The Texas Two-Step: a Problematic Reframing of the Bankruptcy Code Toolkit or an Equitable Solution for Productive Conglomerates and their Mass Tort Claimants?

Large companies often have numerous divisions, each focusing on a unique aspect of the corporate mission for the benefit of the entire enterprise. There are situations, however, in which the parent company decides it is beneficial to “spin-off” one of these divisions from the rest of the company. The term “spin-off” generally refers to transactions in which a parent company creates an independent company and transfers to it a particular line of the parent’s business. The parent then distributes shares of the new company to the parent’s shareholders. The new, spun-off entity now has its own distinct management and mission.
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The reasons to implement a spin-off are varied. For instance, the parent company may recognize that certain investors are interested only in a particular line of business and not the parent’s enterprise as a whole; spinning off that line of business will unlock potential value by attracting new investors to the spun-off entity. Additionally, a spin-off will result in the appointment of new management for the spun-off entity, which can then focus solely on the new entity’s direction and operations. This frees up the parent’s management to focus on their own remaining business lines.

Executing a spin-off can be a complex undertaking. In every spin-off transaction, the issues can vary greatly depending on a variety of factors, including (i) the goals to be achieved by the transaction, (ii) how deeply the businesses were integrated prior to the spin-off, and (iii) the extent to which the parent will own the new entity after completing the spin-off. It should come as no surprise then that a substantial amount of legwork goes into executing a spin-off; the transaction must be effectuated through multiple steps involving the conveyance of assets, assumption of liabilities, and distributions to shareholders. For instance, one work stream requires a thorough review of existing agreements to determine whether they may be assigned from the parent to the new entity, or whether consents to assignment will be required.

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Reprinted from Norton Journal of Bankruptcy Law and Practice, Vol. 31 No. 2 (April 2022), with permission of Thomson Reuters. Copyright © 2022. Further use without the permission of Thomson Reuters is prohibited. For further information about this publication, please visit https://legal.thomsonreuters.com/en/products/law-books or call 800.328.9352.

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