In Print: Volume 85: Number 4
Workers, Information, and Corporate Combinations: The Case for Non-Binding Employee Referenda in Transformative Transactions
By Matthew T. Bodie
85 Wash. U. L. Rev. 871 (2007)
How can I convey to you the disgust which your name awakens in me? The merger with Warner was a catastrophe. But the hitherto unimagined stupidity, the blind arrogance of your deal with Case simply beggars description. How can you face yourself knowing how much history, value and savings you have thrown away on your mad, ignorant attempt to merge with a wretched dial-up ISP? I don’t know what advice you have to offer, but I have some for you. Buy some rope, go out the back, find a tree and hang yourself. If you had any honor you would.
—e-mail from Robert Hughes, Time magazine art critic, to Gerald Levin, AOL Time Warner CEO, 2002
Employees present a curious puzzle for corporate law. On the one hand, employees are central to every business. The success of a corporation depends on its employees, from the chief executive officer down to the front-line production or service worker. But, for the most part, corporate law relegates employees to the sidelines. The players in corporate-law dramas are management, directors, and shareholders. The tension between shareholders and management is the focal point of corporate scholarship. Employees have no role in corporate governance.
Perhaps nowhere is this contrast as dramatic as in the realm of mergers, acquisitions, and other transformative transactions. Such transactions are generally negotiated at the highest levels of management, approved by the board, and then announced to great fanfare. Shareholders have the power to vote on most large-scale combinations and therefore hold veto power over their ultimate consummation. In contrast, employees have no say. Even unionized employees do not have the right to bargain over these transactions; at most, they can merely bargain about their effects.
However, as the e-mail in this article’s epigraph vividly demonstrates, employees do have opinions about mergers, acquisitions, and other such transformative corporate transactions. Some of these opinions may be fairly predictable: for example, employees will be fearful of a merger that promises to eliminate huge swaths of the company’s workforce. But employees also have more nuanced opinions about their work environment—opinions based on much more intimate knowledge about the company than shareholders typically have. These opinions may be overlooked in the post-announcement excitement, especially since management has an interest in hearing only positive news about the forthcoming combination.
This Article proposes that employees be given the right to vote on mergers, sales of substantially all assets, and the other corporate combinations for which shareholders can vote. Unlike shareholders’ ballots, the employees’ choices would not be binding on the company. Referenda would be held before the required shareholders’ elections so that shareholders could know about the results before they cast their votes. Although it might be possible to implement the referendum through federal law, states could also insert the referendum into their systems for corporate governance.