‘The greatest innovation in the history of bankruptcy’

One thing to start: Elon Musk has confirmed on a video call with his advisers that he intends to close his $44bn acquisition of Twitter on Friday, potentially bringing an end to the turbulent acquisition process, according to people briefed about the matter.

In today’s newsletter:

How Jones Day made a fortune with the ‘Texas two-step’

Greg Gordon, a partner at Cleveland-based law firm Jones Day, didn’t mince his words when describing the benefits of the “Texas two-step”, the elaborate bankruptcy strategy he devised to help companies deal with mass tort claims.

“I, of course, think that divisional merger is the greatest innovation in the history of bankruptcy,” he told delegates attending a legal conference in Washington in April.

Gordon, who works out of the law firm’s Dallas office, is a veteran in the world of corporate restructurings.

In recent years, he has been marketing a highly lucrative legal strategy that has enabled Johnson & Johnson, Saint-Gobain, Trane Technologies and Georgia Pacific, which is owned by Koch Industries, to halt a torrent of asbestos-related personal injury litigation that could expose them to billions of dollars in damages, reports the FT’s Jamie Smyth.

3M has deployed a similar but slightly different bankruptcy scheme to handle claims that earplugs it sold to the US army caused hearing loss. 3M and J&J deny their products are responsible for injuries suffered by claimants.

The “two-step” got its catchy name from a Texas state statute that allows companies to split themselves into separate entities and ringfence all legal liabilities into one of them. The subsidiary then files for Chapter 11 bankruptcy and the parent funds a trust, which is established to cover the cost of a global settlement agreed with claimants.

Typically, all litigation is put on hold while the company and claimants engage in mediation overseen by bankruptcy courts. If a global settlement is agreed, the company benefits from a shield against all future personal injury claims linked to the defective product or drug.

Under the scheme the parent company can remain outside of bankruptcy, freeing it from restrictions commonly associated with Chapter 11 such as paying dividends to shareholders.

So far, the strategy has worked well for the companies that have deployed it, as well as Jones Day, which has earned more than $70mn in court-appointed bankruptcy fees.

It has also enraged personal injury lawyers, politicians and claimants, some of whom are very sick with cancers they allege are linked to asbestos exposure. Tort lawyers claim it is “perverting” the bankruptcy system and robbing their clients of the chance to be heard by a jury.

Adam Levitin, a professor of law at Georgetown University, said companies are “weaponising the bankruptcy system against mass tort victims” and without the pressure of trials can engage in a “breath-holding contest” over settlements.

Gordon, the architect of the “Texas two-step”, denies this, claiming the alternative path of litigating tens of thousands of tort cases resulted in a “lottery for claimants” and the “large majority” lost.

Two high-stakes legal actions involving J&J and 3M should soon determine whether these strategies are legal. If the US federal appeals court decides they are, it could “open the floodgates for others to follow suit”, according to Levitin.

That would be music to the ears of Gordon and his partners at Jones Day.

Adidas cuts ties with Kayne, finally

When Adidas struck a deal to partner with Kanye West almost a decade ago, it was quickly seen as a stroke of genius.

The deal put the German sportswear brand on the map and generated billions of dollars as West’s shoe designs quickly became its bestselling items.

But of late, the partnership with West, now known as Ye, has become more of a liability.

The rapper and fashion designer has displayed increasingly erratic behaviour, earlier this month wearing a shirt with the words “White Lives Matter” at Paris Fashion Week and shortly after posting anti-Semitic comments on social media.

West’s actions prompted luxury fashion house Balenciaga to ditch him and Instagram and Twitter to suspend his account. For Adidas, it took a little longer — the company announced it has cut ties with West on Tuesday, weeks after he made the comments, and said it did not “tolerate anti-Semitism and any other sort of hate speech”.

Pressure had been mounting on the company, whose founder belonged to the Nazi regime, to walk away from its lucrative contract with West.

Adidas had been able to turn the other cheek during other controversies stirred up by the musician, such as his bizarre meeting with then-president Donald Trump wearing a ‘Make America Great Again’ hat. That’s a testament to how much West has contributed to the brand’s popularity and success in the US.

While Adidas does not break down West sales, it has been a significant driver of its top line whether it is because people wanted to buy his shoes or because they became interested in the brand after his involvement.

The company said it expects to take an up to €250mn hit to net profit this year. Last week, it warned on profits for the second time in three months, saying net income was expected to reach €500mn in 2022.

The reality is Adidas would face a bigger cost sticking with West at this point. Turns out his claim that he can “say anti-Semitic things, and Adidas can’t drop me” was wrong.

No happy ending for Warner-Discovery deal

Any early enthusiasm surrounding Hollywood’s latest megamerger had evaporated several months ago. Since the $43bn merger of Warner with Discovery closed in April, the new management team has been searching for places to cut $3bn in costs, increasing the anxiety levels of an industry that has been in upheaval for at least five years.

Still, it was striking when Warner Bros Discovery quietly disclosed on Monday that it will have to write off as much as $2.5bn due to cancelling shows and movies. The deal’s architect David Zaslav has personified the new era of austerity in Hollywood, following a period of extravagance as streamers raced to build their products, inundating audiences with more television than ever before.

Under Zaslav’s watch Warner has cancelled high-profile projects including a nearly completed movie, Batgirl; JJ Abrams’s HBO series Demimonde; and a CNN streaming service. Batgirl’s directors Adil El Arbi and Bilall Fallah had publicly expressed disbelief with the decision.

These decisions are resulting in heavy near-term losses. In an SEC filing Warner said restructuring costs due to its merger with Discovery could total up to $4.3bn through 2024, including between $2bn and $2.5bn in charges because of “strategic content programming assessments”.

These charges are related to decisions not to move forward with shows already in development, pulling existing shows or movies from the HBO Max streaming platform, or changing the release strategy for programming, said a person close to the situation. The group is “overwhelmingly done” with these changes, the person said.

Lex’s take? “Media integrations are messy. WBD is attempting to smash two disparate companies together amid an economic slowdown and an advertising slump. Still, front-loading bad financial results is an age-old plot device to set up a happy ending.”

Maybe, adds DD.

Job moves

Ewen Stevenson, HSBC chief financial officer, is being replaced at the end of this year by Georges Elhedery, co-head of global banking and markets. Greg Guyett, formerly Elhedery’s co-chief, has been made chief executive of global banking and markets with immediate effect.

TPG has hired Pamela Pavkov as head of its TPG NEXT strategy to back new diverse-led alternative asset management firms. Pavkov comes from Jasper Ridge Partners.

Rightmove has appointed EQT Growth founding partner Johan Svanström as chief executive. He will replace Peter Brooks-Johnson, who stepped down after 16 years at the company.

Rothschild & Co has named Nasser Al Issa, the former investment chief of Saudi Agricultural and Livestock Investment Co, as head of Saudi Arabia while making Britain’s former top civil servant Mark Sedwill as chair of the region, per Bloomberg.

The Sovereign Wealth Fund Institute has appointed Lakshmi Narayanan, the former vice-chair and CEO of professional services group Cognizant, as chair.

Smart reads

Crypto demystified Read 40,000 words from Bloomberg’s Matt Levine on cryptocurrencies in this cover-to-cover issue.

Isle of Oligarchs A web of shell companies in the Isle of Man tax haven has helped obscure the wealth of sanctioned Russian oligarchs and made sanctions tougher to enforce, reports the WSJ.

ByteDance Investigations Internal probes led by ByteDance’s Chinese investigators into TikTok’s recently departed US security chief have created new concerns over the protection of user data, reports Forbes.

News round-up

ChemChina sells back 12% Mercuria stake (FT)

Amundi warns on hidden leverage in the financial system (FT)

EY Israel rejects break-up plan pushed by global bosses (FT)

Dax to lose most valuable company as Linde plans delisting (FT)

China’s wealthy activate escape plans as Xi extends rule (FT)

Royal Bank of Canada plans UK commercial banking push (FT)