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.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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