Chairman of the Bayer board of management Werner Baumann was absolutely giddy the day the German pharmaceutical giant acquired St. Louis-based Monsanto back in 2018, telling whoever was paying attention, “Today is a great day: for our customers – farmers around the world whom we will be able to help secure and improve their harvests even better; for our shareholders, because this transaction has the potential to create significant value; and for consumers and broader society, because we will be even better placed to help the world’s farmers grow more healthy and affordable food in a sustainable manner.”
In its filing with the U.S. Securities and Exchange Commission, Bayer said it wanted to buy Monsanto in order “to reinforce Bayer as a life science company,” and “the acquisition of Monsanto would be a compelling opportunity to establish a leadership position in the agricultural industry, which has attractive long-term growth prospects.”
In hindsight, one can reasonably argue the acquisition is among the worst in corporate history, ranking right up there with Bank of America’s ill-fated acquisition of Countrywide Financial and Time Warner’s massive losses in the wake of buying America Online.
The boat anchor around Bayer’s neck is glyphosate, the active ingredient Roundup weed and grass killer. Groundskeeper Dewayne Johnson opened the litigation floodgates against glyphosate back in 2018 when he convinced a California jury that the weed killer contributed to his non-Hodgkin’s lymphoma. The San Francisco jury awarded Johnson $289 million, which was eventually reduced through Bayer litigation to $78 million.
Since the Johnson verdict, Bayer’s case load swelled to more than 100,000. Greek physician Hippocrates wrote in his classic tome Amorphism, “For extreme disease, extreme methods of cure, as to restriction, are most suitable.”
Let me translate: desperate times require desperate measures. It’s fair to say by now Bayer is desperate to put glyphosate litigation in the rear-view mirror. Just. Get. It. Over. That has the Bayer brain trust turning over every rock in the hopes of finding a golden ticket. Reportedly under one of the rocks up for consideration is the Texas two-step.
Two what?
The Texas two-step is a legal, although arguably dubious practice, of putting an end to liability associated with massive lawsuits. A company in legal distress uses the Texas law in state court to split their company in two — one company containing all its assets and the other company containing all its liabilities associated with tort claims. Then the spun off company files bankruptcy, relieving the other company of its lawsuit problems while avoiding having to submit its assets to the bankruptcy courts.
Proponents of the Texas two-step say creation of a spun-off affiliate to pay claims gives plaintiffs access to equal or greater assets in bankruptcy court as opposed to typical tort litigation.
Opponents of the two-step argue spun off affiliate companies are nothing more than shell corporations with no business operations of their own and as such are not properly Chapter 11 debtors, which under bankruptcy law requires a going concern to preserve.
Of late, the courts haven’t been very helpful in determining whether the Texas two-step is a legal bankruptcy maneuver.
Among the corporations engaged in the two-step is Johnson & Johnson, which is plagued by tens of thousands of mass tort claims associated with its talc-based baby powder. J&J spun off a company containing all the tort claims called LTL Management that it hoped would liberate its operating business from the bankruptcy process.
This past January, the Third U.S. Circuit Court of Appeals slammed J&J’s two-step maneuver, finding that LTL and J&J are not in “financial distress” and thus not eligible for bankruptcy. The court noted bankruptcy petitions must be filed “in good faith” for a valid bankruptcy purpose and not to obtain a tactical litigation advantage. A valid bankruptcy purpose presumes the filer is actually in financial distress — which the court ruled is not the case at LTL.
But in a different case last month, the U.S. Supreme Court denied certiorari on a Texas two-step case, that allows Georgia-Pacific spun-off affiliate Bestwall LLC to continue holding asbestos lawsuit liabilities.
It’s not unfair to say that there remains significant divergence in the courts as well as among legal scholars regarding the validity of the two-step.
But if times are desperate, well then, desperate measures need to be considered. And that’s likely what Bayer ag higher-ups have concluded in defending against a continuous massive flood of glyphosate lawsuits.
Bayer’s track record in defending itself in Roundup glyphosate tort cases has been spotty — losing just about as often as it wins.
Recently, Bayer has found itself on a losing streak. Since the end of last year, juries have awarded plaintiffs roughly $4 billion. And new cases keep cropping up all the time.
Bayer has burned through at least $10 billion of the $16 billion it earmarked to defend itself in glyphosate tort cases. And it still has more than 50,000 cases pending with new cases popping up seemingly on a monthly basis. It would not be a stretch to think Bayer lawyers are bone tired and wonder if they’ll ever find the end of the tunnel.
Bayer has been ducking questions about whether it is considering a bankruptcy filing predicated on the two-step, but newly minted Chief Executive Officer Bill Anderson wouldn’t flat out deny it, saying he is prepared to “explore every reasonable option to protect the company and protect our mission from the litigation industry.”
Which sounds a lot like Bayer is actively considering dancing the Texas two-step with Roundup plaintiffs. I wouldn’t be surprised if a new Bayer affiliate company pops up in Texas.
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