Taking the Texas Two Step a Step Further​

By Jake Rickman​

What do you need to know this week?

On Monday, the consumer health and pharmaceutical giant Johnson & Johnson (J&J) petitioned a New Jersey court to halt a claim brought by two other US states, New Mexico and Mississippi. The attorney generals representing the states submit that J&J misrepresented the safety of certain products containing talc, a potential carcinogen.

This latest filing follows on from a previous set of proceedings brought by plaintiffs in a consumer class action personal injury suit that resulted in a verdict of $2.24bn against J&J, in addition to the $4.5bn in legal fees it had amassed.

Shortly thereafter, to shield itself from the judgement, J&J undertook a controversial decision to slip on its ballroom shoes and try for itself the widely criticised restructuring procedure known as the Texas Two-Step.

In essence, the two steps are as follows:
  1. The J&J corporate group incorporated a new company (“BadCo”) in Texas and then transferred all of its existing liabilities related to the talc litigation (“tort liabilities”) to BadCo along with a relatively small portion of assets.
  2. BadCo then filed for Chapter 11 bankruptcy in the North Carolina bankruptcy court, despite the fact it has virtually no operations or significant business activity in the state. The effect of the Chapter 11 filing means that BadCo is shielded from any further lawsuits until the Chapter 11 process is complete. The North Carolina Chapter 11 proceedings have since been sent to New Jersey, which is where J&J’s principal assets are located. J&J argues that because BadCo is in Chapter 11, no claims can be filed against the company.
While most jurisdictions do not allow a company to transfer its tort liabilities to an independent entity, Texas has a peculiar piece of company law that treats a demerger (the transfer of assets and liabilities to a new company) as if it were a merger (the acquisition of assets and liabilities). There is no precedent for using the Texas Two Step as a restructuring tool to so plainly ring fence tort liabilities — a matter at the heart of the case before the New Jersey court.

J&J has justified its conduct by arguing the Two Step is an efficient restructuring tool that ensures it will be able to pay existing and future claims which would otherwise threaten the business’ existence.

Its critics allege that the move was a bad-faith effort to frustrate existing and future court judgments against the company.

Why is this important for your interviews?

This saga raises legal and ethical questions at the heart of commercial law: Who is entitled to what if there is not enough to go around? Which stakeholders should the law treat more favourably? On what grounds does the law evaluate who should win and who should lose?

If you find these sorts of issues interesting, you might use this case as an insight into international restructuring and insolvency law, which can be a remarkably diverse area of law, with matters ranging from purely transactional (consensual out-of-court debt restructurings) to the highly disputed (this matter).

While yours truly humbly submits restructuring and insolvency is a perennially fascinating area of law, given the increasingly dim economic outlook on our horizons, now may be an opportune time to market yourself to interviewers as someone interested in restructuring and insolvency law.

How is this topic relevant to law firms?

J&J is advised by Weil, Gotshal & Manges and Skadden.
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