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Pretty sus how they could shift all liabilities onto a subsidiary, call bankruptcy and then call if a day. Isn't this just abusing the system?

kayodelycaon 2y ago
Yes. But it doesn't always work. https://en.wikipedia.org/wiki/Piercing_the_corporate_veil https://en.wikipedia.org/wiki/Piercing_the_corporate_veil
dannyw 2y ago
Yes, one that was rejected by court twice.
triceratops 2y ago
Matt Levine steelmanned this approach in a column. What J&J tried to do was fund the subsidiary with however much they thought they'd be liable for and treat claimants as creditors to the bankrupt subsidiary. Bankruptcy law is designed to deal fairly with all creditors. The alternative is that a couple of gigantic judgments against J&J right at the beginning would leave no money for people who sued later. The courts rejected this approach, not because of unfairness specifically, but because J&J had provided funding to the subsidiary. If the subsidiary has money, it can't be bankrupt yet. If the subsidiary ultimately pays all claims to everyone who is entitled (a big if), it isn't necessarily wrong. [1] The one downside is claimants can't go after all of J&J's assets in the event of a huge victory. I'm recounting all this from columns I read while back, so someone please correct me if I got details wrong. 1. https://www.investopedia.com/texas-two-step-bankruptcy-definition-5225888 https://www.investopedia.com/texas-two-step-bankruptcy-defin...
- legitster 2y ago
  Levine's write up about the situation was great: https://www.bloomberg.com/opinion/articles/2023-01-31/matt-levine-johnson-johnson-s-jnj-bankruptcy-didn-t-work https://www.bloomberg.com/opinion/articles/2023-01-31/matt-l... >"So you might want to file for bankruptcy to pay off all your victims fairly and, perhaps, cheaply, even if their claims will not really “bankrupt” you in the traditional sense. But in fact that is kind of a drastic step, expensive and disruptive and risky and probably bad for shareholders. No chief executive officer of a big company wants to file for bankruptcy if it is not strictly necessary. > There is a neater approach: > -You put the liabilities in a box. You create a new subsidiary, you put the product-that-kills-people business in that subsidiary, and you transfer the liabilities related to that product to the subsidiary. This is, in general, hard to do, but in fact Texas has a weird merger law that allows it: You can “merge” your company into two companies, one with the liabilities and one with the rest of the business. > -You have the box — the new subsidiary with all the product liabilities — file for bankruptcy. You get fair and consistent adjudication of the product claims, inside the box, and the rest of the company just goes along relatively normally. > This is called the “Texas two-step.” In its extreme form it sounds like very bad cheating: You can’t really put all the liabilities and none of the money in the box; that is just a way to defraud victims, and surely they’d find a way to do something about it. But a milder form of the Texas Two-Step is that you put the liabilities in the box, put the box in bankruptcy, but have the parent company guarantee its product liabilities. (Perhaps up to some reasonable number, perhaps not.) Then you can say “no, we are not doing this to get out of paying our liabilities; we are doing it to pay them in a fairer and more consistent way.”

kayodelycaon 2y ago

Yes. But it doesn't always work. https://en.wikipedia.org/wiki/Piercing_the_corporate_veil https://en.wikipedia.org/wiki/Piercing_the_corporate_veil

dannyw 2y ago

Yes, one that was rejected by court twice.

triceratops 2y ago

Matt Levine steelmanned this approach in a column. What J&J tried to do was fund the subsidiary with however much they thought they'd be liable for and treat claimants as creditors to the bankrupt subsidiary. Bankruptcy law is designed to deal fairly with all creditors. The alternative is that a couple of gigantic judgments against J&J right at the beginning would leave no money for people who sued later. The courts rejected this approach, not because of unfairness specifically, but because J&J had provided funding to the subsidiary. If the subsidiary has money, it can't be bankrupt yet. If the subsidiary ultimately pays all claims to everyone who is entitled (a big if), it isn't necessarily wrong. [1] The one downside is claimants can't go after all of J&J's assets in the event of a huge victory. I'm recounting all this from columns I read while back, so someone please correct me if I got details wrong. 1. https://www.investopedia.com/texas-two-step-bankruptcy-definition-5225888 https://www.investopedia.com/texas-two-step-bankruptcy-defin...

legitster 2y ago
Levine's write up about the situation was great: https://www.bloomberg.com/opinion/articles/2023-01-31/matt-levine-johnson-johnson-s-jnj-bankruptcy-didn-t-work https://www.bloomberg.com/opinion/articles/2023-01-31/matt-l... >"So you might want to file for bankruptcy to pay off all your victims fairly and, perhaps, cheaply, even if their claims will not really “bankrupt” you in the traditional sense. But in fact that is kind of a drastic step, expensive and disruptive and risky and probably bad for shareholders. No chief executive officer of a big company wants to file for bankruptcy if it is not strictly necessary. > There is a neater approach: > -You put the liabilities in a box. You create a new subsidiary, you put the product-that-kills-people business in that subsidiary, and you transfer the liabilities related to that product to the subsidiary. This is, in general, hard to do, but in fact Texas has a weird merger law that allows it: You can “merge” your company into two companies, one with the liabilities and one with the rest of the business. > -You have the box — the new subsidiary with all the product liabilities — file for bankruptcy. You get fair and consistent adjudication of the product claims, inside the box, and the rest of the company just goes along relatively normally. > This is called the “Texas two-step.” In its extreme form it sounds like very bad cheating: You can’t really put all the liabilities and none of the money in the box; that is just a way to defraud victims, and surely they’d find a way to do something about it. But a milder form of the Texas Two-Step is that you put the liabilities in the box, put the box in bankruptcy, but have the parent company guarantee its product liabilities. (Perhaps up to some reasonable number, perhaps not.) Then you can say “no, we are not doing this to get out of paying our liabilities; we are doing it to pay them in a fairer and more consistent way.”