Mr. WARNER. I would have to agree that if it had not been for GAF being so cooperative, there would have just been no way that we could have purchased the mine and kept it going.

I would just like to mention, as you mentioned, about the legislation. There are a couple of things in the bill as I glanced through it. Now, I may have interpreted differently, but it sounds to me like this has to be a payroll plan. I don't think it should be limited to that. It would seem to me that there could be provisions made for-that payments be made from the profits rather than from the payroll.

And then there is one other thing in the bill that I think is important: The appropriation for a feasibility study, where it says there shall be no forgiveness. Looking back in our particular case, you always find some with a negative viewpoint in any, no matter what you undertake to do. If the feasibility study showed negative, who would pay that bill? It would be like paying for a dead horse. It would be very hard to come up with that.

It seems like that portion, there should be some provisions made as a grant.

Mr. McHUGH. Well, as I understand our bill, the Federal Government would pick up the cost of the feasibility study.

Mr. WARNER. That was my concern.

Mr. McHUGH. I am a little curious about the stock ownership, and specifically the mechanism for an employee to sell back his stock to the company. There apparently is a problem from your perspective in this regard. Under the certificate of incorporation or other legal arrangements which the company has, is it not possible for the company to have a first option on the sale of any stock that an employee wants to sell?

Mr. WARNER. We have that. We have the option to buy, the company does, to buy them back. But there has to be a bona fide offer first by someone, the way our bylaws are set up. The owner of the share has to have a bona fide offer for a certain amount, and before they can sell it to this party they have to offer it to the company for that same price.

Mr. McHUGH. Why are you concerned, then, about Mr. Manosh picking up a larger percentage of the stock ownership, if the company itself can match his offer?

Mr. WARNER. He; having one-third of the shares, no matter how many the company buys back, it doesn't dilute his amount. His percentage still would stay. It increases, really.

Mr. JOHANNESEN. It increases his percentage. As there are fewer shares out there, the number of shares that he owns becomes a larger percentage.

Mr. McHUGH. Have you explored with legal counsel or others a way of getting around this particular problem? It seems to me it is not insoluble.

Mr. WARNER. What we are looking at right now is an ESOP plan so that the new workers can have a chance to participate in it. As it is, we have a lot of young workers that have come in in the last 3 years that do not have shares and there is no way for them to buy them. Like Ms. Johannesen mentioned, where the book price is $2,300, on shares that were sold for $50, they just can't afford to buy them.

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Mr. McHUGH. My time is up.

Thank you, Mr. Chairman. And let me say that I am especially pleased to have Ms. Johannesen here, since she is or was a graduate student at Cornell, which is in my hometown, and I know she has worked very closely with Professor Whyte, who was of great help to us in putting this bill together.

Mr. LUNDINE. I must follow up on this whole question about how it occurred that this Mr. Manosh was able to acquire one-third of the stock, when the company, apparently, prior to his putting his own slate of directors in place, had a first option, and when the company apparently had achieved such financial success that it could have matched that offer.

Ms. JOHANNESEN. Well, there was a problem. Toward the end of 1977, as I had mentioned, there had been a drop in sales. They were having trouble with the burners, and it cost a lot of money. They were investing money in this new Vermont Industrial Products, and it was a decision to let Mr. Manosh buy some of the shares because the company did not wish to tie up their cash by buying back the shares.

At the time, I don't think that the board of directors thought that Mr. Manosh was interested in pursuing beyond buying just a few shares. I don't think they realized that he had the intention of trying to come in and take over the whole company.

Is that correct?

Mr. WARNER. That is correct. But there was another thing behind the scene. There were some of the ones from management that were on the board that were looking for a lot of votes to get this wallboard plant in operation, which some of us felt as if it should be a separate entity and not to have it a thorn in the side of VAG.

By letting Mr. Manosh buy shares from those that were the opposition, they knew that it was going to control their vote. So there was a lot of manipulating there.

Mr. LUNDINE. From this experience, are there any other criteria which you would suggest to us, not to restrict stock sales outside of the American tradition, but to assure the continuation of employee ownership after a company goes ahead and operates successfully?

Mr. WARNER. I think, personally, that that problem will automatically take care of itself, like ours. Now that we realize the predicament we are in, we are just going to come up with an employee stock ownership plan that will provide for the new employees to be able to participate.

Mr. LUNDINE. I would also be interested in your observations about the strengths and the problems with ESOP's, if you develop one, because this is an interesting aspect of the whole issue.

Mr. WARNER. Well, I would be very interested. Of course, I am interested in the program and the bill.

I would like very much for any questions that the committee might have, to send me a list of questions, and I will get them answered in detail and see that they are sent back.

Mr. LUNDINE. Thank you. I have only one other

Ms. JOHANNESEN. Could I just comment on something that was said? Mr. Warner was talking about in terms of introducing an ESOP

plan, and indeed, that is a possibility. But I hasten to add that it all depends upon the goodwill of Mr. Manosh. It is possible that Mr. Manosh does not wish that his equity be diluted by extending it to the new employees. It is also possible that he may see down the road that he will not want to stay in the asbestos business forever, and that maybe this could be a vehicle for him selling his own shares. So it is possible that he might institute it.

But as of right now, the employees of VAG are very much at the mercy of whatever Mr. Manosh wants to do. And I don't think that he has really made his decision, made it known, on that particular issue. Mr. LUNDINE. Going back to the time, if I may, just briefly, when you were organizing, I am interested in the fact that $100,000 was raised by employee stock subscriptions. We have heard testimony that in a number of instances, SEC registration requirements and the requirement for a prospectus and all of that posed substantial burdens and inhibited the solicitation of equity investment by employees. Did you encounter any difficulty along that line?

Mr. WARNER. We did not, because there was no special amount that was assessed to each one. Many of them bought one share at $50. The average was six. They figured out about $300 per employee. So we were looking for an average of six.

Mr. LUNDINE. You did not register with the SEC, then?

Mr. WARNER. I wasn't directly involved, but I don't think that we did.

Ms. JOHANNESEN. It was an internal Vermont sale, so it was not necessary. It was only two people and the employees had first refusal, and it was only those shares left over that were sold to community people.

Mr. WARNER. Just one quick comment that might interest you. The one worker, the one that bought the most, put in $5,000, and he walked away with a quarter of a million dollars just a short time ago. Mr. LUNDINE. That interests me greatly.

Do you have any further questions, Mr. Kostmayer or Mr. McHugh? Mr. McHUGH. You mentioned earlier that there was a union at the mine at the time this transfer took place.

Mr. WARNER. Yes, and there still is. Again, going back to what Ms. Johannesen mentioned, that this John Lupien objected immensely to worker participation. He declared there was no need for a union after the workers bought the mine. But the need was there, just as great as it was before. And it is working very well.

Mr. McHugh. Is that particular union associated with an international union?

Mr. WARNER. It is an international.

Mr. MCHUGH. Was there any opposition expressed by the international union?

Mr. WARNER. They stayed completely out of it. I was in contact with them and they felt that that was not-that they should be completely neutral.

Mr. McHUGH. Thank you very much, Mr. Chairman.

Mr. LUNDINE. I thank you both very much for sharing the unique experience of the Vermont Asbestos Group with us. Your testimony has been very interesting and very worthwhile.

And this hearing will now be adjourned.

[Whereupon, at 12:15 p.m., the subcommittee was adjourned, subject to the call of the Chair.]

[The following statement was received for inclusion in the record:]

STATEMENT OF DAVID P. ELLERMAN

The Voluntary Job Preservation and Community Stabilization Act H.R. 12094 (hereafter the "bill") would greatly assist our nonprofit organization, the Industrial Cooperative Association (ICA), in its work to save jobs by organizing worker buyouts of viable plants that would otherwise be shut down. The ICA has successfully established industrial cooperatives (i.e., companies that are worker-owned on the cooperative one-worker/one-vote basis*) after plant closings at Colonial Press in Clinton, Massachusetts and at Menorah Poultry in Willimantic, Connecticut. However, in both these cases, the original plants and machines were liquidated so the new cooperative companies, called Colonial Cooperative Press and International Poultry, had to be restarted in different buildings with new equipment and a reduced workforce. The ICA also organized worker buyout attempts, that were ultimately unsuccessful, at Kasanof's Bakery and New England Provisions Company (NEPCO) in Boston. In addition, the ICA consulted with union leaders and Board members of the Vermont Asbestos Group (VAG) in an attempt to prevent the reconversion of that company from a non-cooperative form of employee ownership to a more or less conventional form of private ownership. The purpose of this written testimony is to bring these and other experiences of the ICA to bear on the provisions of the Job Preservation Bill. The raison d'etre of the Industrial Cooperative Association is to provide technical, legal, organizational, and financial abilities to employees who wish to convert conventional businesses into workers' cooperatives or who wish to start up a new cooperative. Even with this expertise available, the task has been exceedingly difficult. For example, in both the cases of Colonial Cooperative Press and International Poultry, a small group of individuals worked largely on a volunteer basis for over a year and a half to get the companies going again. Without the technical and financial assistance, it would have been well nigh impossible for the employees to restart those firms.

Employee groups traditionally do not have the entrepreneurial knowledge and orientation necessary to carry out a conversion to employee ownership. Yet when a viable plant is scheduled to close, it is the employees who, having invested a good part of their adult lives in the company, are the most willing to exert great effort to save the business. If the employees think erroneously that "nothing can be done", then the closing is a defeat that can have a disasterous effect on both their self-esteem and personal finances. But if the workers' strong desire to maintain the business and insure their livelihoods can be coupled with the knowledge of how to save the company through employee ownership, then the result can be another success story in the best American tradition of self-help and self-reliance. There is an old saying: Give a man a fish, you feed him for a day; teach him how to fish, you feed him for a lifetime. Unlike the public monies spent on unemployment compensation and welfare, the money provided by this bill for technical and direct financial assistance to implement employee ownership will, when successful, not only keep those workers off the unemployment rolls, but will provide them thereafter with a stable livelihood.

In all the cases we are familiar with, outside technical help has been crucial to the worker buy-out attempt. In the cases of Colonial Press and Kasanof's Bakery, there was some casual discussion of employee ownership and much handwringing prior to the intervention of an outside group which provided the technical assistance to conduct a feasibility study and arrange financial backing for the effort. In the case of Vermont Asbestos Group, important help was provided by a Vermont industrial development agency. A local economic development corporation played a leading role in organizing the effort in Herkimer, New York, to set up the Mohawk Valley Community Corporation.

The nature of the technical information about employee ownership is of crucial importance. When a conglomerate or some other outside owner closes a

For more details, see: "What is a Workers' Cooperative?", ICA, 2161 Massachusetts Ave., Cambridge, Mass.

viable plant for reasons unrelated to the economic well-being of the local community, then any form of employee ownership that will soon revert to absentee ownership will not contribute long term economic stability to the community. Yet without specialized information about the different forms of employee ownership (e.g., direct purchases of shares, ESOP's, or cooperatives), the employee group is likely to choose the most naive form of employee ownership-which is also the most short-lived. In the words of the philosopher Santayana; "Those who do not learn the mistakes of the past are doomed to repeat them." The bill, by providing information about the forms of employee ownership, will enable the employee/community groups to make the most informed and intelligent choice.

If the employee/community groups fail to learn the mistakes of the past, they will tend to just choose the simplest form of employee or employee/community ownership, i.e., direct purchase of shares by the workers and/or community members according to each individual's financial capability. The better-off employees and, in particular, the managers will buy the largest portion of the shares. When the company gets going again and starts turning a profit, the lopsided distribution of the profits (in dividends and capital gains) and voting power will quickly undermine the espirit de corps of the cooperative effort to save everyone's job. The inequality in the votes and profits will create disaffection and dissension among the less well-off employees as they see the power and wealth gravitating towards a small group within the company (usually the management personnel).

As the years pass, the older employees and managers will want to realize their capital gains by selling their sizable holdings. If the company is to remain employee-owned, then the younger workers entering the company would have to buy the shares of the departing employees. But it is quite difficult for young employees, already in debt for a car, house, etc., to buy the large and often appreciated holdings of the older employees. Hence those shares are usually sold to outsiders. As time passes, the company will become less and less employee-owned. Eventually some group of financiers or another corporation will attempt a takeover bid by making a tender offer to the remaining employee-shareholders and the outside shareholders. The disaffected employees, having witnessed the gradual erosion of "their company", will probably jump at the chance to at least get some cash out of the matter. Hence the naive structure of most employee-owned corporations embodies a "suicidal" tendency which, like a time bomb, will eventually lead to the demise of the employee-ownership of the company.

When Vermont Asbestos Group was established, some academic students of workers' ownership predicted for the reasons stated above that it would not last over ten or fifteen years as an employee owned company. But even the most pessimistic observers were surprised when the whole scenario described above played itself out within three years time. Apparently the process was hastened by the spectacular (over thirty-five times) increase in the value of the shares. When it became clear that takeover bids were imminent, ICA consultants met with some union leaders and board members of VAG in January 1978 to outline a plan for conversion to the cooperative form of employee ownership. With the benefit of hindsight, some of the union leaders and board members said they would have used the cooperative form in the beginning-if only they had known about it. However, there had been too much dissention in the intervening 3 years to allow any concerted effort towards conversion into a cooperative. Due to the lack of any cooperative effort, the employees rushed to cash in their highly appreciated shares as soon as an offer was made. As a self-help effort to save jobs, VAG was a success. However, the noncooperative form of employee-ownership at VAG must be viewed as one of the mistakes of the past that future employee groups are not doomed to repeat if they are supplied with appropriate information about the alternative forms of employee ownership.

The ownership structure of the Mohawk Valley Community Corporation is similar to that of VAG except that, in this case, it is the Mohawk Valley residents who own a majority of the shares rather than the employees. The expected employee disaffection set in within a year's time of the founding of the new corporation. A union leader told a researcher that all the workers would now say only "I've got a job," and that is all. The gradual dilution of the employee ownership component will be hastened if management succeeds in its plan to get the shares traded on the over-the-counter market in Albany. Since the shares have not undergone a spectacular rise in value, the company has not as yet been the object of a takeover bid.