Mike Spector

NEW YORK (Reuters) – Johnson & Johnson (NYSE:) on Friday said it would split into two companies, hiving off its consumer health division that sells Band-Aids and Baby Powder from its pharmaceuticals and medical devices business.

The historic breakup comes as J&J faces nearly 40,000 lawsuits alleging its Baby Powder and other talc products contained asbestos and caused cancer, which the company denies. Plaintiffs are women with ovarian cancer, and mesothelioma patients.

Chief Executive Alex Gorsky told The Wall Street Journal that the talc litigation did not play a role in the decision to break up J&J. It is expected to conclude the separation within 18-24 months.

In October, J&J undertook a separate corporate reshuffling aimed squarely at tackling its talc liabilities. Here is what J&J did:

TEXAS TWO STEP

Using Texas’s divisional merger law, the company’s Johnson and Johnson Consumer Inc business split in two, offloading talc liabilities into a newly created subsidiary. LTL Management LLC was the name of the subsidiary. It then relocated to North Carolina.

LTL applied for bankruptcy protection in Charlotte within days. In legal circles, the series of transactions is known as a “Texas two-step.”

J&J has offered to contribute $2 billion toward resolving remaining talc litigation as part of the newly created subsidiary’s bankruptcy reorganization.

CONTROVERSIAL LAW MOVE

Earlier this week, a North Carolina bankruptcy judge overseeing the proceedings transferred the case to New Jersey, where J&J is headquartered. He also halted talc litigation against J&J for 60 days, extending to the healthcare conglomerate a legal shield already provided to LTL, the entity under bankruptcy protection.

Plaintiffs’ lawyers have decried J&J’s latest move to grapple with talc liabilities, accusing the financially healthy company of manipulating the bankruptcy system without filing for Chapter 11 protection itself.

In Washington, Congressional Democrats have introduced legislation that would ban the use of divisional mergers to offload liabilities as J&J did, and also limit the ability of companies that have not filed for bankruptcy from obtaining legal protections extended to those under Chapter 11 court protection.

J&J, a blue-chip company with a market value exceeding $400 billion, has spent close to $1 billion defending against the talc litigation. The New Brunswick (NYSE)-based New Jersey company has spent nearly $1 billion more on settlements and verdicts, even though it won some cases.

REUTERS INVESTIGATED

A 2018 Reuters investigation found J&J knew for decades that asbestos, a known carcinogen, lurked in its Baby Powder and other cosmetic talc products. The company stopped selling Baby Powder in the U.S. and Canada in May 2020, in part due to what it called “misinformation” and “unfounded allegations” about the talc-based product. J&J maintains its consumer talc products are safe and confirmed through thousands of tests to be asbestos-free.

In June, the U.S. Supreme Court declined to hear J&J’s appeal of a Missouri court ruling that resulted in $2 billion of damages awarded to women alleging the company’s talc caused their ovarian cancer.