1 changed files with 32 additions and 1 deletions
@@ -70,9 +70,39 @@ A lock on the company is worthless if the business can walk out the side door. T

 - **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.
+- **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. How that works, including when a co-op buys a company, is [below](#when-a-co-op-owns-another-company).
 - **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 owns another company
+
+The membership rule is what stops a co-op from becoming a small club of owners with employees under them. Owning other companies is the easiest way around it. Mondragon's co-ops grew abroad by building and buying ordinary companies. By 2016 they controlled about 100 foreign subsidiaries and joint ventures that weren't worker-owned. Only about half of Mondragon's businesses were co-ops, and only about a third of its employees were members, counting non-co-op businesses at home too ([Kasmir, 2016](https://globaldialogue.isa-sociology.org/articles/the-mondragon-cooperatives-successes-and-challenges)). Its appliance co-op, Fagor, bought the French maker Brandt in 2005, and the workers of its foreign purchases weren't offered ownership. Fagor went bankrupt in 2013 owing €800 million to €1.1 billion, after Spain's housing crash and years of cheaper competition ([Fagor, Wikipedia](https://en.wikipedia.org/wiki/Fagor)). The collapse had several causes. A big purchase adds risk, and more so when the buyer is carrying debt.
+
+So "controlled companies are locked" needs rules for what control is, what happens to the people who come with a purchase, and how a co-op gets out of a bad one.
+
+### What counts as control
+
+- **More than half, or running it.** Holding more than half the votes or the value counts as control. So does the right to name most of the board, or running the company through a management contract. Stakes held by the co-op's managers, members' relatives, or companies they control are added to the co-op's own. Several locked co-ops holding a company together control it together, and the one with the largest stake is responsible for the rules below.
+- **Even partnerships.** In a 50–50 joint venture with an ordinary company, the co-op has control only if it runs the venture day to day. Otherwise the stake is an investment. That leaves room for joint ventures, and the hours rule below keeps them from becoming a workaround.
+- **Less than control is an investment.** A co-op can hold a smaller stake in an ordinary company as an investment of its reserve, like any investor.
+- **Dependence without ownership.** A co-op doesn't have to own a company to run it. It can franchise its business to others, or use a contract manufacturer that works mostly for it. It can't make an independent company convert, and the model doesn't try. Instead, the hours of any franchisee of the co-op, and of any supplier that sells most of its output to the co-op for two years running, directly or through a middleman, count in the co-op's hours test below. Ordinary buying from ordinary suppliers isn't covered, and isn't meant to be.
+
+### What the co-op has to do
+
+- **No lasting subsidiaries with workers.** Within three years of taking control, a controlled company with employees is either merged into the co-op or turned into its own locked co-op run by its own workers, like a [spin-off](growth.md). Its workers choose which, by secret ballot, once they've had the lock explained in writing. If it becomes its own co-op, the parent's stake becomes an investment on the usual terms: repayment plus a share of profit for at most 15 years, with no vote ([Capital, After](capital.md)). Any other shareholders are bought out first at an independent appraisal. A locked co-op run by its own workers meets this rule, though one that sells most of its output to the parent is counted with the parent for the hours test, as spin-offs are. A company with no employees, like one that only holds a building, can stay under the co-op's control. It's locked like any other asset.
+- **One hours test across the group.** The co-op itself meets the three-quarters rule as usual. Across the co-op, the companies it controls, and the franchisees and dependent suppliers above, members of locked co-ops have to do at least half of all hours, once the co-op's own phase-in is over. So a co-op can't buy companies one after another, or farm its work out, to keep a large workforce outside membership.
+
+### The people who come with a purchase
+
+- **Membership is offered, not imposed.** Acquired workers become members automatically after probation unless they opt out. Their time at the old company counts toward probation. Nobody acquired can be let go at the end of probation except for cause.
+- **Saying no is safe.** Someone who was working there on the day of the purchase and opts out keeps their job and pay, and their hours don't count against any hours test for as long as they stay. The co-op gains nothing by pushing them out.
+- **Unions and contracts carry over.** A buyer that keeps most of a unionized workforce generally has to recognize and bargain with its union ([NLRB v. Burns, 1972](https://www.law.cornell.edu/supremecourt/text/406/272)). The co-op recognizes the union and honors its contract. After that, recognition sticks unless most of the workers the union covers vote to end it, the rule the model already uses for recognized unions ([Labor Law](labor-law.md#union-rights-the-biggest-gap)). The company's pension promises stay with it. Where labor law requires something different, labor law wins.
+
+### Buying, and getting out
+
+- **Big purchases need the members.** Buying a company with more workers than the co-op has members, or paying more than a quarter of the reserve, needs a majority of all members, not just those voting, by secret ballot. The members can vote in advance on a ceiling for the price, so the terms don't have to be made public during the deal. The price includes any debt the co-op takes on, and purchases within three years are added together. The federation gives a written opinion first. It's advice, not a veto.
+- **Selling one back.** Any sale of a controlled company with employees goes through the lock-holder, whatever its size. The company's workers get the first chance to buy it as their own locked co-op. Within three years of the purchase, before it's merged or converted, the co-op can sell it to anyone else at an independent appraisal. Anything above what the co-op paid goes to the federation fund, so buying companies to run without members and then resell them doesn't pay.
+- **Abroad, the same rules, with a substitute.** Where local law has no form for a worker co-op with a lock, the lock-holder can approve a local structure that gives the workers the same control and the same limits on sale, like voting shares held in trust for them. If there's no such structure, the co-op can't keep control past three years. It can hold a smaller stake, or sell as above. That makes plants abroad much harder to run, and it costs co-ops some foreign business.
+
 ## 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, 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. The full rules, and the amendment to federal bankruptcy law they need, are in [When a Locked Co-op Goes Bankrupt](bankruptcy.md). In short:
@@ -91,5 +121,6 @@ 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.**
+- **Owning other companies is harder.** Joint ventures, purchases and plants abroad come with rules ordinary firms don't face ([above](#when-a-co-op-owns-another-company)). Deals are slower, some sellers and partners will walk away, and co-ops may lose business abroad to firms that can own plants there.
 - **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)).