Courts, Congress Likely to Stand in Way of J&J’s Third Texas Two-Step Plan

Rhea-AI Summary

Johnson & Johnson (NYSE: JNJ) faces significant challenges in its third attempt to use the 'Texas Two-Step' bankruptcy strategy to manage talc-related liabilities. The U.S. Court of Appeals for the 3rd Circuit recently rejected J&J's previous bankruptcy attempt, deeming it filed in bad faith. Additionally, bipartisan legislation, the Ending Corporate Bankruptcy Abuse Act (ECBA) of 2024, has been introduced to ban such maneuvers.

J&J faces a July 26 deadline for talc claimants to vote on a third bankruptcy attempt. Critics argue the proposed compensation unfairly shortchanges victims. The company needs 75% approval to proceed with another Texas Two-Step filing in Texas. Lawyers representing ovarian cancer victims urge J&J to abandon this strategy and provide fair compensation.

Positive

• None.

Negative

• U.S. Court of Appeals for 3rd Circuit rejected J&J's previous bankruptcy attempt
• Bipartisan legislation introduced to ban the Texas Two-Step bankruptcy strategy
• Proposed compensation plan criticized for unfairly shortchanging victims
• Potential failure to secure 75% approval for third bankruptcy attempt
• Ongoing legal challenges and negative public perception

Legal Expert

The recent developments in Johnson & Johnson's (J&J) talc litigation saga mark a significant setback for the company's legal strategy. The U.S. Court of Appeals for the 3rd Circuit's decision to reject J&J's 'Texas Two-Step' bankruptcy maneuver for the second time underscores the judiciary's growing skepticism towards such corporate tactics. This ruling, coupled with the introduction of the bipartisan Ending Corporate Bankruptcy Abuse Act (ECBA) of 2024, signals a potential sea change in how courts and legislators view corporate attempts to use bankruptcy as a shield against mass tort liabilities.

The court's finding that LTL Management's bankruptcy filing was made in bad faith due to lack of financial distress is particularly noteworthy. It sets a precedent that could deter other large corporations from employing similar strategies. The proposed ECBA legislation, if passed, would create an even more formidable barrier against such maneuvers by establishing a presumption of bad faith for Texas Two-Step bankruptcies.

From a legal perspective, J&J's third attempt at a Texas Two-Step bankruptcy faces significant hurdles. The 75% approval threshold for the settlement plan is a high bar, especially given the growing opposition and scrutiny. Even if J&J secures the votes, the recent court rulings and potential legislative changes cast doubt on the viability of this strategy.

The lack of court supervision in the voting process raises serious questions about the fairness and transparency of the procedure. This could potentially open up avenues for legal challenges to the validity of the vote itself, regardless of the outcome.

In light of these developments, J&J may need to reassess its legal strategy. The mounting legal and legislative pressure could push the company towards considering more traditional settlement approaches or facing the prospect of individual trials, which could potentially result in higher overall costs and reputational damage.

Financial Analyst

The ongoing talc litigation saga presents significant financial implications for Johnson & Johnson. The company's market capitalization of approximately $400 billion underscores the magnitude of its resources, but also highlights the potential for substantial financial impact from these lawsuits.

J&J's persistent attempts to use the Texas Two-Step bankruptcy strategy suggest that the company views the potential liability as material to its financial position. While the exact liability is uncertain, estimates have ranged from $5 billion to over $20 billion. The rejection of this strategy by courts and the potential legislative ban could force J&J to reassess its financial provisions for these claims.

From an investor's perspective, the uncertainty surrounding this litigation poses a risk to J&J's stock price and dividend stability. The company's legal troubles have already led to a $8.9 billion talc settlement offer, which, if implemented, would impact cash flows and potentially affect future dividend growth or share buybacks.

Moreover, the ongoing negative publicity could have indirect financial consequences by damaging J&J's brand value, potentially affecting sales of its consumer health products. This is particularly relevant given the recent spin-off of its consumer health division into Kenvue.

The financial markets will be closely watching the outcome of the July 26 vote and any subsequent legal developments. A failure to secure the required 75% approval or further legal setbacks could lead to increased volatility in J&J's stock price. Investors should be prepared for potential short-term fluctuations while keeping an eye on the long-term implications for J&J's financial health and market position.

Market Research Analyst

The ongoing talc litigation saga involving Johnson & Johnson (J&J) has broader implications for the pharmaceutical and consumer goods industries. This case is being closely watched as it could set precedents for how large corporations handle mass tort liabilities.

From a market perspective, J&J's struggles are likely to prompt other companies facing similar issues to reassess their legal and financial strategies. The potential legislative action against the Texas Two-Step bankruptcy maneuver could have far-reaching effects, closing off a controversial but potentially effective tool for managing large-scale liabilities.

This situation also highlights the growing importance of Environmental, Social and Governance (ESG) factors in corporate valuation. J&J's handling of the talc issue, particularly its attempts to use bankruptcy proceedings, may be viewed negatively by ESG-focused investors. This could lead to a reassessment of J&J's ESG ratings, potentially affecting its attractiveness to certain institutional investors and ESG-focused funds.

Moreover, the ongoing litigation and negative publicity could impact consumer perceptions of J&J's brand. While the company has a diverse product portfolio beyond talc-based products, persistent negative associations could affect consumer trust and loyalty across its range of consumer health products.

Looking ahead, this case may prompt increased scrutiny of product safety and corporate responsibility across the industry. Companies may need to invest more in product testing, safety measures and transparent communication to mitigate similar risks. This could lead to increased costs but may also present opportunities for companies that can effectively demonstrate their commitment to consumer safety and corporate responsibility.

For investors, this situation underscores the importance of considering litigation risk and corporate governance issues when evaluating pharmaceutical and consumer goods companies. It also highlights the potential for regulatory changes that could affect how companies manage and disclose potential liabilities.

U.S. Court of Appeals for 3rd Circuit latest to reject unprecedented bankruptcy strategy

PHILADELPHIA--(BUSINESS WIRE)-- Lawyers on behalf of tens of thousands of ovarian cancer victims are calling on Johnson & Johnson (NYSE: JNJ) to end its “war of attrition against cancer victims.”

“The third time will not be the charm for J&J,” says Andy Birchfield, head of the Mass Torts Litigation Section at the Beasley Allen Law Firm, who has been instrumental in helping to foil the first two attempts at bankruptcy by the half-trillion-dollar company. “Recent developments in the courts and in Congress should convince J&J to abandon its strategy and act as a responsible corporation by providing truly fair and reasonable compensation in a non-coercive resolution.”

On Thursday, the U.S. Court of Appeals for the 3^rd Circuit reinforced an earlier ruling that J&J could not stash its talc liabilities in a shell subsidiary and then plunge it into bankruptcy to stymie thousands of lawsuits alleging that its talc products caused ovarian cancer and mesothelioma. The court found the bankruptcy was filed in bad faith because the subsidiary, LTL Management, LLC, was not in financial distress.

Earlier this week, a bipartisan group of congressional lawmakers led by Sen. Josh Hawley (R-MO) and Sen. Sheldon Whitehouse (D-RI) introduced legislation to ban the Texas Two-Step. The Ending Corporate Bankruptcy Abuse Act (ECBA) of 2024 would deter the Texas Two-Step and ensure injury victims have a chance to be heard in court. The ECBA would instruct courts to presume a bankruptcy has been filed in bad faith if it is a Texas Two-Step bankruptcy.

“Johnson & Johnson has brought this legislative action upon itself by flouting the law and arrogantly pushing a failed strategy,” says Leigh O’Dell, co-lead counsel for consolidated multidistrict litigation. “The courts and Congress are saying that J&J is not entitled to use the powerful tools of bankruptcy to strip away the rights of cancer victims.”

Friday July 26 is the deadline for talc claimants to approve or reject a third J&J bankruptcy attempt. A settlement plan aimed at ending the litigation must receive 75% of all votes before the company can proceed with another Texas Two-Step maneuver and bankruptcy filing, this time in Texas. Opponents of the plan say that proposed compensation unfairly shortchanges victims and their families, many who have died or suffered for a decade or more.

“For J&J to lose this vote would be akin to Vladimir Putin losing a Russian election,” says Mr. Birchfield. “J&J controls the ballot. J&J determines who can vote and all the rules for voting. J&J controls the agent that counts the ballots and determines which votes will be counted and which ones will be discarded. And this is all done without court supervision.

“However, there is a vast difference between winning the vote through ballot stuffing and succeeding with a bankruptcy plan. This will be J&J’s third attempt to use bankruptcy to shirk its responsibility for its asbestos-laden talc-based baby powder. The egregiousness of J&J’s scheme to use bankruptcy to evade accountability and cap its liability has prompted bipartisan congressional action with a bill that would curb the abuse of J&J’s Texas Two Step.”

Beasley Allen is one of the country’s leading civil litigation firms, holding several national records for verdicts and settlements.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240726363190/en/

Mike Androvett

mike@androvett.com

214-507-5456

Source: Beasley Allen Law Firm

FAQ

What is the Texas Two-Step bankruptcy strategy that Johnson & Johnson (JNJ) is attempting?

The Texas Two-Step is a bankruptcy strategy where J&J attempts to stash its talc liabilities in a shell subsidiary and then file for bankruptcy to limit lawsuits alleging its talc products caused cancer.

Why did the U.S. Court of Appeals for the 3rd Circuit reject J&J's previous bankruptcy attempt?

The court found that J&J's bankruptcy filing was made in bad faith because the subsidiary, LTL Management, , was not in financial distress.

What is the Ending Corporate Bankruptcy Abuse Act (ECBA) of 2024?

The ECBA is bipartisan legislation introduced to ban the Texas Two-Step strategy and ensure injury victims have a chance to be heard in court. It would instruct courts to presume a Texas Two-Step bankruptcy has been filed in bad faith.

What is the deadline for talc claimants to vote on J&J's third bankruptcy attempt?

The deadline for talc claimants to approve or reject J&J's third bankruptcy attempt is Friday, July 26.

What percentage of votes does J&J need to proceed with another Texas Two-Step bankruptcy filing?

J&J needs to receive 75% of all votes to proceed with another Texas Two-Step maneuver and bankruptcy filing in Texas.