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The change of control clauses in the context of the free negotiability of shares

It is common in continuing contracts to agree on the obligation for the contractor to seek prior authorization from the public entity if there is a change of shareholding control (change of control clause). However, it is important to analyze the validity of those clauses in the light of commercial regulation.

It is important to note that Article 379 of the Commercial Code mentions as one of the rights of shareholders the possibility to feely negotiate its shares. Additionally, Article 403 of the Commercial Code provides that shares are freely tradable as a general rule, unless: (i) they are privileged shares; (ii) the pre-emption right over them has been agreed; (iii) they are non-released industry shares; or (iv) they are pledged shares. In addition, Article 13 of Law 1258 of 2008 establishes the power for shareholders of a Sociedad por Acciones Simplificada to limit the negotiability of the shares in the bylaws of the corporation, if such limitation does not exceed the term of 10 years.

In this regard, it is necessary to examine whether, through a contract concluded between the company and a third party – such as the State, the free negotiability of that company's shares, enshrined in Articles 379 and 403 of the Code of Trade. Thus, the Consejo de Estado (Administrative Supreme Court) has taken a position on this issue and made it clear that the free negotiability of shares cannot be restricted contractually. In a judgment of 20 February 2008, they stated: "The free negotiability of shares by the shareholders is only diminished by the precise limits imposed in the Law, without it being possible to stablish any other limitations not permitted or legally authorized."[1]

Meanwhile, while public contracts are, by express legal provision, intuitu personae, the Consejo de Estado[2] has established that such a character is preached only in respect of the contractor, but not of its shareholders. For this reason, the only operation to be subject to prior authorization from the public entity is the assignment of the contract, but not the change of control.

In conclusion, it should be noted, then, that the free negotiability of shares is inherent in the company´s constitution. In this sense, only the Law and the bylaws in the Sociedad por Acciones Simplificada may limit this right of shareholders. Additionally, it should be noted that this position has been adopted by the Consejo de Estado, which has made it clear that the characteristic of intiutu personae is preached exclusively from the contractor and not from its shareholders.

[1]Consejo de Estado – Section three. Judgment of 20 February 2008. C.P. Myriam Escobar Warrior.

[2]Consejo de Estado – Section Three. Judgment of 7 February 2002. C.P. Alier Eduardo Hernández Enríquez.


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