Demutualization Prevention

The worker cooperative structure is designed to protect the inalienable rights of its members. It is important to ensure these rights in practice by preventing worker cooperative demutualization, or conversion to a structure where their rights are not protected.

In an environment where companies are typically traded above their net asset value, there will always be positive financial incentive for cooperative members to sell out. This usually happens when a worker cooperative is sold and converted to a investor owned business. By selling out, members can attain a one time payment greater than the value of their ownership stake. This comes at the cost of their democratic employment, ownership, future profit appropriation, and human rights.

Short of changing public opinion and laws required to ban illegitimate forms of businesses, there are practical measures that can be taken to prevent demutualization within the current legal system. One aspect of the legal system that can be used to the advantage of worker cooperatives is the high value placed on upholding contracts.

Coop asset backed security holders are not allowed governing control over a worker cooperative, which represents a positive control right. However, coop asset backed security holders are allowed to retain a partial negative control rights. coop asset backed security holders have the right to say their capital cannot be used in a manner that violates member rights.

This negative control right can be granted to coop asset backed security holders by giving them a vote on demutualization. It is the right to say their capital will not be used in a way which alienates control or profit from the members. A vote on demutualization has nothing to do with any governance aspect of a worker cooperative and thus is not prohibited.

The charter (articles of incorporation) or bylaws of a worker cooperative can require a 100% quorum, plus the unanimous consent of all coop asset backed security holders and debt holders for demutualization. A 100% quorum and unanimous consent of all members would also be required. Changes to the demutualization section of the charter or bylaws can require an equally high threshold. The 100% quorum plus full consensus of all parties would be an extremely difficult threshold to achieve, and an effective deterrent to demutualization. This would be especially true with a large number of investors.

The coop asset backed security holders and debt holders are not allowed to propose demutualization. A vote can only occur if a membership proposal on demutualization is brought before them by the members. Unanimous member consent is required to bring demutualization to an investor vote.

The investors in a coop can be thought of as composing a trust that is responsible for preventing demutualization. This trust is controlled democratically with one investor, one vote, regardless of investment size. The voting structure mitigates the influence of wealth on decisions. It caters to the super minority of one, who can single handedly prevent demutualization.

The coop can always offer to purchase coop asset backed security from investors who may block the vote, but the investor must agree to the sale. Paying special dividend on coop asset backed securities can only reduce the nominal value of all coop asset backed securities proportionally. Unless the dividend is for the full value of all outstanding coop asset backed securities (impractical), holders will retain their vote.