[mijoharas]

Yeah, I'm trying to understand how this is allowed? It seems like it's in incredibly bad faith. Can anyone explain how this can happen?

Taking this to it's extreme, can't you just buy some property so that you owe 1 million dollars, put that debt into it's own company and then say "sorry, that company is bankrupt, I can't pay".

Is that not what's happening here? I feel like I must be missing something.

[haneefmubarak]

IANAL, but IIRC from some reading on this a while back (I could totally be wrong) you have to group the assets that the debt is connected to in the new entity specifically to prevent this. You also can't liquidate the asset connected to the debt and then spin off the new entity while keeping the money from the liquidation.

So I think the way that these rules play out WRT J&J would be that they have to include all assets pertaining to their baby powder / talc business into the new entity, along with the amount of cash that is ordinarily used to operate the business into the spin out. That way the spin out contains what realistically constituted the talc business (net of profits that have been taken or reallocate in the past), so it can be held liable for any debts associated with the same business.

EDIT: looks like in their case they're basically splitting into two companies - one that does pharmaceuticals (drugs, vaccines, etc) and the spinoff that does consumer products (Listerine, shampoo, the baby powder / talc in question, etc) with each part receiving relevant operating assets and associated liabilities, but the pharma side (which will retain the name) keeping the excess cash on hand and other non-operating assets.

[mijoharas]

This makes sense to me now. Thanks for the clarification!

[ccleve]

Sometimes moving money in this manner can be construed as a fraudulent transfer of funds. https://en.m.wikipedia.org/wiki/Fraudulent_conveyance

[sandman008]

Matt Levine has already discussed Texas Divisive Mergers w.r.t. J&J case:

https://www.bloomberg.com/news/newsletters/2021-07-20/money-...

"It does seem … wrong? Like, obviously, if you run a big company that has big liabilities, you’d like to be able to just get rid of the liabilities. And obviously companies have tried, and there are simple approaches (spin off the assets and leave the liabilities, etc.), and those simple approaches don’t work because generally it is bad for a company to be able to just get rid of its liabilities. It would be weird if there was a cheat where doing it as a Texas two-step merger did work."