[natroniks]

Can someone here clarify: Is today's ruling about the legitimacy of structuring JNJ's talc liabilities into LTL? Or is it saying that LTL can't file for bankruptcy AT THE MOMENT because the firm (LTL) is not yet in financial distress? I don't see this as a loss for JNJ's "Texas Two-Step" strategy, but rather the judges are saying "LTL can't declare bankruptcy preemptively, LTL needs to be under actual financial distress before declaring bankruptcy."

[Kon-Peki]

That's a good question. The court opinion I linked in a different comment addresses this.

They are merely saying that LTL can't declare bankruptcy preemptively, because it is in amazing financial health. The "Texas Two-Step" structure they created was enormously friendly to LTL because LTL was intended to immediately go bankrupt.

Does the Texas law used to create this kind of corporate structure require such friendly terms? Is quick bankruptcy the loophole? That is something I don't know.

[natroniks]

Thanks for your input. The main downside I could imagine is if the courts rule that JNJ must provide open-ended financial backing to LTL. JNJ initially provided $2B to LTL to cover liabilities, but made clear they wouldn't be shocked if it were somewhat more than $2B. What's not being judged here is whether LTL can ever declare bankruptcy. In a confusing turn, many comments (here and elsewhere) seem to be taking the next step and claiming that the court's decision today implies the courts will rule the whole Texas Two Step" structure is "in bad faith." As of now, the only "bad faith" move is LTL declaring bankruptcy while they're still solvent. Should there be enough judgments against LTL such that they run out of money, then they might indeed be able to declare bankruptcy and shield JNJ from further costs (though, as I state, there has been previous discussion of adding to the the initial $2B pot).

[Kon-Peki]

The court doesn't need to force J&J to provide open-ended backing. LTL already have it:

> The Funding Agreement merits special mention. To recap, under it LTL had the right, outside of bankruptcy, to cause J&J and New Consumer, jointly and severally, to pay it cash up to the value of New Consumer as of the petition date (estimated at $61.5 billion) to satisfy any talc-related costs and normal course expenses. Plus this value would increase as the value of New Consumer’s business and assets increased. App. 4316-17 (Funding Agreement 4-5, § 1 Definition of “JJCI Value”).15 The Agreement provided LTL a right to cash that was very valuable, likely to grow, and minimally conditional. And this right was reliable, as J&J and New Consumer were highly creditworthy counterparties (an understatement) with the capacity to satisfy it.

My question, inspired by yours, is why? Why did J&J provide such a generous funding agreement if it didn't have to? Or did it? The only thing I can think of is that they needed to do so, but it wasn't supposed to matter as LTL filed bankruptcy two days later.

[ethbr0]

To shield JNJ leadership and ownership, including shareholders.

If you make an agreement to pay an unlimited amount of money to a spin-off, obviously you're not doing it to save money.

You're doing it to retain control, even when you have to pay extremely large amounts of money.

[puffoflogic]

Let's just wait and see whether (should I say, "when"?) LTL mysteriously breaches the terms of, or simply renegotiates, that very funding agreement. Not until after appeals options are exhausted, of course, but soon thereafter.

[natroniks]

I'm not sure if JNJ liked including that clause, but by embracing this commitment and having the courts approve it with specific limitations to the Consumer Brands business, they may be able to save themselves in the end - or about 85% of themselves. > https://www.geneonline.com/soon-to-be-jj-spinoff-kenvue-file... The upcoming spinoff of Kenvue will be very interesting to say the least. Will JNJ be willing/able to sacrifice their consumer brands business altogether to protect the pharma/devices segments? Even the full $61.5B represents just about 15% of JNJ's current mkt cap; the rest of it basically represents drugs and equipment. If Kenvue takes on the entire commitment to LTL funding, then the real distinction isn't, as many say, Goodco (JNJ) and Badco (LTL). It's Goodco (JNJ), shield (Kenvue), Badco (LTL) - maybe? For JNJ, losing Kenvue would be a momentous, eye-watering loss, but it wouldn't bring down the entire mothership. For a look at how endless legal battles in one corner of a conglomerate can bring down the whole bloody thing, cf. 3M over the last like 10 years; they, too, are attempting a spinoff. >https://www.reuters.com/legal/us-judge-penalizes-3m-bars-it-... > https://investors.3m.com/news/news-details/2022/3M-Announces...

Frankly, I just hope this legal wrangling doesn't somehow lead to even worse supply shortages in basic treatment (Tylenol, Motrin, etc). This winter was the first time I can recall heairng about shortages in cold medicine.

[Kon-Peki]

That’s interesting. I hadn’t heard about Kenvue. Their SEC filing says that one of the risk factors for Kenvue is:

> Legal proceedings related to talc or talc-containing products, such as Johnson’s Baby Powder, sold outside the United States and Canada (pursuant to the Separation Agreement, Johnson & Johnson will retain talc-related liabilities for products sold in the United States and Canada), including personal injury claims alleging that talc causes cancer, and other risks and uncertainties related to our historic or current sale of talc or talc-containing products (talc-based Johnson’s Baby Powder will be discontinued globally in 2023).

I wonder if J&J was doing this with the assumption that they had succeeded with LTL! If this ruling isn’t reversed, you have J&J with the US & Canada talc liabilities and Kenvue with the RoW talc liabilities!

https://www.sec.gov/Archives/edgar/data/1944048/000162828023...

[natroniks]

Great find, and fascinating given the talc cases I've seen are all US based. Maybe that's just a bias and more a reflection of the sources I read than fact. Going to the source you provided, I see they do undercut the obligation later on: > Johnson & Johnson will indemnify us for certain liabilities, including talc-related liabilities for products sold in the United States and Canada, but such indemnity may not be sufficient to protect us against the full amount of such liabilities or Johnson & Johnson may be unable to satisfy its indemnification obligations.

Also, JNJ is going to maintain voting control of Kenvue such that changes to these obligations might be in JNJ's control anyway...

[taneq]

I feel like the inclusion of the “outside of bankruptcy” clause followed by almost immediately filing for bankruptcy may be more than just a passing coincidence. Promise whatever you have to, as long as you have a get-out-of-jail-free card.