26 October 2022 3M and the Texas Two Step

3M and the Texas Two Step​

What do you need to know this week?

As reported by the Financial Times, the US consumer conglomerate 3M is facing the court’s scrutiny in its attempt to use the controversial Texas Two Step to minimise its potential liabilities arising from the largest mass tort action launched against a company in US history.

The Texas Two Step makes use of a corporate-friendly merger law unique to the state of Texas that permits a company to split out its liabilities into a separate company (BadCo), thereby protecting the trading group’s valuable assets and allowing it to carry on business as usual.

In practice, corporate groups using the Two Step create a trust over a small portion of the assets which is used to meet BadCo’s liabilities as and when they come due. However, the fundamental effect of the Two Step is that successful tort claimants do not have any recourse against the trading group itself.

In essence, the US bankruptcy courts are being asked to rule on the fairness of the Texas Two Step as a way for large companies to limit their liability arising from multi-jurisdictional tort claims and class actions.

Arguments in favour of the Two Step say that it ensures claimants can obtain some compensation for their loss, while also protecting the corporate group from going out of business completely. Critics state that the manoeuvre is inequitable and allows companies to shirk their liabilities without real consequence.

Why is this important for your interviews?

We have previously covered the Texas Two-Step in the context of pharma giant Johnson & Johnson’s (J&J) ongoing mass action related to their use of talc in certain consumer products. You may rightly wonder how this ongoing legal development in the United States is relevant to commercial law in England, and therefore how you might leverage it in an interview.

Aside from the commercial implications billion-dollar tort claims have on global companies like 3M and J&J, the question here is if the US courts will ultimately endorse the Texas Two Step as a legitimate way to manage potentially substantial legal liabilities. This is because the American bankruptcy and insolvency regime has played an increasingly relevant role in the development of the United Kingdom’s own insolvency laws.

In other words, if the US courts legitimise the Texas Two Step, will the UK and other jurisdictions follow suit and create a similar mechanism for UK corporate groups?

It would not be the first time Parliament has imported substantial aspects of the US insolvency regime into the UK. In 2020, Parliament passed The Corporate Insolvency and Governance Act 2020 which introduced a new mechanism — the Part 26A Plan — for insolvent companies and their creditors to reach a restructuring agreement. One of the new features of the Part 26A plan is the “cross-class cramdown” tool that allows a court to sanction a restructuring proposal even where an entire class of creditors dissents.

The cross-class cramdown originates under the US Chapter 11 bankruptcy proceedings. Other common law nations including Singapore have also adopted the mechanism in recent years.

How is this topic relevant to law firms?

As the FT notes, Jones Day has been one of the biggest proponents of the Two Step, having advised J&J in its use and netting $70m worth of fees in the process, despite the fact the claimants have yet to receive any money…