Foreign that you run, a large and profitable company that's been around for decades. You have millions of customers having become a household name for your product or service that you provide. But then one day people start realizing that your products or Services have been causing some egregious societal harm over the course of decades, such as a consumer product that causes cancer or perhaps electrical transmission lines that have been starting wildfires in drought-stricken regions and the Court's side against you ordering you to pay hundreds of millions or even billions of dollars worth of Damages and penalties to the victims. You can't win all these lawsuits and the magnitude of the liabilities could take you out for good.

You could declare bankruptcy, which, while it would wipe out shareholders, could allow the businesses operations and brand to survive. But what if you could benefit from all of those protections offered by bankruptcy law without all the downsides? What if you could get rid of all those liabilities without having to pay out everything you have to the victims? As it turns out, that just might be possible. a Texas law allows companies to split into two, split their liabilities from their assets, and then had the liability heavy company file for bankruptcy. Aside from the ethical concerns and allegations of fraud, this setup is perfect.

The victims cannot sue the company that holds all the assets. They can only sue the company that has nothing. And that's what Johnson and Johnson is doing right now to settle thousands of cancer lawsuits relating to their asbestos contaminated baby powder. But how is this even possible? and if it works, why doesn't every company with any liabilities do it foreign? Quick pause from our sponsors over at Policy Genius.

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Everyone knows Johnson and Johnson It's the massive American multinational with massive consumer products and pharmaceuticals businesses as one of the top 50 largest companies in the country is been a member of the mighty Dow Jones for decades and over the years has made its shareholders rich. and if you're like most American consumers, you associate them with products like Band-Aids Neutrogena moisturizers and perhaps even baby powder. But for some consumers, Johnson and Johnson's iconic baby powder means something very different. In 2021, the company had to set aside four billion dollars to cover expenses, including a 2.1 billion dollar settlement with 22 cancer victims who developed cancer after using Johnson Johnson's Talc based baby powder.

Investigations have shown that this baby powder had been contaminated with asbestos for years a known carcinogen, and now that the courts have shown that they side with the victims in many of these lawsuits, Johnson and Johnson's legal troubles are piling up staggeringly high. While 2.1 billion dollars is a large hit for any Corporation, a company like Johnson and Johnson can recover from it in just a few months, but that only settles with 22 of the claimants. There are currently over 40 000 court cases over the baby powder, and each one could potentially reach a similar verdict if each of those cases had the same outcome that could bankrupt any company in the world operating today Johnson and Johnson knew that if it wanted to protect its position as one of the strongest companies in the world, it had to move Heaven and Earth to put a cap on these cancer lawsuits foreign. The strategy that Johnson Johnson decided to use is known as the Texas two-step It involves using a Texas law that allows businesses to conduct What's called the divisive merger in which a company divides itself into two businesses and is free to distribute its assets and liabilities into the two new businesses, however it wants.

The first step is to conduct a divisive merger and put substantially all the liabilities of the Legacy business into want and substantially all the assets into the other. The second step is to have the liability laid in business file for bankruptcy while the asset Rich business pretty much gets a free pass. This strategy has really only been used a few times, all in the last few years. In 2017, Georgia Pacific spun off a business entity that held its own asbestos litigation liabilities and that business almost immediately filed for bankruptcy in North Carolina.

Later on, a company called Dbmp was spun off from another company for the same reason and filed for bankruptcy also in North Carolina And in 2020, the same thing happened again with a company called Train Technologies again in the state of North Carolina in 2021, Johnson and Johnson started by far the largest Texas two-step by splitting into a company called New Jnj and LTL Management: LTL was stuck with all the asbestos liabilities and New Jnj received almost all of the assets of the original company despite Johnson and Johnson being headquartered in New Jersey LTL almost immediately filed for bankruptcy in no other state than North Carolina Foreign: Johnson's use of the Texas two-step has been condemned by various legal Scholars and even members of Congress take a listen to this testimony during a 2022 Senate Judiciary subcommittee hearing about a hypothetical Texas two-step process involving one company original Co that then splits into two companies Badco and Goodco. Yes. Mr Chairman: I Think you've made an excellent point in suggested an excellent point, which is that Good Co isn't a bankrupt. It's not supposed to get the protections of the bankruptcy, but it gets to enjoy those protections at the same time As like a puppet on a string, it controls bad code because Badko has overlapping officers and directors with Goodco and the rest of the corporate family.

It's really just a an illusion your honor to think of of bad cause anything other than an empty shell as even some of the courts applying these bankruptcies have recognized. Make someone think of the old doctrine of piercing the corporate veil. You're exactly right, your honor, that not your honor, Excuse me Mr Chairman Sorry that uh you tell him a lawyer that, uh, there are supposedly remedies that that will work. But what we're talking here about time.

People don't have 10 years to wait for all of this to play out. People are dying now. People need to get paid now. And ultimately, this is all about delay.

That's the whole point. And so Justice Delight is Justice denied. Uh Mr A victims group appealed the bankruptcy of LTL and in January of 2023, the appeals court ruled that the bankruptcy was illegitimate. The judge said that the Bankruptcy code's original intent was to Grant Safe Harbor to punitive debtors and financial distress Johnson and Johnson was not in distress.

The victims group says that the bankruptcy was not filed in good faith and constitutes an improper bankruptcy purpose. It was done purely as a litigation tactic to Shield Johnson Johnson's billions of dollars of assets from the court cases. After the ruling, the company's stock dropped nearly five percent at one point in a single day, chopping billions off the company's market value in one of the worst single day declines in years. Foreign.

However, there is another side to the story. There are some reasonable arguments that Johnson and Johnson can and have made for why the Texas two-step is legitimate. Firstly, they didn't saddle LTL with all the liabilities and zero assets. They set up a trust with about two billion dollars for LTL to distribute to the cancer victims in the bankruptcy process.

This basically means that they offered two billion dollars to put an end to all future litigation. Secondly, there actually can be real benefits to the victims in the case of a bankruptcy. All the tens of thousands of cases get resolved cleanly in one bankruptcy case, and the pool of money available to the victims theoretically gets distributed as fairly as possible to all the claimants. If there were no bankruptcy, each individual case would have to be fought with Johnson and Johnson separately, which would take years and incur massive legal expenses.

On top of that, the cases that get resolved first would likely get bigger payouts, and by the time the later cases get resolved, there may be no money left, so the claimants would likely not get Fair resolutions in relation to one. Another factor is that the claim that Johnson and Johnson's baby powder cause the cancer is still an ongoing debate. A scientific study involving over 10 000 subjects found only a slight association between metallic powder and ovarian cancer, and even that slight Association has some doubt. According to the study, the use of talc powder only increased the risk of ovarian cancer by around 50 percent above Baseline.

That basically means that if you use talc powder and eventually got ovarian cancer, there's actually about a two and three chance that you would have gotten it even had you not used the talc powder Also, the researchers say they found no relationship between how long the tug powder was used and the risk of cancer, which is normally associated with carcinogenic things like smoking. Johnson Johnson has used these arguments in its legal battles with the cancer victims. Without being a subject matter expert in carcinogenic substances and a lawyer, it's hard to say whether or not these penalties that Johnson Johnson has been ordered to pay so far have been unfair. The total value of all the pending asbestos lawsuits is, of course unknown, and various analysts have come up with widely varying estimates, something that they could get away with settling for as little as 5 billion dollars.

while Johnson and Johnson itself has estimated the liability at about 300 billion dollars, If they were that big, that would minimally the company for many years, it may even be enough to force the entire company into bankruptcy. If that were to happen, it would seem a bit extreme, especially since the link between intalk powder and cancer seems to be debatable at best from a scientific perspective, and the disruption that I would cause in Johnson Johnson's business would be a substantial, inefficient, dead loss to the company that benefits no one. Still, if their Texas two-step maneuver works that would be massively in favor of Johnson and Johnson by allocating two billion dollars of assets to LTL, they essentially are writing their own punishment. It would be like if you got a speeding ticket and the police officer let you decide how much you want to pay for the ticket.

And seeing as they've already paid out more than two billion dollars in past judgments, it seems like a fair number would be significantly more than that. There needs to be a middle ground solution, one that doesn't. Force Johnson Johnson itself into bankruptcy, but still fairly compensates the cancer victims for the asbestos poisoning. We'll have to wait and see what happens today.

The experts don't seem to know what the right solution is foreign. It's looking like the courts and the stock market are expecting Johnson and Johnson's Texas two-step gimmick to fail. and depending on how you look at it, there's some indication that Johnson and Johnson itself is preparing a contingency plan in November of 2021. Within weeks of LTL management, Johnson and Johnson announced I would be spitting off a major part of the company.

The new company would take the consumer business that makes things like Tylenol, Neutrogena and Aveeno while the remaining company would be the pharmaceutical business that sells drugs and medical devices like its covid vaccine. It could be a coincidence that they are doing this at the exact same time that they're dealing with the potentially crippling lawsuits from their asbestos cancer victims. But if the Texas two-step fails by spinning off their consumer products business, they could potentially protect half or more of their assets from the lawsuits. And unlike the Texas two-step spinning off the consumer business is very unlikely to get blocked.

Analysts have been talking about splitting up Johnson and Johnson for years since. The business that makes coveted vaccines is indeed very different from the business that makes baby powder and lotions. Operating separately Could improve focus and allow each business to be more Nimble at least according to the CEO. But the reality is that they probably won't just be spinning off the consumer business, they'll also be spinning off the asbestos lawsuits.

The outcome of the Johnson and Johnson situation has already had ramifications in other parts of the economy. 3M is currently facing a similar situation with lawsuits over its Combat Arms version 2 earplugs and they are trying a similar maneuver after the Johnson Johnson divisive merger was shot down by the appeals court in January Victims Groups for the 3M lawsuits ask the judge to do the same thing to 3M. These lawsuits are similarly massive and involved over a hundred thousand claimants. Depending on the outcome of the Johnson and Johnson case, we could see a new era of corporate bankruptcies in America.

All right guys, that wraps it up for this video. What do you think about Johnson Johnson's Texas two-step maneuver? Do you think it should be allowed to happen? Let us know in the comments section. Below In the meantime, thank you so much for watching and we'll see you in the next video. Wall Street Millennial Signing out.