By:
Mara Victoria Vargas
New York
On October 5, 1995, the Constitutional Court of Colombia issued a decision which will require that a law be passed by Congress regulating privatizations.
Background: Constitutional and Regulatory Framework for Privatizations.
Article 60 of the Colombian Constitution ("Article 60") provides that the sale by the Nation of its participation in a company is subject to the offering of special conditions to the workers, workers organizations (i.e., unions) and solidarity sector organizations (i.e., cooperatives) ("Workers and Solidarity Sector"). These special conditions are aimed at promoting the "democratization" of the ownership of the entity being privatized and are intended to facilitate its acquisition by the Workers and Solidarity Sector. Article 60 also provides that the law should regulate this matter; however, no special law was issued by Congress for these purposes.
Prior to the October 5 decision, privatizations in Colombia followed the procedure set forth in Decree 663 of 1993 -- the Estatuto Orgánico del Sistema Financiero (the Statute of the Financial System or "Decree 663"). According to Decree 663, the sale program for each entity to be privatized must be approved by (i) a decree of the Council of Ministers or (ii) the Board of Directors of the corresponding entity or the competent Ministry, if the state holds less than 50% of the capital of the entity being privatized.
Each privatization program must include measures aimed at democratizing the ownership of the corresponding entity, as well as the special conditions to be offered to the Workers and Solidarity Sector. As of now, these special conditions have included the following: (i) a first offer exclusively addressed to the Workers and Solidarity Sector, prior to any offer or sale to private investors; (ii) special credit lines and similar facilities to finance the acquisition of the shares by the Workers and Solidarity Sector; and (iii) special terms for the payment of shares acquired by the Workers and Solidarity Sector. The sales program must also include the minimum offering price of the shares, which must be based on a technical and financial evaluation of the entity being privatized.
Decree 663 further provides that the sale process itself must be carried out through an auction on the stock exchange, or by means of other procedures assuring wide publicity and free competition. The auction must be governed by the general rules established by the Superintendencia de Valores - the Stock Superintendency.
The Claim
The foregoing provisions of Decree 663 were challenged before the Constitutional Court on the grounds that they violated Article 60. The basic arguments underlying the claim were that the intent of the Constitution was to promote the "democratization" of the ownership of state companies and, therefore, that such ownership should pass exclusively to the Workers and Solidarity Sector under the preferential right granted by Article 60.
The main charges brought by the claimant can be summarized as follows:
(i) The Government lacks the competence to approve the privatization programs and to set the special conditions for the Workers and Solidarity Sector. The claimant argued that Article 60 granted such authority directly to Congress and that it could not be delegated to the Executive. Moreover, delegation to the Executive would allow a given administration to apply its own criteria, to the possible detriment of the general interests of the Nation.
(ii) The use of an auction procedure as an instrument for the sale prevents the effectiveness of any special conditions for the Workers and Solidarity Sector, and the auction should not be subject to the general rules established by the Stock Superintendency. The claimant argued that since the essence of the auction is to award the ownership to the highest price offered, it would impair the rights of the Workers and Solidarity Sector.
(iii) Setting the minimum price based on the technical and financial evaluation of the entity is contrary to the basic principles embedded in the concept of a Social State (Estado Social de Derecho), which Colombia is by constitutional definition. The claimant argued that such principles even justify selling at a loss, in order to "democratize" the ownership of the entity being privatized.
The Decision
The Constitutional Court first analyzed the meaning and the purposes of the "democratization" of the ownership of state entities. In the Court's opinion, "democratization" purports to create a balance in the ownership among the different segments of society and, therefore, requires that special conditions be offered to the Workers and Solidarity Sector, which might not otherwise acquire such ownership. However, "democratization" does not require that ownership be given exclusively to such preferred beneficiaries to the detriment of the general interests of the Nation. Thus, although Article 60 grants a preferential right to the Workers and Solidarity Sector, it cannot be construed to require that ownership pass exclusively to them.
Regarding the particular charges brought by the claimant, the Constitutional Court decided as follows:
(i) The general framework for "privatization" processes must be set forth in a law issued by Congress. This law must include the special conditions to be offered to the Workers and Solidarity Sector. The authority to issue such general framework and special conditions corresponds exclusively to Congress, which may not delegate it to the Executive. Nonetheless, the particulars of each privatization program (i.e., terms, special credit lines, price of the shares, etc.) must be established on a case-by-case basis, following the guidelines of the law to be passed by Congress to regulate privatizations.
(ii) Following a prior decision (C-211, April, 1994), the Court affirmed that the use of auctions in the privatization process is not in itself contrary to the intent of Article 60 as long as there is a "closed auction," which is defined as a special auction in which the only persons entitled to bid are the members of the Workers and Solidarity Sector. The Court added that the particular characteristics of such an auction merit special rules that should be designed by the Stock Superintendency. Based on the Court´s main ruling as to the non-exclusive right of the Workers and Solidarity Sector to acquire the ownership of the State entity being privatized, we must conclude that in the event of a "closed auction," a public auction should follow, opened to investors at large.
(iii) The Constitutional Court affirmed that the use of technical criteria for the valuation of the entity being privatized is not contrary to the Constitution and, on the contrary, will assure the stability of the corresponding entity and safeguard the interests of the Nation. However, the Constitutional Court added that the actual application of these criteria will depend on the provisions of the law on privatizations which must be issued by Congress.
Upon issuance of the October 5 decision, the Government of Colombia announced that it will submit a bill to Congress regulating privatizations. In the meantime, and until Congress passes the law, no privatizations may be carried out. Finally, it is important to stress that this decision does not have retroactive effect; thus, it does not affect privatizations completed prior to its issuance.
