market -privatization-

The second part of the Decree refers to a true privatization of the shares the State holds in companies listed on the stock exchange. Therefore, this chapter is not applicable to the sale of the shares acquired during the transitory relief described in the previous section, but it applies to the sale of the shares the State holds in public or mixed companies, provided that they are listed on the stock exchange market.

These special provisions allow the implementation of Law 226 of 1995 (the “Privatization Law”) to be more flexible, under the understanding that the earnings from those transactions shall be used to relieve the adverse economic effects arisen from the declared State of Emergency. Thus, some of the aspects of the abovementioned Law -such as the definition of price of the sale- are modified in order to have a more “agile mechanism aligned with market standards and international practices”.

In particular, this part of the Decree sets forth that the price of the shares will be set at the market price, in accordance with the offers received during the transaction process, which should take into account the “international practices”. In addition, it leaves the National Government to decide whether it sets a minimum price for the sale or not.

The abovementioned measures, strongly modify the Privatization Law, which sets forth in its article 11th, that the sale price of the shares held by the Colombian State must be set in accordance with the valuation of the entity, taking into account the market conditions, profitability, commercial value of its assets and liabilities, and the support of the Nation. Additionally, setting a minimum price (which in the Decree is not absolutely necessary) is a requirement included in article 10th, which seeks to protect public assets.

It is important to highlight that, despite the difficult time the country is facing, the lax application of such regulation might lead to the sale of State shareholding, without the minimum guarantees this kind of transactions require. A decision of this magnitude and in those terms, although legally justified, may be questionable, because, even though the resources to attend the crisis are essential, the institutions and the stability of companies with State shareholding may be seen as something much more important. Moreover, although it has been argued [4] El Tiempo, 8 de junio de 2020. Abren puerta para que Estado rescate empresas comprando acciones that the State’s shareholding in companies such as Ecopetrol or ISA will not be sold under this new regulation, the reality is that the Decree is not very clear when establishing the terms of a potential privatization and for that reason, it leaves an open door to argue otherwise.

Therefore, after a first analysis of the Decree, many legal questions and issues remain to be answered and solved. This discussion requires a joint work between both private and public sectors, to foresee a balance between both interests at stake: on one hand, the economic crisis we are facing, and on the other, the confidence in the investment of the State.

Authors

Juan Camilo Rodríguez
Juan Camilo Rodríguez, LL.M.
Managing Partner
Bogotá
Daniel Rodríguez
Daniel Rodríguez, LL.M.
Partner
Bogotá