Multinational bankruptcy: where complexity is a feature, not a bug
Anthony DeWitt assesses the legal implications of a multinational company falling into bankruptcy, with a particular focus on the US.
No industry so profoundly affects the citizens of the world as the pharmaceutical industry, as evidenced by the Covid-19 pandemic. The scientific miracles wrought by researchers produced vaccines in record time. No one doubts the many significant contributions of these organizations.
Subject to regulation in every country where they do business, these companies often have organizational charts with more arrows than an archer’s convention, populated by multiple corporations, partnerships, and LLCs, in multiple countries.
This organizational structure serves two purposes. It allows pharmaceutical companies to respond to government regulators within the respective countries where they sell products. These firms also benefit from centralized business services like research and development, strategic planning, finance and overall administration.
In the US, several companies (e.g., Purdue Pharma, Endo Pharmaceuticals, Mallinckrodt plc), no doubt originally with good intentions, marketed opioid pain relievers that were stronger, and hence, more addictive than the prior generation of these drugs.
Ignoring the precautionary principle, and failing to consider Baron Acton’s Law, those at the tops of those organizations allegedly instructed their sales and detail people to ignore obvious signs of the drugs’ abuse in order to generate greater profits. Addiction pushed profits higher, but municipal, state, and private party litigation soon became a millstone around the necks of the companies; they were drowning in litigation.
Government action
When companies operating in the international space become embroiled in a bankruptcy driven primarily by government action on public health and plaintiff litigation driven by private law firms, the obvious answer, to ‘stop the bleeding,’ is to seek bankruptcy protection.
But here, the complexity of having multiple business organizations[1] in multiple countries becomes a feature, not a bug. The most important action in the bankruptcy occurs well before bankruptcy filing, in the planning stage. The availability of multiple organizations allows for shifting of cash away from those entities with the greatest potential for liability to other entities offshore that may or may not be subject to bankruptcy, and that even when they are, may not be discovered to have received transfers in time for creditors to file specific claims against those entities before the bankruptcy claims bar date.
Even when transfers are belatedly discovered, and brought before the bankruptcy court, ostensibly a court of equity, bankruptcy judges fail to employ the dictum that ‘he who seeks equity must do equity.’ Judges hate to disturb pre-filing settlement agreements that gave a wink and a nod to this shuffling of shekels. In fact, anything that tends to get in the way of the headlong rush to reorganization in these complex bankruptcies becomes a problem. Shareholders are ignored. Objectors complaining about special carve outs and insisting that the law be followed with respect to nunc pro tunc orders are ignored. The longstanding requirement that a contract be executory to be assumed fails to ignite a judicial response.
Suffering the most
In the respective countries where the bankrupt pharmaceutical company’s other entities sit, there is no incentive for those governments to police the actual business conduct that led to the bankruptcy, or question the transfer of billions of dollars in assets (what amounts to corporate money laundering en masse). The conduct and the corporate direction of it has never been driven by their countrymen or from their shores.
The corporate shareholder and smaller litigation creditors suffer the most from a multinational bankruptcy. They cannot overcome the onslaught of pleadings filed by lawyers, the bankruptcy court’s preference for reorganization over true equity. The US’ appellate courts resort to ‘Equitable mootness’ to avoid unwinding unlawful acts in bankruptcy because of ‘settled expectations.’
Since US bankruptcy laws seem to drive these large bankruptcies on a global scale, and are not set up to work with the laws of other nations, the time for an international treaty on multinational bankruptcy is long overdue.
Anthony L. DeWitt is an attorney with Bartimus, Frickleton, Robertson & Rader in Leawood, Kansas. bflawfirm.com
