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