Enterprising Legislation for State Owned Companies

Privatization Law
Reorganization and Transformation
Employees
Capitalization or Sale of Shares
Control

The 1992 Constitution expressly provides for the transfer of state owned enterprises and other forms of private sector participation in such public companies. The Constitution also guarantees competition in the marketplace and prohibits monopolies.

Privatization Law

Law 1615/2000 on the Reorganization and Transformation of Public Entities and Reform and Modernization of Agencies of the Central Administration constitutes the principal legal framework for the transformation of state owned enterprises. Law 1615 establishes a regime that applies to all sectors in which private participation is possible. However, to this date privatization has only been authorized with respect to the telephone service company (Antelco), the water and sewage company (Corposana) and the national railroad company (Fccal). The inclusion of other state owned enterprises in the regime requires a law declaring the relevant enterprise to be capable of being privatized.

Pursuant to Law 1615, the Executive Branch is empowered to privatize the authorized state owned enterprises through the issuance of decrees. The entity in charge of privatization is the National Secretariat for State Reform (SNRE), with rank of a ministry dependent on the Executive.

Law 1615 establishes the steps that must be taken in order to privatize a state owned enterprise. They are:

• intervention of the state owned enterprise. The process starts with the declaration of intervention and the appointment of a so-called 'intervener';

• selection of consultants. After the intervention has been effected the SNRE must select through an international bid the legal consultants that will organize the new enterprise and its transfer to the private sector, as well as the investment bank that will assist the government in the sale or capitalization of the enterprise;

• initiation of the process and definition of the legal nature of the new entity. Various provisions of Law 1615 establish that the new entity shall be one or more stock companies. The involvement of the state is determined at this point;

• establishment of the rules that govern the reorganization and transformation. Pursuant to Law 1615 these rules are established in a decree of the Executive. The decree establishes (i) the legal formalities to organize the new legal entity; (ii) the bylaws and other corporate elements, including the determination of the percentage of the preferred option established by the Constitution in favour of the workers and providers of the enterprises; (iii) the value of the enterprise; (iv) the stock capital; (v) the value and prize of the shares; (vi) the assets transferred to the new entity; (vii) the determination of the debts to be discharged; (viii) the grace periods; (ix) the novations of credits and debts, and the decision to release debts and assets. Additionally, Law 1615 determines that the Executive may govern (through decrees) other matters destined to give the process the required transparency, efficiency and effectiveness; and

• sale or capitalization. After the enterprise is transformed into a private entity the consultants selected for the sale or capitalization advise the government on the sale or capitalization process, which is made through a public international bid. The consultants also declare with the execution of the transaction documents between the government and the successful bidder who will be the legal owner of the majority of the capital stock of the new entity (in the case of a sale) or of a controlling percentage of the shares (in the case of a capitalization).

Reorganization and Transformation

The purpose of Law 1615 is the reorganization of the central administration agencies and the reorganization and transformation of state owned enterprises with the aim of improving their efficiency and effectiveness.

Law 1615 prescribes that the Executive is empowered to issue the necessary decrees to implement the reorganization and transformation processes. Decrees must be issued in accordance with the regulatory framework of the public service that is provided by the enterprise.

The decrees that must be issued during the process are:

• a decree of intervention of the state owned enterprise;

• a decree establishing the form of the new legal entity;

• a decree by which the reorganization and transformation rules are established;

• a decree by which the rules to determine the financial situation of the enterprise, the amount of corporate capital and the value and price of the shares are established;

• a decree by which the legal directives as required by the selected form of legal entity are established;

• a decree establishing the bylaws, name, domicile, purpose, corporate capital, direction and control of the activities of the entity;

• a decree establishing the detailed inventory of assets transferred to the new entity;

• a decree by which the releases, wait periods and novations of debts and credits are established;

• a decree by which it is decided whether to release or assume part or all of the liabilities of the enterprise;

• a decree establishing the percentage of the shares of stock destined to the preferred option to be exercised by the beneficiaries, established in Article 111 of the Constitution; and

• all decrees that have the purpose of giving transparency, efficiency and effectiveness to the process.

Administration

The Executive may order the intervention of a state owned enterprise for 180 days, renewable for an additional equal term. Intervention entails the cessation of the administration bodies, usually the enterprise's council of administration.

The intervener is appointed by the Executive with the consent of the Senate, and may only be removed by the Executive or any of the chambers of Congress through an absolute majority. Once the enterprise is transformed the intervener exercises the function of president and sole director of the new entity until the sale of shares or capitalization is accomplished.

The functions of the intervener are limited to:

• administrative management of the entity;

• ensuring the adequate provision of the entity's goods and services; and

• ensuring that the transformation process is duly implemented in a transparent, effective and expeditious manner.

Employees

Pursuant to the Constitution the workers and sectors directly involved with the state owned enterprise are entitled to a preferential option of the percentage of shares established in the corresponding decree, in the form and order prescribed therein. The beneficiaries of this option are precluded from disposing of their shares for five years.

The Executive is empowered to design labour emergency plans which may include voluntary withdrawal, voluntary retirement, transfer of employees to another entity or state company and establishing rules to this effect.

Capitalization or Sale of Shares

According to Law 1615 the Executive has the power to proceed with the partial or total sale of the state owned enterprise, or its capitalization through the issuance of new shares. The sale is effected through an international bidding process.

The minimum price of the sale is fixed by a reasoned decree of the Executive Branch, based on the opinion of the selected financial advisers.

The Executive Branch cannot commit the state through guarantees or securities in connection with the sale or capitalization of the enterprises.

The transformation of the enterprise may not derive from the creation or maintenance of any monopoly, nor grant any market reserve.

Control

According to the Constitution and Law 1615, the general controller of the republic controls and audits the reorganization and transformation process. He exercises the supervision of these processes, effectuates the observations and consultations made by the relevant experts, formulates proposals and recommendations to the Congress and reports any abnormality detected in the reorganization and transformation processes.

Law 1615 prescribes that the procedures of the authorities responsible for implementing the privatization process under the law be made public, as must the backing information. This information must be available to interested parties, unless it is protected by the banking confidentiality rules.

The Congress has reserved for itself the so-called 'red button', a mechanism by which the presidency of the congress is informed if the control entities detect relevant irregularities in the transformation and sale process that might alter the transparency of the process or cause damage to the state. If the irregularities occur before the public international bid for the participation of the private sector in the enterprise, its members (with the favourable vote of the absolute majority) may halt the process as of the date that the irregularity was committed. If the public international bid has already begun then such irregularities may only be challenged judicially.

Finally, Law 1615 establishes that the provision of the different public services by the transformed entity shall be under a concession regime that is conferred in advance by law. A concession contract shall be entered into between the new entity and the state within the six months of the award to the successful bidder in accordance with the legal framework applicable for each sector.

For further information on this topic please contact M Yolanda Pereira Z or Luis Breuer at Berkemeyer Attorneys and Counselors by telephone (+595 21 446706) or by fax (+595 21 449694) or by e-mail ([email protected] or [email protected]). The Berkemeyer Attorneys and Counselors web site can be accessed at www.berke.com.py.