Johnson & Johnson is one of the wealthiest and most successful business entities on the planet. It has a stock market value of $430 billion and it is on the list of one of the 30 constituents of Dow Jones Industrial Average, reports Bloomberg News.
The stalwart in healthcare and consumer product goods boasts of having $25 billion in cash and it has earned a perfect credit rating from both Moody’s and S&P, being one of the two companies to have won this accolade. And this is one reason it came as a surprise when it wanted the protection of Charlotte’s federal bankruptcy court.
J&J is not bankrupt by itself but it has split off designed to go broke while making payments for legal liabilities. It is a part of an effort to manage more than 38,000 lawsuits where the majority of the people filing are women making claims that the company’s baby powder product, which is one of the oldest products of the company is responsible for causing ovarian cancer.
The company has already made payments worth $2.5 billion to about 20 women since the beginning of the year, reports Bloomberg News. The split-off new unit known as LTL Management is a subsidiary that has been set up to resolve issues related to lawsuits for the claims related to baby powder. Immediately after LTL was formed, it filed for Chapter 11 Bankruptcy.
The shuffling of the corporate will not make Johnson & Johnson go off the hook. The company has made a promise to inject at least $2 billion into the new subsidiary LTL Management, which is about half of what it had previously thought of spending to settle all cases.
However, this move could strengthen the position of Johnson & Johnson in settling lawsuits with the plaintiffs. Under the laws of Bankruptcy, LTL will be able to stop in its tracks all the lawsuits that it faces at least temporarily. Bankruptcy will also allow the company to establish a trust fund to satisfy claims that are legitimate for any kind of injury, even if any such cases arise in the future.
In other words, this move will help Johnson & Johnson make the baby powder liability predictable for the shareholders of J&J, who might be worried about the size of the loss and that of the uncertainty that looms.
Earlier this year, Johnson & Johnson has been defending every lawsuit that there is no correlation between ovarian cancer and baby powder. There has been no change in the approach of the company, and it is dealing with all the lawsuits in one place and not fighting cases all across the country and incurring millions on these lawsuits testified lawyer of J&J John Kim, reports Bloomberg News.
He also spoke to Craig Whitley, the US Bankruptcy Judge that it takes many years for the harmful effects to occur that are caused due to the harmful ingredients present in the baby powder and if the litigation carries on for the next 60 years and every claim must be fulfilled and victims keep on winning, it would not be possible for any company to survive.
The lawyers representing the victims of baby powder are saying that Johnson & Johnson is seeking the help of bankruptcy law so that it can stop clients from having their way in court and pay less for the lawsuits. According to them, if J&J requires protection then the entire company must file for bankruptcy, reports Bloomberg News.
To split the company is confusingly being referred to as a divisional merger, a J&J strategy. Texas Two-Step is the familiar name as it relies on the Lone Star State laws. The members of the Democratic Congress have advanced a bill that asks for a ban on the strategy. He said that such tactics allow the rich corporations to defy or exploit the rules that were written decades back to compensate the victims of asbestos poisoning.
The first step that J&J took was to scramble the corporate organization chart of the company and create a string of new businesses in Texas. These were then converted into two cousin companies that were owned by Johson & Johnson. One cousin inherits the J&J’s consumer business, which is worth billions of dollars, and the second cousin gets the lawsuits related to baby powder.
The second step that the company took around 72 hours later. It was the poor company the newly formed LTL Management when it switched from being a corporation in Texas to one in North Carolina, where this type of strategy was allowed by a judge before and then filed for bankruptcy.
For several decades, industrial companies have taken refuge in bankruptcy rules so that the asbestos poisoning cases could be resolved. At one point in time, asbestos was used in just about anything from insulation to automobile brake pads. Many lawsuits against J&J baby powder also claim that the product contains asbestos in it, reports Bloomberg News.
Asbestos has been found to cause severe lung disorders and can prove to be fatal. More than a dozen companies filed for Chapter 11 bankruptcy themselves or have put a separate unit tinted with an asbestos lawsuit so that it could set up a trust fund that would pay for the victims of the lawsuit.
A few of the examples include RPM International, makers of Rust-Oleum paint, specialty chemical giant company, WR Grace & Co, and Pittsburg Corning Corp.
The Texas Two-Step is, however, different. In this, a brand new company is set up without any business operations. A few other companies have sought the help of the Texas Two-Step procedure to file for bankruptcy like Georgia-Pacific being one of them. It helped them win a halt to the lawsuits that they were facing without the need to file for bankruptcy themselves.
Johnson & Johnson may face problems in making the strategy of divisional mergers work as it has designed. This is because questions are still being raised as to whether the parent company, namely, J&J will be able to benefit from any lawsuits in the manner in which LTL Management can.
Bloomberg News also reports that in a win for the judge of J&J, Whitley, he has decided as November 10th as the day for blocking all suits against the parent company for 60 days. But the case is now out of Charlotte to another judge. Whitley ruled that the case must be taken up in a federal court in New Jersey, the place where Johnson & Johnson has its base. The Texas Two-Step strategy has never been in any US court there.
But whatever is the outcome, it is quite likely that both sides are heading towards a protracted fight.
