By: Evan Brown
Corporate spin-offs allow a parent company to break off into two separate structures, known as a parent company and an independent company (spun-off) company. The spin-off allows the independent company’s stock to be distributed to the stockholders of the parent company. Some of the most valued reasons for a spin-off to occur would be because the parent company is preparing to sell the independent company to a third party, the shareholder value is underwhelmed because the parent company is undervalued, the parent company believes the independent company will have a higher valuation once separated, or (in this case) to allow a liability allocation to either company rather than the company as a whole to take fault.
As some may have heard, the pharmaceutical giant, Johnson and Johnson, is planning a corporate spin-off to separate their pharmaceutical and family consumer product sectors to minimize their liability by protecting their assets from the ongoing “talc claims.” However, that specific spin-off between the pharmaceutical and family consumer sectors is not likely to occur until the end of 2023.
The reason for these spin-off discussions started during a 2018 litigation that awarded 22 plaintiffs $25 million each with a jury awarded $4.7 billion in punitive damages. Johnson and Johnson, as of July 2021, discussed a corporate spin-off between the Johnson and Johnson (principal company) and LTL Management, LLC. (subsidiary) by utilizing a Texas law known as “Divisive Merger.” In fact, Texas is one of two states that allow for Divisive Mergers. The definition of “merger” under Texas Law states that “merger” can occur when two companies come together (most familiar definition) or when a company splits apart into two entities. The other state that allows Divisive Mergers is Delaware; however, the company can only split into two if the principal entity was a Limited Liability Company.
Further, once a company incorporates in Texas, the company can avoid fraudulent transfer liability and lower cost asset partitioning versus what would occur planning a spin-off within the other states. The reasoning, the Texas law states:
“…all rights, title, and interests…owned by each organization that is a party to the merger is allocated to and vested, subject to any existing liens…in one or more of the surviving or new organizations as provided in the plan of merger without…any transfer or assignment having occurred.”
Without “any transfer or assignment” there cannot necessarily be a claim for Fraudulent Transfer. With roughly 40,000 lawsuits surrounding the talc found within Johnson and Johnson’s baby powder, the company is willing to try innovative legal maneuvers to save as much of its assets from litigation.
Johnson and Johnson ended up creating an entity, known as LTL Management, LLC., to move all its liabilities surrounding talc under one subsidiary of Johnson and Johnson and then filing Chapter 11 bankruptcy to provide another barrier to liability. This is “high risk” testing of the Divisive Merger under Texas Law. In October 2021, LTL Management filed bankruptcy in hopes to settle roughly 40,000 talc liability claims. The LTL Management bankruptcy claim was originally filed in North Carolina but later removed and entered in New Jersey because that is where Johnson and Johnson is based and most of the talc litigation is occurring within that state. Since LTL Management has filed a Chapter 11 bankruptcy claim, they can use it as a “restraining order” because it protects the company from any foreclosure or any other legal actions; such as more claimants joining the already roughly 40,000 talc powder liability claims.
The interesting concept of the “Texas Two step” spin-off is that once LTL Management was created and had all the claims put into one pool, the principal company, Johnson and Johnson, may allocate any amount of assets into LTL Management but no creditor may go after Johnson and Johnson’s assets—creating a quasi-barrier of liability. The law found within Texas Business Organization Code Annotation § 10.008(4) states,
“…each surviving or new domestic organization to which a liability or obligation is allocated under the plan of merger is the primary obligor for the liability or obligation…no other new domestic entity…created under the plan of merger is liable for the debt or other obligation.”
Some would say that Johnson and Johnson may have successfully out done the normal corporate spin-off and opened a new realm of what is known as the “Texas Two step.”
Concluding, Johnson and Johnson is still planning on doing a corporate spin-off into two different companies, one being the family consumer sector, the other keeping Johnson and Johnson’s name and being the pharmaceutical sector. The company is planning the spin-off to be tax free. The cost of the spin-off is estimated anywhere between $500 million-$1 billion. Johnson and Johnson’s pharmaceutical sector was on track to make $80 billion by the end of 2021; meanwhile, the family consumer sector was to make $15 billion. Thus, the family consumer sector is going to be getting a new name during the spin-off. A lot of investors are hesitant about the standalone value of the individual sectors when it comes to Johnson and Johnson splitting into two organizations. Johnson and Johnson is making the best out of roughly 40,000 liability claims by creating a subsidiary, LTL Management, LLC., and using a Texas law to separate the assets from the principal company, Johnson and Johnson. With the claims being handled, the company’s planned spin-off would provide Johnson and Johnson the maximum liability allocation and a “win-win” if both sectors continue with their projected high stand-alone valuations.
 Amy Fontinelle, Spinoff, Investopedia (updated Oct. 06, 2021), https://www.investopedia.com/terms/s/spinoff.asp.
 Stephen M. Kotran, et al., Spin-offs: Overview, Thompson Reuters Practical Law, https://1.next.westlaw.com/2-503-1986?__lrTS=20201110041509942&transitionType=Default&contextData=%28sc.Default%29 (“After the transaction, both Parent and the spun-off entity (SpinCo) have separate and independent existences with the stockholders of Parent owning the stock of Parent and, initially, the stock of SpinCo”).
 Splitting the Difference: Four Reasons Why Corporations Pursue Spinoffs, Finra (Aug. 08, 2016), https://www.finra.org/investors/insights/splitting-difference-four-reasons-why-corporations-pursue-spinoffs (“The Edge and Deloitte found that a year after a spinoff, parent companies saw their post-spinoff share price increase 14 percent on average, while the spun-off companies added 22 percent on average.”).
 Fontinelle, supra note 1.
 Rick Archer, Johnson & Johnson Puts Talc Spinoff Into Ch. 11, Law360 (Oct. 14, 2021), https://plus.lexis.com/api/permalink/8262c10f-33b4-4bcc-abe5-303a94e7bbe9/?context=1530671 (“[I]t allows a “divisive merger” in which a company rends itself in two and allocates assets and liabilities between the two parts however it prefers.”).
 JOHNSON & JOHNSON: Spinoff Plan Survives Legal Proceeding, Troubled Company Reporter, Vol. 25 (Oct. 06, 2021).
 Jaimy Lee, Johnson & Johnson’s got a new CEO and a plan to split the company in two. Here’s what else to expect out of J&J’s earnings, Market Watch (updated Jan. 23, 2022, 11:24AM ET), https://www.marketwatch.com/story/whats-next-for-a-j-j-that-will-soon-be-split-into-two-different-companies-11642611732.
 Ingham v. Johnson & Johnson, 608 S.W.3d 663 (Mo. Ct. App. 2020), reh’g and/or transfer denied (July 28, 2020), transfer denied (Nov. 3, 2020), cert. denied, 141 S. Ct. 2716, 210 L. Ed. 2d 879 (2021).
 See generally JOHNSON & JOHNSON: Spinoff Plan Survives Legal Proceeding, supra note 7.
 Adam Levitin, The Texas Two-Step: The New Fad in Fraudulent Transfers, Credit Slips (July 19, 2021, 10:50AM), https://www.creditslips.org/creditslips/2021/07/the-texas-two-step.html.
 Tex. Bus. Orgs. Code Ann. § 10.008(2)(c) (West 2015) (emphasis added).
 Levitin, supra note 11.
 JOHNSON & JOHNSON: Talc Users Ask Court to Stop Liability Spinoff, Troubled Company Reporter, Vol. 25 (Sep. 30, 2021) (“[P]atients asked a Missouri court Tuesday, August 24, 2021, for a restraining order against a move they say would deprive them of damages.”).
 Stacey Vanek Smith and Adrian Ma, Johnson & Johnson tests a legal maneuver known as the Texas Two-Step, NPR (Jan. 07, 2022, 5:14 am ET), https://www.npr.org/2022/01/07/1071181199/johnson-johnson-tests-a-legal-maneuver-known-as-the-texas-two-step.
 JOHNSON & JOHNSON: Spinoff to Create Barriers, Says Talc Claimant Grp, Troubled Company Reporter, vol. 25 (Dec. 28, 2021); see In re LTL Mgmt. LLC, No. 21-30589, 2021 WL 5343945 (Bankr. W.D.N.C. 2021).
 Lawrence R. Reich, Esq., Considering the Filing of A Chapter 11 Case, 33 Westchester B.J. 31, 32 (2006).
 Smith and Ma, supra note 17.
 Tex. Bus. Orgs. Code Ann. § 10.008(4) (West 2015); see also Adam Levitin, supra note 11 (discussing that the Texas “merger” definition allows for it to be defined as two companies combining assets and joining into one company and it also can be defined as one company splitting into two).
 JOHNSON & JOHNSON: Spinoff Plan Survives Legal Proceeding, supra note 7.
 Michael Erman and Manas Mishra, J&J to spin off consumer products and focus on pharmaceuticals, Reuters (Nov. 12, 2021, 4:42pm EST), https://www.reuters.com/business/healthcare-pharmaceuticals/johnson-johnson-plans-split-into-two-companies-wsj-2021-11-12/.
 Charlotte Morabito, Johnson & Johnson is spinning off its consumer division, which could come with risks, CNBC (Jan. 10, 2022, 9:52AM EST), https://www.cnbc.com/2022/01/10/johnson-johnson-spin-off-consumer-division.html.
 See Smith and Ma, supra note 17.
 See Archer, supra note 6.