Workers, Information, and Corporate Combinations: The Case for Non-Binding Employee Referenda in Transformative Transactions

Abstract

Employees present a curious puzzle for corporate law. 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. Perhaps nowhere is this difference as dramatic as in the realm of mergers, acquisitions, and other transformative transactions. Such transactions are usually negotiated at the highest levels of management, approved by the board, and ultimately approved by the shareholders. In contrast, employees at most may be able to bargain about the effects of the merger through union representatives; otherwise, they have no input.

This paper proposes that employees be given a vote in a nonbinding referendum on mergers, acquisitions, and the other corporate combinations which shareholders must approve. The purpose of such a referendum would be twofold. First, it would provide more information to shareholders about the costs and benefits of the proposed transaction. As such, it would facilitate greater interaction between shareholders and employees to police management. Second, it would give employees a voice in the process - a voice that is valuable even if it has no material ramifications. Given the low costs in implementing the referendum, the paper encourages states to consider this corporate law innovation as a small but significant addition to their corporation statutes.

Keywords: corporation, mergers and acquisitions, shareholder primacy, employee participation

JEL Classification: j53, K22, M54