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ANALYSIS: Opioid Bankruptcy Has a Surprise Public Benefit Debate

Nov. 12, 2020, 7:34 PM

The public benefit corporation (PBC) has found itself smack dab in the middle of one of the largest DOJ settlement agreements with a pharmaceutical manufacturer ever. Purdue Pharma has agreed to plead guilty to three felony counts related to its marketing and sales of the painkiller OxyContin. The company has also agreed to pay a criminal fine of $3.5 billion, a criminal forfeiture of $2 billion, and a civil settlement of $2.8 billion.

There is a hitch. This is all subject to approval by the bankruptcy court in the Southern District of New York overseeing Purdue’s Chapter 11 filing. And the settlement agreement requires Purdue to reorganize as a “public benefit company (or entity with a similar mission).”

That’s where it gets tricky. There are both public policy and legal arguments against the approval of this settlement agreement, but the outcome could be an incredibly effective way of combating the very problem — the opioid crisis — that the company is accused of facilitating.

Public Policy Argument

There are arguments that this settlement would not provide justice for the families and communities whose lives have been so negatively affected by the opioid crisis in the U.S.

Attorneys general from 25 states signed a letter to U.S. Attorney General William Barr arguing against the settlement agreement. They argued that if the government steps into the bankruptcy proceedings, it could give the appearance of a conflict of interest, and is possible evidence of mixed motives. According to the letter, the government should enforce the law against the perpetrators, not step in and give what could be viewed as special protection to the violating company.

Similarly, more than a dozen Democratic senators also called on Barr to block the plan. In a letter dated Nov. 10, the senators argued that the settlement ignores the objections of the states themselves to the arrangement, which the senators note would include the states “owning or operating a company that has devastated their communities with dangerous opioids.” The letter also relies on “the appearance of a conflict of interest,” which was argued by the attorneys general as well, and the precedent of another company, Insys Therapeutics, that was not restructured as a PBC, but instead sold to a private buyer. There is nothing in the settlement, however, that indicates that the states would own or operate the resulting PBC.

Bankruptcy Law Argument

There are also legal arguments that the proposed settlement violates bankruptcy laws. On Nov. 10, a group of bankruptcy professors, as amici curiae, filed a brief in opposition to the settlement agreement. The brief lays out, among other arguments, that the settlement circumvents bankruptcy code procedural protections and forces creditors to absorb costs that are more rightly attributable to the Sackler family, the indirect owners of Purdue via a number of trusts.

Another recently filed objection of non-consenting states asserts that the settlement violates bankruptcy laws because it “predetermine[s], and coerce[s] creditor support for, the post-confirmation continuation and structure of Purdue’s OxyContin business and the rebranding of an OxyContin manufacturer as an organization of ‘public trust.’” The motion states that the agreement is not properly decided pre-confirmation, and that it excluded a number of affected creditors from the decisionmaking process.

The Public Benefit

Setting aside, for the moment, all of the disagreement around this settlement, there may be a positive nugget amid the rubble. PBCs are constructed so that the company must consider stakeholder interests and the public benefit — in this case, potentially reducing opioid addiction and overdose fatalities — alongside the financial interests of shareholders. The DOJ press release goes further than the settlement agreement itself and adds that the PBC would be “owned by a trust” and function “entirely in the public interest.”

The press release states that one purpose of the newly organized benefit corporation would be to “aim to donate, or provide steep discounts for, life-saving overdose rescue drugs and medically assisted treatment medications to communities,” and that the “proceeds of the trust will be directed toward State and local opioid abatement programs.”

There are currently 37 states with enacted public benefit corporation laws and four with pending legislation. This means that in most states in the country, companies have the ability, or will soon, to incorporate as a public benefit corporation. If the bankruptcy court approves the settlement, it could be the first time a bankruptcy plan requires a company to reorganize as a PBC. If the court does not approve the settlement, it will still be interesting to see whether other companies attempt similar restructurings through bankruptcy proceedings. Using this entity form to rectify the harm done by corporate wrongdoers could be a seamless way to flip bad behavior into good.

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