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The article does a bad job explaining what exactly J&J is trying to do here and what exactly the appeals court won't let them do. J&J's plan was to split into

The article does a bad job explaining what exactly J&J is trying to do here and what exactly the appeals court won't let them do. J&J's plan was to split into two pieces, which I'll call Goodco and Badco. Goodco got the operating assets, Badco got the talc liabilities and more or less immediately filed for bankruptcy. That's a maneuver that has come to be called the Texas Two-Step. However there's a very important missing piece that seems not to be covered by the article: in addition to the talc liabilities, Badco also got a funding agreement with Goodco, which gives Badco the right to be reimbursed by Goodco for any expenses incurred as a result of the talc liabilities, up to ~60 billion USD, or the value of Goodco, whichever is higher. So J&J's play here was not to outright shield their assets from being used to pay talc liabilities, but rather to force the liabilities to be determined by a single bankruptcy process in the near future, rather than tens of thousands of individual lawsuits that would trickle in over the next 100 years or so. The appeals court ruled that because of the funding agreement Badco is not in financial distress, and is therefore ineligible to file for bankruptcy. They did not rule either way as to whether the Texas Two-Step is legal.

kneebonian 4y ago
The fact that the Texas 2 Step is not explicitly illegal is a freaking travesty and the biggest evasion of justice I can think of. EDIT: There's a TV show me and my wife like call leverage. In the show one of the bad guys who is a powerful CEO says "That's the thing if you or I kill a guy we go to jail. Our company kills a guy we shell out a couple dollars and are on our way." There needs to be personal consequences for those involved in this, the concept of a corporation and not a person being liable is at the root of the issues. Individuals should be held accountable for what they do, they shouldn't be able to hide behind a legal fiction to protect themselves from the consequences of their actions. Most of the problems people blame on capitalism aren't a problem with capitalism they are a problem with corporatism. I guarentee there are plenty of CXOs who would be making much different decisions if it involved their asses being thrown in jail, rather than a simple restructuring of their holdings.
- megiddo 4y ago
  Personal liability is still a thing. If you kill someone as part of your job, you are criminally liable and the corp is civilly liable.
  - lmm 4y ago
    The owners of corporations have limited liability - that's kind of the whole point of a corporation. And it's fundamentally unjust.
    - jacquesm 4y ago
      It is an absolutely enormous bug in capitalism and the way the corporate charter is used. Our great grandchildren are going to look back on this age as the age where everything was set up perfectly for what to them will likely be known as 'the big crash' or something to that effect. I can't really see a way out resulting in both (1) getting rid of these constructs and (2) not having that crash anyway on account of the economic backlash of (1). This is a major problem, the question that remains is whether it is the major problem or just one of a whole slew of them that is currently vying for top place.
      - zo1 4y ago
        That's not capitalism. That's 100% purely government with various parties having supposed benefits out of it. And the fact that we have it in our law books and can't change it or have been unable to till now, then you have to concede it's "Democracy".
    - _23sd 4y ago
      J&J's executives aren't off the hook for personal liability because of limited liability for owners (J&J is 70% owned by institutional investors, so the owners are more mutual funds than the CXOs), if there was a claim against them then owning some stock wouldn't protect them. They're off the hook because the corporation has vicarious liability for its employees' actions. To punish executives for their actions on behalf of a corporation, I believe you'd want to change agency law rather than corporate law.
throwaway5959 4y ago
Imagine if people tried to do that with their student loan debt.
- baggy_trough 4y ago
  I imagine that if it worked, nobody would be able to get a student loan after that.
  - CPLX 4y ago
    That’s not how anything works.
    - jojobas 4y ago
      At the very least, interest rates and selectivity would go way up. The current situation is basically the government saying "it's a net positive if everyone willing to do so learns something, however unsuitable they are and useless what they learn", by guaranteeing repayments for low income graduates.
      - Red_Leaves_Flyy 4y ago
        That’s an incredibly uncharitable take.
        jojobas 4y ago
        Is it untrue though? Higher education used to be paid by the state for the brightest few, the rest just didn't have an option to pursue it. Some countries tried to forecast how many engineers/doctors they'd need and ensure there are enough state-paid spots in the respective schools, not sure if the US ever did that. Now it's pretty much available to anyone, you can bet your future income to your Egyptology study and the state still backs your loan in case you can't ever earn a decent wage. Unlike a medical bankruptcy it's not an accident that your studies aren't making you profit, unlike a home loan your knowledge can't be repossessed. You post-bankruptcy earnings would still benefit from your education, it's like keeping your collateral through the bankruptcy and then using it to earn money.
bradleyjg 4y ago
The decision is quite readable and makes that very clear: https://www2.ca3.uscourts.gov/opinarch/222003p.pdf https://www2.ca3.uscourts.gov/opinarch/222003p.pdf
- scott00 4y ago
  Yep, that's how I figured out what the heck was actually going on. I agree it's readable and clear, but it is not concise: 58 pages.
nus07 4y ago
https://www.newyorker.com/magazine/2022/09/19/johnson-johnson-and-a-new-war-on-consumer-protection https://www.newyorker.com/magazine/2022/09/19/johnson-johnso... Very detailed explanation and the history behind it.
randycupertino 4y ago
> J&J's plan was to split into two pieces, which I'll call Goodco and Badco. Goodco got the operating assets, Badco got the talc liabilities and more or less immediately filed for bankruptcy. That's a maneuver that has come to be called the Texas Two-Step. Isn't that what Dupont did with spinning off their PFOAS liability into Chemours? Hell, Lehman even tried to do this with spinning off their bad real estate investments into "SpinCo" but nobody stayed with them to buy them even after they tried to split off their toxic assets. https://seekingalpha.com/article/94962-lehman-s-dirty-laundry-stuck-in-the-spinco https://seekingalpha.com/article/94962-lehman-s-dirty-laundr...
- qikInNdOutReply 4y ago
  This break aparts are usually CEOs deluding themselves, they can outrun the law, by creating a "sacrifice" lamb. And its a reasonable thought, for most mess ups, they could and can. But when so many victims are involved, even politicans do not dare to save them. You are a dead company walking, you just dont know it yet.
mindslight 4y ago
Thank you for that wonderful explanation! Knowing a few things about LLC law, I had wondered the details of what was going on. Every article is like "they moved the liabilities to a new company (because Texas), the end". Per your explanation, it actually sounds like a simple application of general concepts, and also a very sensible court decision that shot it down. FWIW I think a straightforward sanction in these types of cases would be to pierce the corporate veil to claw back the dividends and executive compensation paid out after the company became aware of the dangers of their product. Once the company becomes aware of a large liability, then any such payments are fraudulent transfers.
BoiledCabbage 4y ago
> Badco also got a funding agreement with Goodco, which gives Badco the right to be reimbursed by Goodco for any expenses incurred as a result of the talc liabilities, up to ~60 billion From what I can tell from the source documents this is either a misreading or misleading. Yes Badco can ask Goodco for up to $60B, however that is too cover administrative expenses and payments. However, payments will come from a trust fund decided with Badco in bankruptcy. From what I'm finding online, J&J has proposed to cap that trust fund at $2.5B. Meaning effectively they are trying to decide the max amount they will be held liable for across all cases. So apparently not $60B, if I'm reading that correctly.
- scott00 4y ago
  You are correct that if Badco completes the bankruptcy process the payments will come from a trust fund. But J&J doesn't control how much money goes into that trust fund. The 2.5B is their opening bid but it will ultimately be determined by a judge or jury.

kneebonian 4y ago

The fact that the Texas 2 Step is not explicitly illegal is a freaking travesty and the biggest evasion of justice I can think of. EDIT: There's a TV show me and my wife like call leverage. In the show one of the bad guys who is a powerful CEO says "That's the thing if you or I kill a guy we go to jail. Our company kills a guy we shell out a couple dollars and are on our way." There needs to be personal consequences for those involved in this, the concept of a corporation and not a person being liable is at the root of the issues. Individuals should be held accountable for what they do, they shouldn't be able to hide behind a legal fiction to protect themselves from the consequences of their actions. Most of the problems people blame on capitalism aren't a problem with capitalism they are a problem with corporatism. I guarentee there are plenty of CXOs who would be making much different decisions if it involved their asses being thrown in jail, rather than a simple restructuring of their holdings.

megiddo 4y ago
Personal liability is still a thing. If you kill someone as part of your job, you are criminally liable and the corp is civilly liable.
- lmm 4y ago
  The owners of corporations have limited liability - that's kind of the whole point of a corporation. And it's fundamentally unjust.
  - jacquesm 4y ago
    It is an absolutely enormous bug in capitalism and the way the corporate charter is used. Our great grandchildren are going to look back on this age as the age where everything was set up perfectly for what to them will likely be known as 'the big crash' or something to that effect. I can't really see a way out resulting in both (1) getting rid of these constructs and (2) not having that crash anyway on account of the economic backlash of (1). This is a major problem, the question that remains is whether it is the major problem or just one of a whole slew of them that is currently vying for top place.
    - zo1 4y ago
      That's not capitalism. That's 100% purely government with various parties having supposed benefits out of it. And the fact that we have it in our law books and can't change it or have been unable to till now, then you have to concede it's "Democracy".
  - _23sd 4y ago
    J&J's executives aren't off the hook for personal liability because of limited liability for owners (J&J is 70% owned by institutional investors, so the owners are more mutual funds than the CXOs), if there was a claim against them then owning some stock wouldn't protect them. They're off the hook because the corporation has vicarious liability for its employees' actions. To punish executives for their actions on behalf of a corporation, I believe you'd want to change agency law rather than corporate law.

throwaway5959 4y ago

Imagine if people tried to do that with their student loan debt.

baggy_trough 4y ago
I imagine that if it worked, nobody would be able to get a student loan after that.
- CPLX 4y ago
  That’s not how anything works.
  - jojobas 4y ago
    At the very least, interest rates and selectivity would go way up. The current situation is basically the government saying "it's a net positive if everyone willing to do so learns something, however unsuitable they are and useless what they learn", by guaranteeing repayments for low income graduates.
    - Red_Leaves_Flyy 4y ago
      That’s an incredibly uncharitable take.
      - jojobas 4y ago
        Is it untrue though? Higher education used to be paid by the state for the brightest few, the rest just didn't have an option to pursue it. Some countries tried to forecast how many engineers/doctors they'd need and ensure there are enough state-paid spots in the respective schools, not sure if the US ever did that. Now it's pretty much available to anyone, you can bet your future income to your Egyptology study and the state still backs your loan in case you can't ever earn a decent wage. Unlike a medical bankruptcy it's not an accident that your studies aren't making you profit, unlike a home loan your knowledge can't be repossessed. You post-bankruptcy earnings would still benefit from your education, it's like keeping your collateral through the bankruptcy and then using it to earn money.

bradleyjg 4y ago

The decision is quite readable and makes that very clear: https://www2.ca3.uscourts.gov/opinarch/222003p.pdf https://www2.ca3.uscourts.gov/opinarch/222003p.pdf

scott00 4y ago
Yep, that's how I figured out what the heck was actually going on. I agree it's readable and clear, but it is not concise: 58 pages.

nus07 4y ago

https://www.newyorker.com/magazine/2022/09/19/johnson-johnson-and-a-new-war-on-consumer-protection https://www.newyorker.com/magazine/2022/09/19/johnson-johnso... Very detailed explanation and the history behind it.

randycupertino 4y ago

> J&J's plan was to split into two pieces, which I'll call Goodco and Badco. Goodco got the operating assets, Badco got the talc liabilities and more or less immediately filed for bankruptcy. That's a maneuver that has come to be called the Texas Two-Step. Isn't that what Dupont did with spinning off their PFOAS liability into Chemours? Hell, Lehman even tried to do this with spinning off their bad real estate investments into "SpinCo" but nobody stayed with them to buy them even after they tried to split off their toxic assets. https://seekingalpha.com/article/94962-lehman-s-dirty-laundry-stuck-in-the-spinco https://seekingalpha.com/article/94962-lehman-s-dirty-laundr...

qikInNdOutReply 4y ago
This break aparts are usually CEOs deluding themselves, they can outrun the law, by creating a "sacrifice" lamb. And its a reasonable thought, for most mess ups, they could and can. But when so many victims are involved, even politicans do not dare to save them. You are a dead company walking, you just dont know it yet.

mindslight 4y ago

Thank you for that wonderful explanation! Knowing a few things about LLC law, I had wondered the details of what was going on. Every article is like "they moved the liabilities to a new company (because Texas), the end". Per your explanation, it actually sounds like a simple application of general concepts, and also a very sensible court decision that shot it down. FWIW I think a straightforward sanction in these types of cases would be to pierce the corporate veil to claw back the dividends and executive compensation paid out after the company became aware of the dangers of their product. Once the company becomes aware of a large liability, then any such payments are fraudulent transfers.

BoiledCabbage 4y ago

> Badco also got a funding agreement with Goodco, which gives Badco the right to be reimbursed by Goodco for any expenses incurred as a result of the talc liabilities, up to ~60 billion From what I can tell from the source documents this is either a misreading or misleading. Yes Badco can ask Goodco for up to $60B, however that is too cover administrative expenses and payments. However, payments will come from a trust fund decided with Badco in bankruptcy. From what I'm finding online, J&J has proposed to cap that trust fund at $2.5B. Meaning effectively they are trying to decide the max amount they will be held liable for across all cases. So apparently not $60B, if I'm reading that correctly.

scott00 4y ago
You are correct that if Badco completes the bankruptcy process the payments will come from a trust fund. But J&J doesn't control how much money goes into that trust fund. The 2.5B is their opening bid but it will ultimately be determined by a judge or jury.