Acquiring publicly held companies in Colombia



After considerable legal and political turmoil, in January 2016 the Colombian Ministry of Finance and Public Credit successfully sold to a subsidiary of the Canadian investment fund Brookfield Asset Management Inc its majority stake in local energy company Isagen S.A. E.S.P. This landmark case, which constitutes the largest privatisation operation ever made in Colombia, raised numerous issues regarding the legal framework applicable to this type of operation. Furthermore, the Isagen case revealed the vulnerability of the system to judicial and political attacks by detractors, and how these attacks can seriously delay the bidding process and jeopardise the overall possibility of closing a transaction.

Moreover, the issues raised by the Isagen case acquire deeper relevance in light of recent announcements made by government-controlled oil company Ecopetrol S.A., the largest company in Colombia, and Empresa de Energía de Bogotá S.A. E.S.P. (EEB), a major energy company owned by the district of Bogotá, to sell their participations in companies considered non-strategic to the companies’ core businesses. The Council of Bogotá has also approved the sale of the District’s majority stake in telecommunications company Empresa de Telecomunicaciones de Bogotá S.A. E.S.P. (ETB). Both Ecopetrol and EEB have a wide portfolio of investments, and as both companies are controlled by a public body, the sale of their participations has to abide by the rules set forth in Law 226 of 1995 (Law 226), which regulates privatisation processes in Colombia.

Basic aspects of Law 226

Two specific rules regulate privatisations in Colombia. First, article 60 of the Colombian constitution, which grants a right of first offer to the workers, retirees and the employee union of the company being privatised (among other entities, altogether referred to as sector solidario). This preferential right must be cleared by the seller before offering the shares to the general public. Second, Law 226, which further develops article 60 of the constitution and sets forth additional rules for privatisation processes.

Articles 2, 3, 4 and 5 of Law 226 establish the guiding principles that must be observed when completing a privatisation process. Article 2 establishes the democratisation principle, by virtue of which any person, either natural persons or legal entities, must have access to the shares being offered by the public body acting as seller. In order to accomplish this goal, article 2 imposes an obligation on sellers to implement mechanisms of wide publicity and free competition throughout the process. Article 3 further develops the right of first offer set forth in article 60 of the constitution, crystallising the principle of preference in favour of the sector solidario. Subsequently, article 4 establishes one of the most important principles and simultaneously one of the most sensitive aspects of privatisation processes; the protection of public treasury principle. By virtue of this principle, the seller must act with extreme caution throughout the transaction, and must make its best efforts to sell the shares at the best price possible, considering of course market conditions and the specific characteristics of the underlying asset. The proper observance of this principle is one of the most highly scrutinised points by the Contraloría General de la República (Contraloría), the Colombian control agency that monitors the proper administration of the public budget. Finally, article 5 establishes the continuity of the service principle, which is especially relevant when the company being privatised is a public utility company or empresa de servicios públicos (ESP). This principle seeks to avoid any type of interruptions in the public service supplied by the ESP as a consequence of the privatisation process.

From a more procedural standpoint, articles 6 and 7 establish that that the public body acting as seller is responsible for designing the sales programme of the shares or Programa de Enajenación, which must be founded upon technical studies, including a valuation of the shares being offered. For this purpose, sellers usually use an investment bank with considerable knowledge and expertise both of privatisation processes and in the relevant market in which the company operates. In light of the aforementioned protection of public treasury principle, the company valuation is a critical aspect of the privatisation process. Finally, before offering the shares the sales programme must be approved by the Council of Ministers, when the seller is part of the central government (article 8), or by the corresponding local authority, when the seller is a regional public body (article 17). For instance, the sale of the shares owned by the District of Bogotá in ETB had to be previously approved by the Council of Bogotá.

The foregoing provisions constitute the basic aspects of Law 226. However, the legal framework established by these provisions is far from being exhaustive. From a legal standpoint, the public entity acting as seller in each specific privatisation holds a wide margin of regulatory discretion in designing and executing the transaction. A margin of discretion that, in turn, also entails a considerable degree of liability and exposure for the public body acting as seller.

Legal Issues raised by the Isagen case

The Isagen case marked a ‘before and after’ for privatisation operations in Colombia. The Colombian government, seeking to raise funds to enhance the country’s transportation infrastructure, decided to sell its majority stake in Isagen back in 2009. However, the government was only able to sell its 57.6 percent stake in Isagen until January 2016. Considering the exchange rate at the date of closing, the transaction’s overall value exceeded US$2bn.

The operation faced considerable opposition in Colombia. Numerous congressmen claimed that the operation would be a considerable detriment to the country’s public treasury. Allegations that the country’s ‘energetic sovereignty’ would be jeopardised were also made. Additional to the political resistance and the noise made by the media, the transaction had to face numerous legal battlefronts, as opponents of the process filed an extensive set of legal claims before pretty much all the judicial instances available in Colombia. In light of these massive challenges, it was only normal that the process suffered continuous delays and interruptions. Moreover, in light of the overall turmoil surrounding the operation, the Council of Ministers decided to considerably raise the share price just weeks before the adjudication proceeding, even surpassing the high end of the estimated price range provided by the investment bankers.

All these challenges shed light on the vulnerability of the system to judicial and political attacks, and demonstrated how an excessive use of the available legal instruments can seriously delay the privatisation process and eventually jeopardise the overall possibility of closing the transaction. In the Isagen case, the attacks ultimately only had the effect of discouraging the majority of bidders from the process and pushing the sale to a date in which we had the highest peso-for-dollar exchange rate in the country’s history at that moment. In the end, only two bidders survived the burdensome process, and only one of them presented itself to the adjudication proceeding. As the economic offer presented fulfilled all the legal requirements, the shares were adjudicated to this sole bidder, which was a subsidiary of the Canadian investment fund Brookfield Asset Management Inc. This point would also raise considerable noise and discussion, mainly derived from misguided interpretations of the scope of Law 226 and how it should interact with the general rules of public procurement in Colombia.

Upcoming challenges

The issues raised by the Isagen case will have a great impact on how Ecopetrol, EEB and the District of Bogotá design and implement their ongoing and upcoming privatisation operations. As mentioned, both Ecopetrol and EEB have a wide portfolio of investments and lead two of the major business groups in the country. Two points will be of special consideration: the valuation of the shares being offered and the adjudication mechanism. The Isagen case will undoubtedly impact how the sellers design the sales programme, and it is foreseeable that in future privatisations there is a certain tendency to establish a price per share that is slightly above regular market conditions as a defence mechanism against potential claims under the protection of public treasury principle. Additionally, very likely the adjudication mechanisms designed to select the final buyers will not be allowed to adjudicate in case of receiving only one offer. These two positions are direct consequences of the scars left behind by the Isagen case, and perfectly reflect the negative effects that can be triggered by deeply politicising operations that are, essentially, business transactions.


Juan Pablo Caicedo De Castro is an associate at Gómez – Pinzón Zuleta Abogados. He can be contacted on +57 1 319 2900 (ext. 291) or by email:

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Juan Pablo Caicedo De Castro

Gómez – Pinzón Zuleta Abogados

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