The Dance of the Texas “Two Step” – “Divisive Merger” Statute and Issues Relating to its Use in Bankruptcy to Resolve Mass Tort Liabilities

Over 30 years ago, the Texas state legislature adopted a corporate merger statutory scheme that permitted companies to adopt a plan for a “divisive merger”, a contradiction of terms if there ever was one, by which a company could divide its assets and liabilities between two companies. 28 years later, this so-called “Texas Two-Step” corporate reorganization strategy was used for the first time, coupled with a bankruptcy filing, to address mass tort liabilities, by having the company to which the tort liabilities were assigned file for chapter 11 relief while the company with most of the assets stays out of bankruptcy while attempting to avoid liability for the tort claims.

This program will discuss the Texas statute, as well as a similar Delaware statute for limited liability companies, the theories in favor of the legitimacy of this strategy to resolve mass tort claims through the bankruptcy process and the fraudulent transfer and other bankruptcy issues that have arisen in the cases filed in recent years attempting to use this strategy.