Executive Summary
- We have previously discussed that Monsanto has considered using the Texas Two-Step liability management strategy to deal with its mass tort exposure related to PCBs and glyphosate.
- The U.S. Supreme Court’s recent decision in Purdue Pharma has thrown a wrench into this potential strategy when it rejected nonconsensual third-party releases.
- Monsanto could conceivably still attempt the Texas Two-Step strategy on the hope of negotiating a consensual settlement with a critical mass of claimants, but we think there’s a substantial risk that holdouts would stymie any such attempt.
- We are still waiting on updates regarding Monsanto’s preemption efforts, particularly the Third Circuit’s forthcoming decision in Schaffner v Monsanto.
- Don’t miss the final episode of this season’s CreditSights flagship podcast, “Know More, Risk Better”—which will be released on July 17 (available HERE) – that will cover the U.S. Supreme Court’s recent decisions in Purdue Pharma and Loper Bright (overruling Chevron).
Relative Value
Given we had a low probability weighting on the prospects of positive news for Monsanto at the U.S. Supreme Court, we are maintaining our Outperform recommendation given the current wide spreads on the bonds. Bayer’s focus on debt reduction in the coming years is positive for bondholders. We expect to see ongoing Glyphosate and PCB verdicts and opinions during the year, and we will assess each one when announced. While we also see a positive outcome in the Third Circuit as a low probability event, an opinion in Bayer’s favor would be a substantial victory for the company.
Texas Two-Step Update
We have previously discussed Monsanto’s litigation challenges concerning polychlorinated biphenyls (PCBs) and glyphosate, the active ingredient in Roundup. We assume our subscribers are generally familiar with these issues, and in particular, Monsanto’s consideration of the Texas Two-Step liability management strategy. For additional context and background, please refer to our previous reports entitled Bayer: Litigation, Preemption & The Texas Two-Step and Bayer: Considering Dancing The Texas Two-Step.
To recap, the Texas Two-Step strategy involves a divisional merger under Texas law that separates a company facing mass tort claims into two distinct legal entities. One entity assumes the liabilities and files for bankruptcy to resolve the claims, while the other retains all valuable assets. In our prior reports, we hypothesized that Monsanto could potentially employ this strategy: ‘Bad Monsanto’ would assume the litigation liabilities, and ‘Good Monsanto’ would keep the valuable assets and continue normal operations. Under this hypothetical scenario, Bad Monsanto would file for bankruptcy and litigation claims related to PCBs and glyphosate would be channeled to itself. Meanwhile, Good Monsanto would be shielded from future litigation through a non-consensual third-party release in exchange for a settlement payment. This payment would fund a recovery trust created in the Bad Monsanto bankruptcy case to compensate tort victims and creditors. (We discuss these concepts in detail in our two primers on mass torts and bankruptcy, which are available here and here.) If successful, this strategy would allow Monsanto to resolve its mass tort exposure in one forum—a bankruptcy court—rather than facing the traditional tort system, which involves case-by-case litigation with unpredictable outcomes and high costs (e.g., jury verdicts).
As we noted previously, the Texas Two-Step strategy has been attempted by several companies in recent years. Notable examples include Johnson & Johnson, which sought to manage its talc exposure through the bankruptcy of LTL Management, and 3M, which attempted to address liabilities associated with its earplug products through the bankruptcy of Aearo Technologies. However, both companies were unsuccessful because the bankruptcy cases for LTL and Aearo were dismissed. By contrast, the strategy has seen limited success in the case of Bestwall LLC, a subsidiary of Georgia Pacific facing considerable asbestos claims. See Bestwall: The Texas Two-Step Gets Political. Over the last year we have also opined that the Texas Two-Step strategy is shrouded in uncertainty and controversy, and that Monsanto’s chances of successfully utilizing the strategy are tenuous at best.
Our concerns about the propriety of the Texas Two-Step—and our view that Monsanto would likely have limited success utilizing such a strategy—have largely been confirmed by the U.S. Supreme Court’s recent decision arising from an appeal in the Purdue Pharma (“Purdue”) chapter 11 bankruptcy case. See U.S. Supreme Court Rejects Third-Party Releases. As we predicted, the U.S. Supreme Court held that the U.S. Bankruptcy Code does not authorize nonconsensual third-party releases, which are a necessary ingredient for protecting ‘Good Monsanto’ in our hypothetical outlined above.
Despite our reservations, we think it is still theoretically possible for Monsanto to attempt the Texas Two-Step strategy on the hope of negotiating a consensual settlement with a critical mass of claimants within the bankruptcy case of ‘Bad Monsanto.’ After all, that is basically what happened in Purdue, where nearly all creditors eventually supported the third-party releases and the reorganization plan. Monsanto could attempt to achieve a similar result, even if some creditors do not agree to the settlement. Nonetheless, we believe there would be significant risk that holdout creditors could be too large and could stymie the strategy, as one motivating factor bringing creditors to the negotiating and settlement table is the threat of a nonconsensual release. Of course, such a strategy also assumes that a Bad Monsanto bankruptcy would not be dismissed like with the attempts made by Johnson & Johnson and 3M. See Mass Torts and Bankruptcy Part 2: Other Cases; JNJ: Third Time’s the Charm?
In the end, the Purdue decision is clearly a setback for Monsanto (if it was even seriously considering this strategy at all), and all eyes and ears will be focused on its outstanding preemption strategy.
Preemption Update
Unfortunately, we do not have any updates on Monsanto’s preemption strategy because we are still waiting on the Third Circuit’s preemption decision in a case styled as Schaffner v. Monsanto. For more background and context, we invite our subscribers to read Bayer: 11th Circuit Denies Rehearing, which is our most recent update on Monsanto’s preemption efforts.
Upcoming Podcast: More on Purdue Pharma
We also encourage our readers to check out the final episode of this season’s CreditSights flagship podcast, “Know More, Risk Better,” which will be released on July 17, 2024. This episode, which is co-hosted by Winnie Cisar (Global Head of Strategy) and Zach Griffiths (Head of IG and Macro Strategy), with special guest Mark Lightner (Head of Special Situations Legal Research), delves into the U.S. Supreme Court’s decisions in Purdue Pharma and Loper Bright (overruling Chevron). The podcast is available HERE.
Mark Lightner, Esq.
Head of Special Situations Legal Research
mlightner@creditsights.com | LinkedIn
CreditSights
Andrew Brady
Head of Basics
abrady@creditsights.com | LinkedIn
CreditSights