No chief executive officer of a big company wants to file for bankruptcy if it is not strictly necessary.
There is a neater approach:
- You put the liabilities in a box. You create a new subsidiary, you put the product-that-kills-people business in that subsidiary, and you transfer the liabilities related to that product to the subsidiary. This is, in general, hard to do, but in fact Texas has a weird merger law that allows it: You can “merge” your company into two companies, one with the liabilities and one with the rest of the business.
- You have the box — the new subsidiary with all the product liabilities — file for bankruptcy. You get fair and consistent adjudication of the product claims, inside the box, and the rest of the company just goes along relatively normally.
This is called the “ Texas two-step .”