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title: The Lock in State Law
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section: The Co-op
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order: 31
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summary: The lock is written into each co-op's charter, but ordinary state law still leaves several ways out, and this page drafts a short law any state can adopt to close them for co-ops that choose the lock.
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---
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# The Lock in State Law
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[The lock](the-lock.md) is built from a co-op's own founding documents and a single *lock share* held by an independent lock-holder, which can veto a sale or a change to the lock. Most of that works under today's law. But co-ops and companies are creatures of state law, and state law has its own ways out that a charter can't fully close by itself.
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This page lists those ways out and drafts a short model law that closes them. It applies only to co-ops that choose the lock. States can adopt it or not, and nothing in the federal law requires them to. A co-op in a state that hasn't adopted it is still locked by its charter and lock share, just less securely.
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## Where state law leaks
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- **Members can vote to stop being a co-op.** Massachusetts has had a law for worker co-ops since 1982, and a co-op can leave that status "by a vote of two-thirds of the members" ([Mass. Gen. Laws ch. 157A, § 4](https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter157A/Section4)). That's exactly the exit the lock closes.
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- **Mergers and changes of form usually need only the owners' vote.** In Delaware, for example, a merger is approved by "a majority of the outstanding stock" entitled to vote ([Del. Code tit. 8, § 251(c)](https://delcode.delaware.gov/title8/c001/sc09/index.html)). Most states also let a company turn itself into a different kind of business, or move to another state, by a vote. A lock share catches these only if the charter says its consent is needed, and only as far as each state's law lets a charter say so.
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- **Some protection already exists, unevenly.** Delaware already gives a class of shares its own vote on any change that would "alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely" ([Del. Code tit. 8, § 242(b)(2)](https://delcode.delaware.gov/title8/c001/sc08/index.html)). So a Delaware lock share can block its own removal. Co-op laws often don't have classes of shares at all, and they vary a lot from state to state.
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- **Courts can end a company.** Massachusetts, like most states, lets a court dissolve a corporation when its directors or owners are deadlocked, or when its creditors can't be paid ([Mass. Gen. Laws ch. 156D, § 14.30](https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXII/Chapter156D/Section14.30)). After debts are paid, what's left normally goes to the owners. A charter can say otherwise, but whether a court has to follow that when it's the one dissolving the company isn't settled everywhere.
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- **Courts dislike permanent limits on selling.** A lock is a "restraint on alienation," a limit on selling property, and courts look hard at those when they last forever ([Cornell Legal Information Institute](https://www.law.cornell.edu/wex/restraint_on_alienation)). Limits on selling company shares are usually allowed if they're reasonable, but "reasonable" is up to a judge.
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- **Creditors can sell without a bankruptcy court.** A lender with a claim on a business's equipment and other assets can sell them after a default, or keep them, under state law ([UCC § 9-610](https://www.law.cornell.edu/ucc/9/9-610)). A mortgage lender can foreclose on its building. A creditor with a court judgment can have the sheriff sell its property, a tax agency can hold a tax sale, a state court receiver can sell the business, and so can an assignee when a business hands everything over to pay its creditors. The [bankruptcy amendment](bankruptcy.md#what-can-be-sold-and-to-whom) tries to reach those sales with a federal law resting on Congress's power over commerce, which will be challenged. A state law covering the same sales is on much firmer ground.
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## What the model law does
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**1. Locking is a choice, and people who vote no can leave.** A co-op becomes locked by saying so in its articles, naming a lock-holder from the approved list and issuing the lock share. For a new co-op, the founders decide it unanimously. An existing co-op or business, like one being [sold to its workers](buyouts.md), needs at least a two-thirds vote of its members, and never less than the vote it would take to leave co-op status. Members who vote no can leave within 90 days and have their whole capital account paid out on the normal schedule. They aren't paid what the business would sell for unlocked. That value never belonged to any one member, and paying it out is exactly the windfall the lock exists to prevent. The status is shown in the state's public business records, and a notice is filed where lenders already look for claims on a business's property (a UCC filing).
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**2. The members' exit doesn't apply.** Once locked, a co-op can stop being a co-op only with the lock-holder's consent, and the lock-holder can consent only to two things: merging into another locked co-op, or closing with its remaining value going to the co-op movement's fund. Any member vote that a state's co-op law would otherwise allow, like the Massachusetts two-thirds vote, doesn't apply to a locked co-op. The lock clauses in the articles, the named fund and the lock-holder can't be changed without the lock-holder's consent either. This is the one real change to members' rights, and it's the point of the law.
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**3. The lock is valid by law.** The lock share and the lock's limits on selling are declared reasonable and not an unlawful restraint on alienation. Anyone who takes over the business with notice of the lock is bound by it, including a receiver, a trustee or a buyer. Notice comes from the public record and the UCC filing.
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**4. The lock-holder has rules too.** Without its consent, a locked co-op can't merge, convert or move to another state except into another locked co-op, and can't sell, lease or license more than a quarter of its assets or its revenue-producing business within any three years, counted together, or its brand, core technology or main customer contracts, whatever their size ([Closing the back doors](the-lock.md#closing-the-back-doors)). Ordinary sales, like selling stock to customers or replacing old equipment with new, don't count. The quarter is measured on the co-op's books at the start of the three years. Companies the co-op controls are locked too. But the lock-holder isn't free to say yes or no as it likes:
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- **It must say yes** to a sale at a fair price of things the co-op no longer needs, and to spinning off part of the business as a new locked co-op.
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- **It must say no** to anything that would leave most of the business, its brand, technology or main contracts in the hands of anyone but a locked co-op.
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- **Silence means yes.** If it hasn't answered a request it must approve within 30 days, the answer is yes.
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- **It can be challenged and replaced.** Members can take a refusal to court quickly, and the lock-holder pays their costs if the refusal was unreasonable. Members can also replace their lock-holder by a two-thirds vote, but only with another one on the approved list, and not in the middle of a deal it's reviewing.
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**5. Breaking the rules doesn't pay.** The state's business filing office must refuse any filing for a merger, conversion, move or change to the lock clauses that breaks them. Asset sales aren't filed with the state, so for those the remedy is different. A sale that breaks the lock can be undone against a buyer who knew about it. A buyer who paid a fair price without knowing keeps what it bought, but the co-op's gain from the sale goes to the fund, and the insiders who arranged it are liable for the rest. That protects honest buyers, which lenders and buyers need before they'll deal with a locked co-op at all.
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**6. Closing hands the value on, even when a court does the closing.** When a locked co-op closes, by its own vote or by a court's order, what's left after its debts and the members' own account balances ([Member Capital Accounts](capital-accounts.md)) goes to the co-op movement's fund named in its articles. Balances count only as allocated under the co-op's published rules. Anything added to members' accounts in the two years before closing, above the average of the three years before that, goes to the fund instead, so members can't empty the reserve into their own accounts on the way out. If the named fund no longer exists, the lock-holder names the closest one, and the attorney general does only if the lock-holder can't. Courts keep every power they have to dissolve a company and to protect members who've been treated unfairly, paid from their own accounts. What they lose is the power to hand the rest to the members.
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**7. Sales outside bankruptcy follow the same rules as inside it.** The rules are written into the state law itself, so they don't depend on a federal law that might be changed or never passed. They apply when a lender sells or keeps a locked co-op's property, a mortgage is foreclosed, a sheriff sells for a court judgment, a tax sale is held, a receiver sells, or the co-op hands everything over to pay its creditors, if what's sold adds up, over three years, to more than a quarter of the business, or includes its brand, technology or main contracts. They're the rules in [When a Locked Co-op Goes Bankrupt](bankruptcy.md#what-can-be-sold-and-to-whom):
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- for 90 days, only other locked co-ops, the federation and a co-op formed by the workers can buy the business whole, at a price no lower than what the pieces would bring, set by an independent appraiser;
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- after that, the pieces can go to anyone, but no buyer can put the business back together, and a buyer who hires more than a third of the members within two years owes the difference to the co-op's creditors;
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- creditors who never chose to lend, like people the co-op injured and tax agencies, are paid by the federation fund anything the lock cost them, as in bankruptcy.
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A lender that follows these rules has sold in a "commercially reasonable" way under the UCC, so it can't be penalized for the lower price. A clause in a loan agreement choosing another state's law to avoid these rules is void in the adopting state's courts. A lender whose claim was on file before the co-op locked, and who didn't agree to the lock, isn't bound.
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**8. Several parties can enforce it.** The lock-holder, any member, any other locked co-op, the bank, and the state attorney general can all go to court to enforce the lock. That matches [The Lock](the-lock.md#how-the-lock-is-made-to-hold). Anyone who brings a frivolous case pays the other side's costs, as in [bankruptcy](bankruptcy.md#everything-else), so competitors can't use lawsuits to hold up each other's deals.
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**9. A backstop if the lock breaks anyway.** If a court still lets a locked co-op convert or be sold, the value above creditors and members' own balances goes to the fund, not to the members. That's layer 4 of the lock, now written into state law. Nobody gets a windfall from breaking it. This part has real precedent. Italian co-ops that take the tax benefits for being mainly mutual must write into their bylaws that their whole net value, apart from members' paid-in capital, goes to the movement's funds when they close ([Italian Civil Code, art. 2514](https://www.brocardi.it/codice-civile/libro-quinto/titolo-vi/capo-i/sezione-i/art2514.html)), and the same happens if they become an ordinary company ([art. 2545-undecies](https://www.brocardi.it/codice-civile/libro-quinto/titolo-vi/capo-i/sezione-v/art2545undecies.html)). Italy has sent that value to the funds since 1992 ([Law 59/1992, art. 11](https://www.diritto.it/i-fondi-mutualistici-per-la-promozione-e-lo-sviluppo-della-cooperazione/)). But Italy lets a co-op change its form. It locks the value, not the co-op, and that's the softer alternative [The Lock](the-lock.md#what-the-lock-costs) leaves open.
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**What it leaves alone.** It changes no taxes, sets no rules for co-ops that didn't choose the lock, and doesn't require any co-op to lock. Everything else about running a co-op stays with the state's ordinary co-op or corporate law.
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## Which state's law counts
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Under a long-standing rule, a company's internal affairs, like who votes on a merger, whether members can leave co-op status, and where its value goes when it closes, are governed by the law of the state where it's organized, not where it does business. So a co-op can organize under the model law in a state that has adopted it, wherever it works, the way many companies organize in Delaware. The bank lends to co-ops organized anywhere, but it publishes which states have adopted the law.
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That rule covers less than it sounds like:
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- **Property is different.** Sales of land follow the law of the state where the land sits. A receiver or sheriff in another state follows that state's law. Lenders' rules for equipment may too.
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- **Lenders pick their law.** A loan agreement can choose which state's law governs it ([UCC § 1-301](https://www.law.cornell.edu/ucc/1/1-301)). The model law voids a choice made to avoid the lock, but only in the adopting state's own courts.
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- **Some states reach in anyway.** California applies some of its own corporate rules to companies organized elsewhere that do most of their business there and are mostly owned by people who live there ([Cal. Corp. Code § 2115](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP§ionNum=2115)).
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Outside the adopting state, the co-op's charter, the lock share and the federal rules are what's left.
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## Draft text
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A short version, written to be dropped into a state's co-op or corporate law. Section numbers are placeholders.
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> **Sec. 1. Definitions.** (a) A "locked cooperative" is a cooperative or corporation whose articles (1) state that it is a locked cooperative under this Act, (2) name a lock-holder approved under Sec. 9, and (3) name a cooperative development fund. (b) The "lock share" is the single share issued to the lock-holder. (c) A "lock-preserving transaction" is a merger or consolidation into, or a transfer of the business to, another locked cooperative, or a dissolution under Sec. 6. (d) A "covered transfer" is any transfer, lease or license, voluntary or not, that together with others in the preceding 36 months exceeds 25 percent of the book value of the cooperative's assets at the start of that period, or 25 percent of its revenue-producing business, or includes its principal trade name, core technology or principal customer contracts, but not a sale of inventory or replacement of equipment in the ordinary course of business.
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>
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> **Sec. 2. Election.** (a) A cooperative becomes a locked cooperative by adopting articles under Sec. 1(a), approved (1) at formation, by all of its founding members; or (2) otherwise, by at least two-thirds of its members and not less than the vote required to revoke cooperative status, and by the holder of any security interest in substantially all of its assets. (b) A member who voted against an election under subsection (a)(2) may withdraw within 90 days and shall be paid the balance of the member's capital account on the cooperative's ordinary schedule. (c) The Secretary of State shall show locked status in the public record of the entity, and the cooperative shall file a financing statement giving notice of it.
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>
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> **Sec. 3. Status.** (a) A locked cooperative may end its locked status only by a lock-preserving transaction. (b) Any provision of law allowing members to revoke cooperative status, including [the state's worker-cooperative revocation section], does not apply to a locked cooperative. (c) Without the written consent of the lock-holder, no amendment may change the articles' lock provisions, named fund or lock-holder, except a replacement under Sec. 5(d). (d) The lock share and the restrictions in the articles are reasonable restrictions and are not void as restraints on alienation. They bind every successor, receiver, assignee, trustee and transferee with notice.
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>
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> **Sec. 4. Restricted transactions.** Without the written consent of the lock-holder, a locked cooperative, and any entity it controls, shall not (1) merge, consolidate, convert, domesticate or transfer to another jurisdiction, except in a lock-preserving transaction or into an entity that remains a locked cooperative; or (2) make a covered transfer.
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>
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> **Sec. 5. Duties of the lock-holder.** (a) The lock-holder shall consent to a lock-preserving transaction, to a covered transfer of assets no longer needed in the business at fair value, and to a transfer of part of the business to a new locked cooperative. (b) The lock-holder shall not consent to any transaction by which all or substantially all of the business, or its principal trade name, core technology or principal customer contracts, would be held by anyone other than a locked cooperative. (c) A request under subsection (a) not answered within 30 days is approved. A member may seek expedited review of a refusal, and the court shall award costs against a lock-holder whose refusal was unreasonable. (d) Members may replace the lock-holder by a two-thirds vote with another approved lock-holder, except while a request is pending before it. (e) A lock-holder shall not act on a transaction in which it, or a fund it controls, is a party or would receive assets.
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>
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> **Sec. 6. Dissolution.** (a) On the dissolution of a locked cooperative, whether voluntary or by order of a court, the assets remaining after payment of creditors and of members' capital account balances shall be distributed to the cooperative development fund named in its articles, or, if that fund no longer exists, to a fund named by the lock-holder that most nearly serves the same purpose, or, failing that, by the Attorney General. (b) Allocations to members' capital accounts in the 24 months before dissolution, in excess of the average annual allocation in the 36 months before that period, are paid to the fund and not to the members. (c) No court shall order any other distribution of those assets, except payment from a member's own capital account.
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>
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> **Sec. 7. Transfers outside bankruptcy.** (a) Notwithstanding [the state's enactment of UCC Article 9], any law governing mortgages, execution, tax sales, receiverships or assignments for the benefit of creditors, and any choice of law in an agreement, a covered transfer of a locked cooperative's property by a secured party, mortgagee, officer executing a judgment, taxing authority, receiver or assignee shall be made as follows: (1) for 90 days after notice of the sale, the business may be sold as a whole only to a locked cooperative, a cooperative federation or a cooperative formed by its workers, at a price not less than the value of its assets sold separately as found by an independent appraiser; (2) thereafter its assets may be sold separately, but no buyer, with anyone financially related to it, may acquire all or substantially all of the business; and (3) a buyer under paragraph (2) that employs more than one-third of the cooperative's members within two years shall pay the cooperative's creditors the difference between the price paid and the value of the business as a going concern. (b) A disposition made in accordance with this section is commercially reasonable. (c) The cooperative development fund shall pay each involuntary creditor the amount, if any, by which this section reduced its recovery. (d) This section does not apply to a secured party that did not consent to the election and whose interest was perfected before the cooperative became locked.
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>
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> **Sec. 8. Enforcement and remedies.** (a) The lock-holder, any member, any other locked cooperative, [the bank] and the Attorney General may bring an action to enforce this Act. A court shall award costs against a party whose action is frivolous. (b) The Secretary of State shall not accept a filing that would effect a transaction prohibited by Sec. 3 or 4. (c) A transfer in violation of Sec. 4 may be set aside against a transferee with notice. Against a transferee that gave fair value without notice, it stands, and the cooperative's proceeds from it, and any loss to the cooperative, are recoverable for the fund from the persons who caused it. (d) If any conversion or transfer is completed despite this Act, the value of the business in excess of its debts and its members' capital account balances, as found by the court, is held in trust for the fund named in its articles.
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>
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> **Sec. 9. Lock-holders.** The Attorney General shall approve as lock-holders the organizations on [the bank's] list of approved lock-holders, and any cooperative federation or nonprofit that meets published standards of independence, funding and succession equivalent to that list's.
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## What it costs, and who objects
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- **Members give up an exit the law otherwise gives them.** Libertarian and conservative critics object that the model law overrides a state's own rule, like the Massachusetts two-thirds vote, for people who may join the co-op decades after the choice was made. Founders choose it unanimously. In an existing business, those who vote no can leave with their savings. Anyone who joins later is told in writing before becoming a member. That narrows the objection but doesn't answer it: "forever" still binds people who weren't there, which is why the lock's [costs](the-lock.md#what-the-lock-costs) and the Italian alternative stay open questions.
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- **Members who vote no get their savings, not a share of the business.** A libertarian critic would pay them what their share would be worth if the business were sold unlocked. The model law doesn't, because that value is exactly what the lock keeps from being cashed out. So some dissenters will feel they lost something, and they may take it to court.
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- **The lock-holder has real power over big sales.** The duties above limit it, but a member who wants to sell part of the business still has to convince an outside body, or a judge.
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- **Lenders get less if a co-op fails.** Fewer buyers means lower prices, and a 90-day wait. Lenders will charge for that, and the bank's published recovery rates show how much.
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## What this doesn't solve
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- **Only adopting states.** A co-op organized elsewhere relies on its charter and lock share alone, and even a co-op organized in an adopting state can lose property sold under another state's law.
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- **A legislature can repeal it.** Nothing here can stop a later legislature changing its own corporate law, and most states reserve the power to amend the rules for companies they charter. A repeal would leave the charter, the lock share and the federal rules.
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- **Bankruptcy still needs Congress.** State law can't override federal bankruptcy law. The [bankruptcy amendment](bankruptcy.md) is still needed, and this law only covers the sales that happen outside bankruptcy.
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- **It hasn't been tested.** No US state has a lock like this for a business. The closest are charity law, which already keeps a charity's assets dedicated to its purpose, and Britain's community interest companies ([The Lock](the-lock.md#why-forever-isnt-as-strange-as-it-sounds)). How courts would read it, and whether a dissenter could win a claim that locking took their property, is unknown.
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Claude Opus 5.5