Explain why a permanent lock has precedent (UK CICs, steward ownership,
US nonprofit conversions) and what it prevents (building-society
demutualisation). Enforce it in layers: an independent veto-only lock
share, articles, statute, and a backstop that sends the value to the
federation fund if the lock is ever broken. Treat piecemeal asset sales,
hire-backs and subsidiaries as sales; adapt Argentina's bankruptcy rule,
noting it needs a Bankruptcy Code amendment; state the lock's costs.
Co-Authored-By: Claude Opus 5.5 <[email protected]>
Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx
@@ -9,7 +9,7 @@ summary: The biggest risk is that the model gets repealed, not that the state ov
This model asks little of the state: charter [a bank](the-bank.md), enforce [the lock](the-lock.md), run [the floor](the-floor.md). The concentration-of-power argument still applies to the floor (see [Open Problems](open-problems.md) on "essential" sectors), but it isn't the biggest risk.
**The main risk is durability, not overreach.** A model that can be built gradually can be dismantled gradually. A future Congress can defund the bank, and a statutory lock can be repealed by the same kind of majority that passed it. Postwar social democracy got rolled back once the coalition that built it weakened; a voluntary co-op sector is exposed to the same thing. So the design question is: **what makes this hard to reverse?** Partial answers: the lock written into each co-op's own charter and into state co-op law, not just federal statute; a federation that becomes financially independent of the public bank; and, above all, a co-op sector large enough to have its own constituency.
**The main risk is durability, not overreach.** A model that can be built gradually can be dismantled gradually. A future Congress can defund the bank, and a statutory lock can be repealed by the same kind of majority that passed it. Postwar social democracy got rolled back once the coalition that built it weakened; a voluntary co-op sector is exposed to the same thing. So the design question is: **what makes this hard to reverse?** Partial answers: the lock written into each co-op's own charter and backed by an independent lock share (see [The Lock](the-lock.md#how-the-lock-is-made-to-hold)), and into state co-op law, not just federal statute; a federation that becomes financially independent of the public bank; and, above all, a co-op sector large enough to have its own constituency.
**Money out of politics.** Legislative work pays well enough that good people want the job, but any money, gift, or benefit from a non-government entity ends the salary and starts a prison sentence. Politicians should benefit only from serving their people.
@@ -15,7 +15,7 @@ This model doesn't buy, seize or convert anyone's company. Instead it builds new
- **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally. Salaries still exist, and hard jobs still pay more. Part of each year's profit builds up in a personal account that's paid out when you leave, and part goes into a permanent reserve that keeps the business investing. [Worker Ownership](worker-ownership.md), [Member Capital Accounts](capital-accounts.md) and [Investing for the Long Run](the-long-run.md)
- **A small public bank lends to worker co-ops.** It charges market rates, so it only succeeds if co-ops can really compete. Its whole job is to be willing to lend to a kind of company other banks won't. Spain, Italy and the US have all tried versions of this, and the pilot is built around what went right and wrong. [The Bank](the-bank.md) and [Has This Been Tried?](precedents.md)
- **Co-ops funded this way stay co-ops forever.** They can't be sold to conventional owners, and members can't vote to cash out what earlier members built. [The Lock](the-lock.md)
- **Co-ops funded this way stay co-ops forever.** They can't be sold to conventional owners, and members can't vote to cash out what earlier members built. An independent lock-holder can veto any attempt, including selling the business off piece by piece. [The Lock](the-lock.md)
- **It runs as an honest experiment.** A one-time $350 million pilot aims to fund about 400 new co-ops. The success measures are published before the first loan. If, after twelve years, co-ops stay open about as well as similar conventional firms while paying their members fairly, and the bank earned at least what Treasury bonds would have, Congress votes on growing it. If not, it shuts down automatically. [The Test](the-test.md) and [The Pilot, in Numbers](pilot-spec.md)
- **Co-ops back each other up.** They pool part of their profits into a shared fund. If one fails, its workers are moved into others instead of being left with nothing. [The Federation](federation.md)
- **Nobody is left behind by low-margin work.** Owning a company doesn't help much when there's barely any profit to own, so a strong floor covers the rest. [Ownership and the Floor](the-floor.md)
@@ -15,7 +15,7 @@ An honest list of what the model hasn't solved yet, most dangerous first.
3.**Members' savings sit inside their employer.** [Member capital accounts](capital-accounts.md) are capped at a year's pay and protected by a solvency test, but they rank behind the co-op's creditors. Fagor's 2013 bankruptcy shows what that can mean. Federation-backed insurance is an option, not yet a design.
4.**Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.
4.**Is the lock too rigid?** A co-op that should be sold (a better operator exists, the members want out) can only go to another co-op. If the co-op sector is small, that buyer pool is tiny, and viable firms may be liquidated instead of rescued. The federation as buyer of last resort is a partial answer. Critics on the right add a sharper version: a lock that outlasts a repaid loan by generations is a permanent restriction on selling property, bought with one loan, and it binds members who never agreed to it. The lock is now built to hold in layers, including an independent lock share and rules against selling the business piece by piece ([The Lock](the-lock.md#how-the-lock-is-made-to-hold)). Its biggest legal gap is bankruptcy: federal bankruptcy law generally overrides limits on selling a bankrupt company's property, so the lock only holds in bankruptcy if Congress amends that law. Italy offers a softer model: a co-op there can convert into an ordinary company, but its accumulated reserves go to the co-op development fund, not to the members ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). That would keep the part of the lock that stops members cashing out what earlier generations built, and drop the part that stops a firm from ever changing hands.
5.**Scale.** Even a total success at pilot scale leaves most workers in conventional firms. The labor-market effect needs a sector large enough to move wages, and nobody knows how long growth to that size takes, if it happens at all. That's the price of not forcing it.
- **Indivisible reserves.** A slice of every year's profit goes to a collective reserve no member can ever withdraw. On dissolution, after debts are paid, remaining assets go to the federation fund, not to the members. Italian co-op law already works this way. It removes the incentive to kill the co-op for its assets.
What the lock does *not* do: keep failing firms alive. A locked co-op can still go bankrupt, and its assets can still be sold in liquidation. It just can't be sold as a going concern to anyone but another co-op.
## Why "forever" isn't as strange as it sounds
A permanent lock sounds extreme. But plenty of organizations already live under one, and the law already knows how to handle them.
- **Britain's community interest companies.** Since 2005, UK law has offered a kind of company whose assets are locked to its purpose. Official guidance is blunt: "once a company is a CIC it cannot become an ordinary company" ([UK government guidance](https://www.gov.uk/government/publications/community-interest-companies-how-to-form-a-cic/community-interest-companies-guidance-chapters)). A dedicated government regulator enforces the lock. That hasn't scared people off. There were more than 37,000 of them in 2025, and a record 8,376 were approved that year ([CIC Regulator annual report, 2024–25](https://assets.publishing.service.gov.uk/media/68809f4f28f29c99778a7504/cic-25-01-community-interest-companies-annual-report-2024-2025.pdf)).
- **Companies that can't be sold.** Some well-known firms, including Bosch, Zeiss and the search engine Ecosia, are "steward-owned": set up so that control can't be sold to outsiders. Bosch and Zeiss do it through foundations. Ecosia uses a simpler device: an independent body holds a single "golden share" whose only job is to veto any change that breaks those rules ([Wikipedia](https://en.wikipedia.org/wiki/Steward-ownership)).
- **American nonprofits.** Assets given to a charity stay charitable. When Blue Cross of California moved its business into a for-profit company in the 1990s, state regulators made it hand over more than $3.2 billion to two new health foundations. Its first offer had been $100 million ([Community Catalyst, 2004](https://www.communitycatalyst.org/wp-content/uploads/2022/11/conversion_and_preservation_of_charitable_assets_of_blue_cross_and_blue_shield_plans_mar04.pdf)). Notice what happened there, though: the company *did* change form. What the law protected was the value.
There's one honest difference. The founders of a community interest company, or of Ecosia, chose their lock freely. Here the lock is the condition of a public loan. Founders still choose it, since nobody has to borrow from the bank, but they choose it as part of a deal.
**And the failure the lock prevents is real.** Britain's building societies were member-owned mortgage lenders. From 1989 on, several of the biggest (Abbey National, Halifax, Northern Rock, Bradford & Bingley and others) turned themselves into banks. They won their members' votes by paying out windfalls from reserves that earlier generations had built, and speculators opened small accounts just to collect. Every converted society ended up swallowed by a bigger bank or failed ([Co-operative News, 2014](https://www.thenews.coop/big-bang-demutualisation-building-societies-failed/)). Northern Rock, a building society until 1997, suffered Britain's first bank run in well over a century in 2007 and was nationalized the next year ([Wikipedia](https://en.wikipedia.org/wiki/Northern_Rock)). Those failures had many causes, and mutuals can fail too. But the windfall votes show exactly the incentive the lock removes: current members cashing out what their predecessors built.
## How the lock is made to hold
A lock written only into a co-op's own rules can be voted away by its members. A lock written only into federal law can be repealed by Congress. So it's built in layers, and each one is meant to hold if another fails.
1.**A lock share.** Each locked co-op issues one special share to an independent **lock-holder**. The share pays nothing. It votes on only four things: a sale or merger, a change to the lock clauses, a payout on dissolution, and a sale of a large part of the business (below). On those, it has a veto. It **can't approve** a sale to a conventional buyer, because nobody can. And it **must approve** anything that follows the lock, such as a merger with another locked co-op, so it can't hold good deals hostage. A refusal can be challenged in court. State corporate law already allows restrictions of this kind. Delaware, for example, lets a company require consent before its shares change hands, or bar transfers to designated kinds of buyers, as long as the restriction isn't "manifestly unreasonable" ([Delaware Code, title 8, § 202](https://delcode.delaware.gov/title8/c001/sc06/index.html)). This is the same device Ecosia uses.
2.**The co-op's founding documents.** The lock clauses are written into the articles, and they can be changed only with the lock share's consent. (Articles that simply claim they "can never be amended" may not hold up under state law. A required consent is what actually does the work.)
3.**The law.** The bank's authorizing statute makes the lock a condition of every loan and says it outlasts repayment. It also changes federal bankruptcy law for locked co-ops (see below). Where states are willing, the lock goes into state co-op law too (see [The Constitution](constitution.md)).
4.**A backstop that follows the money.** If a court or a later Congress ever breaks the lock and a co-op converts or is sold anyway, the reserves and any sale value above members' own account balances still go to the federation fund, not to the members. Italy works this way ([Has This Been Tried?](precedents.md#italys-co-op-funds-coopfond-and-the-marcora-law)). So even if the lock on the firm's form fails, nobody gets a windfall from breaking it.
**Who holds the lock share.** Each co-op picks its lock-holder from a list of approved ones: its [federation](federation.md), or an independent nonprofit lock trust with its own endowment and a successor named in case it ever shuts down. The rules keep the lock-holder honest:
- **It can't be a buyer, or benefit from a sale, in any deal it reviews.** If the co-op's federation might absorb the co-op, or would receive its assets on dissolution, a different lock-holder reviews that deal.
- **It isn't the only one who can enforce the lock.** Any member, any other locked co-op, the bank and the state attorney general can also go to court.
- **It publishes an annual review** of the co-ops it holds shares in.
**Where the legal risk really is.** Courts are wary of "restraints on alienation": conditions that stop an owner selling property, especially forever ([Cornell Legal Information Institute](https://www.law.cornell.edu/wex/restraint_on_alienation)). For company shares, reasonable restrictions are generally allowed, so that risk is manageable. **The bigger threat is bankruptcy.** Federal bankruptcy law generally overrides contract terms that restrict transferring a bankrupt company's property ([11 U.S.C. § 541(c)(1)](https://www.law.cornell.edu/uscode/text/11/541)). Without a change to that law, a court-run sale could hand a failed co-op's whole business to any bidder, lock or no lock. So the bank's statute has to amend the Bankruptcy Code for locked co-ops. That needs Congress, and it's listed in [Open Problems](open-problems.md).
**What about members who never agreed to it?** Nobody is forced to work at a locked co-op. The lock is explained in writing when someone is hired and again when they become a member. The trade is the same as joining a nonprofit: you get a vote and a share of the profits in a firm you didn't found, and you can't sell it.
## When a co-op needs to change hands
The lock stops a co-op being sold to conventional owners. It doesn't freeze it in place. A co-op can still:
- **Merge with or be bought by another locked co-op**, including a much bigger one.
- **Split off part of its business** as a new locked co-op, or sell that part to one.
- **Sell things it no longer needs**, like old equipment, a building or a patent it doesn't use, to anyone at a fair price. The gain goes to the reserve (see [Investing for the Long Run](the-long-run.md#the-rules)).
- **Take outside money without giving up control**, on voteless, expiring terms (see [Capital, After](capital.md)).
- **Get help from its federation**, which can lend to a struggling co-op or help find a co-op buyer (see [The Federation](federation.md)).
## Closing the back doors
A lock on the company is worthless if the business can walk out the side door. These rules are part of the lock itself, so they last as long as it does, not only while a bank loan is outstanding.
- **Selling the business piece by piece counts as selling it.** If a co-op sells, leases or licenses more than a quarter of its assets or its revenue-producing business within any three years, counted together, that's treated as a sale of the business, and the lock share can veto it. The same goes for the brand, the core technology, or the main customer contracts, whatever their size.
- **Buying the assets and hiring the workers counts too.** If a buyer of the co-op's assets hires more than a third of its members within two years, the deal is treated as a sale of the whole business after the fact. The buyer owes the federation fund the difference between what it paid and the value of the business as a going concern. People are always free to change jobs. This rule makes a buyer pay full price for a whole business, even if it picks the business up in pieces.
- **Subsidiaries are covered.** Any company a locked co-op controls is also locked, and its workers are covered by the membership rule. Otherwise a co-op could grow through an ordinary subsidiary and then sell it. That's the pattern behind Mondragon's non-member foreign subsidiaries.
- **No outside control through the back door.** The limits in [Capital, After](capital.md) (outside claims last at most 15 years, rank behind lenders, and carry no vote) apply forever, not just while a bank loan is outstanding. No investor, lender, supplier or licensee can hold a veto over the co-op's budget, hiring or management. No contract can give one outside party an exclusive claim on most of what the co-op produces for longer than five years.
## When a co-op goes bankrupt
Argentina changed its bankruptcy law in 2011 so that when a firm fails, its workers can form a co-op, keep the business running, and buy it at its appraised value, counting what they're owed toward the price ([Law 26.684, articles 189, 203 bis and 205](https://www.argentina.gob.ar/normativa/nacional/ley-26684-183856/texto)). This model borrows the idea, adapted to American law.
- **Only co-ops can buy the business whole.** Its own workers (as a new locked co-op), the federation, or any other locked co-op can bid. It's sold by open bidding among them, with an independent appraisal as the minimum price. The lock-holder picks the appraiser.
- **Workers' unpaid wages count toward their bid**, but only at what those claims would actually have recovered in the bankruptcy. Federal law gives unpaid wages some priority, capped at $17,150 per worker for wages earned in the last 180 days ([11 U.S.C. § 507(a)(4)](https://www.law.cornell.edu/uscode/text/11/507)). But secured lenders are paid first, so that priority often recovers little.
- **No buying back your own failure cheaply.** People who managed the co-op in the two years before it failed can't get bank financing to buy it back. Deals the co-op made in the three years before failure can be challenged by the lock-holder, on top of what bankruptcy law already allows.
- **If no co-op buys it**, the assets are sold off separately to anyone. But no single buyer and its related companies may assemble enough of the pieces to add up to the business.
- **A reorganization can't hand over control.** If a locked co-op reorganizes in bankruptcy instead of closing, the plan can't give voting shares to anyone but members.
**This does cost creditors something.** When only co-ops can bid on the whole business, the price may be lower than an open auction would fetch, and lenders will charge for that risk. That's part of the lock's price (below).
## What the lock costs
The lock has real costs, and they should be stated plainly.
- **Fewer buyers means lower prices, and sometimes a breakup.** When a failing co-op finds no co-op buyer, a business that a conventional buyer would have kept running may be sold off in pieces, and its workers lose their jobs. Lenders get back less, and they'll charge for it. The pilot publishes the bank's recovery rate on failed loans (see [The Pilot, in Numbers](pilot-spec.md#what-gets-measured)), so this cost shows up in the numbers.
- **While the sector is small, so is the pool of co-op buyers.**
- **Members can't take the firm's value with them.** That's the point of the lock, and it's also the heart of [the founder problem](founder-problem.md).
- **"Forever" is a long time.** Critics on the right argue that a permanent lock, bought with one loan, binds generations who never chose it. Italy takes a softer approach: a co-op can become an ordinary company, but its accumulated reserves go to the co-op movement's fund, not to the members. Whether this model should follow Italy is an open question (see [Open Problems](open-problems.md)).
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