GE, J&J Spinoff Work Begins for ‘Bevy’ of Outside Lawyers (1)

Nov. 19, 2021, 10:30 AMUpdated: Nov. 19, 2021, 5:38 PM

General Electric Co. and Johnson & Johnson have nearly three dozen outside lawyers already tackling the mountains of legal work necessary for the breakup of their companies.

Tasks involving disclosures, tax avoidance, contracts, liabilities, intellectual property, and executive compensation—among other things—are enough to overwhelm even the most robust in-house legal departments.

The effort requires “a bevy of lawyers to assist,” said Edward Adams, a University of Minnesota professor who specializes in corporate law. “There’ll be a tremendous amount of work for outside counsel.”

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GE has retained Paul Weiss Rifkind Wharton & Garrison as lead outside counsel for the spinoffs, and it has also hired Gibson Dunn & Crutcher. J&J has tapped Cravath Swaine & Moore and Baker McKenzie.

The lawyer teams are helping GE break off its healthcare business and its renewable energy, fossil fuel power, and digital units from its jet-engine division. They are assisting J&J’s plans to split its consumer products division from the drugs and pharmaceutical lines.

The moves by both companies, announced last week, come as corporate spinoffs have hit a 10-year high, according to a Bloomberg Law analysis. So far, 205 spin-off transactions from companies like Prudential Plc, Dell Technologies Inc., and L Brands Inc. have been announced, nearly reaching a 2011 record of 227 deals.

While legal considerations are unlikely to prevent GE and J&J from successfully executing their plans, the painstaking work of breaking up large companies brings a heavy legal lift even if all goes perfectly.

“It’s a little bit like surgically separating conjoined twins,” said New York Law School professor Jeffrey Haas. “You want to make sure each has the proper respiratory function, heart function, et cetera.”

The companies are counting on experience. J&J’s Cravath’s team includes corporate partners Robert Townsend III, who has worked on Anheuser-Busch InBev NV’s acquisition of SABMiller, and Jenny Hochenberg, who advised Time Warner Inc. in its $109 billion sale to AT&T Inc.

GE’s outside team includes Gibson Dunn corporate partner James Moloney, who aided St. Jude Medical Inc.'s merger with Abbott Laboratories and Kraft Foods’ acquisition of Cadbury Plc. Andrew Fabens, a Gibson Dunn capital markets partner, helped Petco Health & Wellness Co. and Ancestry.com go public.

GE has also retained Paul Weiss corporate partner Scott Barshay, who represented the company in its $21.4 billion sale of its biopharma business to Danaher Corp.

GE and J&J did not immediately respond to requests for comment.

Post Spin-Off

Haas said he expects GE and J&J to lean on outside firms for help with legal functions at the new public companies the spin-offs will create. “You have to make sure that when you separate these businesses, you do it in a way where they have the ability to thrive post spin-off,” he said.

Outside expertise will help GE and J&J avoid the few pitfalls that could exist, such as failing to prove a legitimate business purpose for the spinoffs. The lawyers will also help satisfy regulatory requirements of organizations like the Internal Revenue Service.

“The reason that you spent a lot of money to hire top notch tax firms in the spinoff is to make sure that the transaction will be tax free,” said Christine Kim, associate professor at University of Utah College of Law.

Internally, the companies will need to be careful about contracts, liabilities, and executive compensation as the new businesses are created.

“They have to be very thoughtful and very calculating—I use that word in a positive way—about how they split the assets, both consistent with the business missions of the various entities, but also contractual liabilities, what assets fit where,” Adams said. “Otherwise, it may be challenged as what’s called a fraudulent conveyance.”

The outside lawyers will also help ensure that the new public companies post spin-off will meet disclosure requirements of the Securities Exchange Act of 1934—all of which should be doable for the outside legal team.

“This is all about, ‘We’re trying to unlock value for our shareholders, or seek perceived value,’” Adams said. “I don’t see any legal stumbling blocks that are going to prevent that.”

—Data visualizations from ANALYSIS: YTD Spinoff Deal Count Is the Highest Since 2011 by Grace Maral Burnett.

(Adds Paul Weiss role as lead outside counsel in fourth paragraph, adds announced spinoffs in sixth paragraph. )

To contact the reporter on this story: Ruiqi Chen in Washington, D.C. at rchen@bloombergindustry.com

To contact the editor responsible for this story: Chris Opfer at copfer@bloomberglaw.com;
John Hughes in Washington at jhughes@bloombergindustry.com

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