George S. Christian is Senior Counsel of the Texas Civil Justice League
The popular press has mischaracterized companies’ use of Texas’ divisional merger law, as part of a corporate structuring known as the “Texas Two Step,” as an inappropriate way for companies to address liability in mass tort matters. Some coverage has incorrectly pointed to the Chapter 11 filing by Johnson & Johnson’s subsidiary, LTL Management (LTL), as an example of how Texas’ law can be misused. As both a clear reading of Texas law and a thoughtful and thorough ruling from US Bankruptcy Judge Michael B. Kaplan demonstrate, nothing could be further from the truth.
Some background: Using Texas law, LTL was created as a separate subsidiary of Johnson & Johnson to hold and manage claims in the company’s cosmetic talc litigation. In October 2021, LTL filed for voluntary Chapter 11 bankruptcy protection initiating a court-supervised process to resolve all cosmetic talc claims equitably, efficiently, and swiftly.
The use of the divisional merger law and subsequent bankruptcy is wholly aligned with longstanding Texas law defining “merger” to include “the division of a domestic entity into two or more domestic entities or other organizations or into a surviving domestic entity and one or more new domestic or foreign entities or non-code organizations.”1 The Texas Legislature enacted this provision in 1989 as part of an important modernization of the law of business organizations. According to an original drafter of the legislation, the change “permitting a single corporation to adopt a plan of merger providing a division of that corporation’s assets and liabilities among two or more resulting corporations or other entities” constituted one of the “most far-reaching and innovative changes to the merger provisions of the [Texas Business Corporation Act] enacted by the 1989 Texas Legislature.”2 At the time of the Texas law’s enactment, Pennsylvania already provided a similar statutory mechanism, and several other states, including Delaware, subsequently followed suit.
Far from being unusual, LTL’s divisional merger was an appropriate use of a widely accepted law that expressly permits such an action. Those who now criticize its use, including some who were involved in its enactment3 (and for which they were glad to take justifiable credit at the time), are simply wrong. These former proponents wrote the statute to require each successor entity of a divisional merger adopt a plan that includes “the manner and basis of allocating each liability and obligation of each organization that is a party to the merger, or adequate provisions for the payment and discharge of each liability and obligation, among one or more of the surviving or new organizations.”4 As many others have done in the past, that is precisely what LTL did in this case.
The statute cannot be spontaneously rewritten to read: “each liability and obligation, except for a liability or obligation arising from mass tort litigation.” That’s not how the law works. The Legislature designed the flexible new merger provisions “to provide domestic corporations with greater flexibility in structuring business combinations.”5
Further, not only is Johnson & Johnson Consumer Inc.’s reorganization in the face of a massive and unending wave of tort litigation entirely appropriate and proper under Texas law as described above, it’s also entirely appropriate and proper under the US Bankruptcy Code. As Judge Kaplan forcefully noted in his February ruling allowing the bankruptcy to proceed, “Let’s be clear, the filing of a chapter 11 case with the expressed aim of addressing the present and future liabilities associated with ongoing global personal injury claims to preserve corporate value is unquestionably a proper purpose under the Bankruptcy Code.”6
The facts and the law are clear: The company’s actions were the responsible thing to do, not only for the shareholders and employees of the company, but also for the talc claimants themselves. A court-supervised, claimant-approved restructuring process will ensure both current and future claimants are treated fairly. It is the best option for obtaining a global resolution—and it will happen faster than the MDL system could possibly handle the nearly 40,000 talc-related claims pending against J&J. Unsurprisingly, Judge Kaplan said it best: “[T]his Court holds a strong conviction that the bankruptcy court is the optimal venue for redressing the harms of both present and future talc claimants in this case—ensuring a meaningful, timely, and equitable recovery.”7
If the Texas Legislature thought the law had been “abused” by the many other companies that have gone through similar divisional mergers, it would have done something about it by now. It speaks volumes that those who make that argument have not even bothered to ask—probably because they know what the answer would be.
- Tex. Bus. Org. Code § 1002(55)(A).
- Curtis W. Huff, The New Texas Business Corporation Act Merger Provisions, 21 St. Mary’s L. J. 109, 114 (1989).
- Architects of ‘Texas two-step’ lambast J&J for its use of the manoeuvre, https://www.ft.com/content/025e7678-ced9-4c53-aa17-c539d621bde7, Feb. 14, 2022.
- Tex. Bus. Org. Code § 10.003(3).
- Bill Analysis, C.S.H.B. No. 472, House Committee on Business & Commerce, March 13, 1989, Texas Legislature 71st R. S., 1989, at 23.
- Judge Michael B. Kaplan of the U.S. Bankruptcy Court for the District of New Jersey Memorandum Opinion, Case 21-03032-MBK, Doc 184, Feb. 25, 2022.