POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT AND METHODS OF RISK MANAGEMENT IN THE ACQUISITION OF COMPANIES WITH ASBESTOS LIABILITIES KEN RIVLIN* & JAMAICA D. POTTS** INTRODUCTION In March 1998, when technology stocks were a hot pick and Enron was just an energy company, Sealed Air Corporation acquired Cryovac, a specialty-packaging division of W.R. Grace & Co. (“Grace”), for $4.9 billion.1 With its purchase of Cryovac, Sealed Air, the maker of Bubble Wrap, added the food packaging capabilities of Cryovac to its operations.2 At the time of the transaction, Grace was a defendant facing a substantial number of asbestos claims, but was able to manage its related liabilities. In 1999 and 2000, however, the number of asbestos claims against Grace and other major defendants increased dramatically. Under the burden of these claims, Grace filed for bankruptcy protection in April 2001.3 In the subsequent bankruptcy proceedings, creditor committees representing asbestos claimants brought an action against Sealed Air, alleging that Grace was insolvent at the time of * Environmental Counsel, Allen & Overy, New York; J.D., Boston University 1994; B.A., Brown University 1987. ** Associate, Allen & Overy, New York; J.D., Harvard Law School 2002, magna cum laude; B.S. Chemistry, Stanford University 1999, with distinction. 1 Sealed Air Corp., Current Report [Form 8-K], SEC File No. 001-12139 (Apr. 15, 1998) [hereinafter Sealed Air 1998 8-K]; Soma Biswas, Sealed Air Settles Asbestos Claims for $838 M, at http://www.TheDeal.com (Dec. 2, 2002), available at LEXIS, The Daily Deal; Sealed Air to Cut 750 Jobs and Take $112 Million Charge, N.Y. TIMES, July 28, 1998, at D4. 2 W.R. Grace and Sealed Air Lose Ruling in Fraud Suit, N.Y. TIMES, July 31, 2002, at C4. 3 W.R. Grace & Co., Annual Report [Form 10-K405], SEC File No. 001- 13953, at 1 (Apr. 16, 2001) [hereinafter Grace Bankruptcy 10-K]. See also Biswas, supra note 1. 626 POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 627 the Cryovac transaction and that the transfer improperly reduced the assets available to pay asbestos claims.4 Facing the risk of a trial verdict that could require the Cryovac transaction to be unwound, or Cryovac to pay up to $3.7 billion in compensation to Grace, Sealed Air settled at the end of November 2002.5 Once approved by the bankruptcy court, the settlement agreement will require Sealed Air to pay $512.5 million in cash and transfer nine million shares of its common stock (valued at approximately $340 million) to a trust established in the Grace plan of reorganization, which will make payments to asbestos claimants on behalf of Grace.6 The Sealed Air case illustrates one of the risks inherent in acquiring assets, even “clean” assets, from troubled companies, particularly companies with asbestos liabilities. Unlike Grace, neither Cryovac nor Sealed Air had ever manufactured or used asbestos-containing materials in their products, nor had they been subject directly to asbestos liabilities.7 Since the late 1990s, asbestos claims have been on the rise, leading to a number of high profile bankruptcies and accompanied by an increase in political, judicial, and corporate scrutiny. In September 2002, the United States Senate held hearings on asbestos litigation,8 and in early November of that year, the Supreme Court heard oral arguments concerning fear of cancer claims in asbestos actions.9 Fueling the interest in asbestos is a recent report issued by the RAND Institute 4 Sealed Air Corp., Quarterly Report [Form 10-Q], SEC File No. 001- 12139, at 12 (May 11, 2001); Biswas, supra note 1. 5 Shanon D. Murray, Letter from Delaware: Something in the Air, at http://TheDeal.com (Sept. 11, 2002), available at LEXIS, The Daily Deal; Biswas, supra note 1; See also infra Part III and the related discussion of the Sealed Air transaction and ensuing litigation. 6 Sealed Air Corp., Current Report [Form 8-K], SEC File No. 001-12139 (Nov. 27, 2002); Sealed Air Settles All Asbestos-Related Claims, N.Y. TIMES, Nov. 30, 2002, at C4; Biswas, supra note 1. 7 See, e.g., Sealed Air Corp., Annual Report Form [10-K405], SEC File No. 001-12139, at 8 (Mar. 23, 2001). 8 Asbestos Litigation: Hearing Before the Senate Committee on the Judiciary, 107th Cong. (2002) [hereinafter Senate Asbestos Hearing]. 9 Norfolk & Western Ry. Co. v. Ayers, No. 01-963, 2003 WL 888363 (March 10, 2003). See also, e.g., Linda Greenhouse, Asbestos Appeal Centers on Fear of Cancer, N.Y. TIMES, Nov. 7, 2002, at C18 (reporting on defense arguments against fear of cancer claims). The Supreme Court upheld the lower court decision permitting such fear of cancer claims to proceed. Norfolk & Western. Ry. v. Ayers, 123 S. Ct. 1210, 1215 (2003). POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 628 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 for Civil Justice, which details new trends in asbestos litigation.10 Several mass settlements, including Halliburton’s four billion dollar settlement of over 300,000 asbestos-related claims, have also kept asbestos litigation in the spotlight,11 and reform efforts have recently made the front page of the New York Times.12 This Article provides a brief overview of the Sealed Air proceedings and identifies some of the key issues that should be considered when contemplating transactions involving companies with asbestos liabilities. With asbestos liability in the United States estimated to exceed the costs associated with Enron, WorldCom, and September 11th combined13 and unsettling business expectations among corporate deal-makers such as Grace and Sealed Air, , there is an increased need for effective exposure control in corporate transactions. In the first two parts of this Article, we present a history of asbestos litigation and an update on current developments in asbestos litigation. Part I provides background information and describes asbestos usage and its possible health consequences. In Part II, we discuss six current trends of asbestos litigation in detail, including (1) increased claims; (2) diminished percentage of claimants with actual injuries; (3) increased exposure by more peripheral defendants; (4) larger verdicts and settlements; (5) increased bankruptcies; and (6) heightened interest in reform. In Part III, we describe the Sealed Air transaction structure, the history of asbestos claims against Grace, and the legal developments that led to the Sealed Air settlement. Part IV discusses lessons that can be drawn from the Sealed Air transaction for purchasers. In this Part, we evaluate the range of inquiries required for due diligence in the context of 10 The RAND Institute is a nonprofit research organization that focuses on policy and decision making. The Senate and the House have requested testimony from staff at the Institute on matters of asbestos litigation and the RAND report is considered objective and authoritative on the subject. See STEPHEN J. CARROLL ET AL., RAND INST. FOR CIVIL JUSTICE, ASBESTOS LITIGATION COSTS AND COMPENSATION: AN INTERIM REPORT (2002), available at http://www.rand.org/publications/DB/DB397/DB397.pdf (last accessed March 27, 2003) [hereinafter RAND REPORT]. 11 Halliburton Settles Asbestos Claims for $4 Billion, N.Y. TIMES, Dec. 19, 2002, at C4. 12 Alex Berenson, Asbestos Accord Said To Be Near, N.Y. TIMES, Apr. 24, 2003, at A1. 13 Business Center: Companies and Some Attorneys Banding Together to Place Limits on Asbestos-Related Liability Lawsuits (CNBC television broadcast, Sept. 9, 2002), LEXIS, CNBC News. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 629 asbestos acquisitions, and then discuss the basic and more complex considerations that may (and in many cases should) guide transaction structure decisions, as analyzed through the lens of Sealed Air. While complete protection from asbestos risk is can rarefly if ever be assured, searching due diligence and innovative deal structures may provide some comfort . Part V provides a final summary of the issues facing acquirer in light of mass tort litigation. I THE HISTORY BEHIND ASBESTOS LITIGATION A. Introduction to Asbestos Asbestos encompasses a family of naturally-occurring fibrous materials that have superior insulation and tensile strength properties.14 The most utilized form of asbestos is chrysotile, a white, curly fiber.15 Chrysotile is a component of roofing materials, plastics, and many materials exposed to high temperature conditions.16 The spiral nature of chrysotile differentiates the fiber from all other forms of asbestos, including the other two commonly used forms of asbestos, amosite and crocidolite, which have straight fibers and have been more tightly linked to disease.17 While all three major types of asbestos are still 14 U.S. DEP’T OF LABOR, OCCUPATIONAL SAFETY & HEALTH ADMIN., ASBESTOS FACT SHEET 1 (2002) [hereinafter ASBESTOS FACT SHEET]. 15 The Asbestos Inst., Chrysotile Products, at http://www.chrysotile.com/ en/products.htm (last visited March 13, 2003) (reporting that there are “still a significant variety of common-day and industrial uses of chrysotile containing products” including “roof sealants, textiles, plastics, rubbers, door seals for furnaces, high temperature caulking, paper, [and] components for the military and the nuclear industry”); See also PRODUCTS LIABILITY PRACTICE GUIDE, PART II SPECIFIC PRODUCTS, (E) TOXIC SUBSTANCES §78.01[a] (Matthew Bender & Co., Inc. 2002). 16 The Asbestos Inst., Chrysotile Products, supra note 15. 17 KATALIN DOBRA & DEP’T OF IMMUNOLOGY, MICROBIOLOGY, PATHOLOGY AND INFECTIOUS DISEASES, DIV. OF PATHOLOGY, KAROLINKSA INSTITUTET, HUDDINGE U. HOSP., MALIGNANT MESOTHELIOMA: AN EXPERIMENTAL STUDY WITH EMPHASIS ON PROTEOGLYCANS IN MESOTHELIAL CELL GROWTH AND DIFFERENTIATION 10 (2002); PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01; Dr. Corbett McDonald, Carcinogenicity of Fibrous Tremolite in Workplace and General Environments 1 (2001) (summary of paper presented at EPA Asbestos Health Effects Conference, May 14, 2001) (on file with authors). See also Asbestos Contamination: Hearing before the Senate Committee on POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 630 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 in use throughout the world, amosite and crocidolite are currently banned or restricted in some countries.18 Amosite asbestos is a short gray or brown colored fiber that was primarily used in insulation products.19 Historically, it has been mined in South Africa20 along with crocidolite, a blue asbestos form considered to be the most hazardous among asbestos fibers.21 Crocidolite was used in a variety of consumer products, including cigarette filters and in asbestos-cement water and sewer pipes that are still in place throughout the United States.22 With deposits pocketed throughout the world, use of asbestos began as early as 2000 years ago, and mining of the inexpensive mineral on an industrial scale became prevalent in the late 1880s.23 Manufacturers began to exploit the flame-retardant and insulating properties of asbestos in heavy industrial use in the 1940s and incorporated asbestos into as many as 3000 products24 by the early 1970s, when usage peaked for the industry.25 From automotive applications such as gaskets and brakes, to home uses such as roof shingles and attic insulation, the use of asbestos for commercial applications proliferated through most of the twentieth century and still continues today at a decreased rate.26 The United States consumes approximately 16,000 metric tons of asbestos each year, incorporating it into machinery, building materials, and other insulation products.27 Health, Education, Labor & Pensions, 106th Cong. (2001) (testimony of Dr. Richard Lemen, former Assistant Surgeon General of the United States) [hereinafter Lemen testimony]. 18 THE ASBESTOS INST., SAVING LIVES WITH CHRYSOTILE ASBESTOS! 4, available at http://www.chrysotile.com/documents/savinglives_en.pdf (last visited April 5, 2003). See also PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[c]. 19 PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[b]. 20 Id. 21 PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[c]. 22 Id. 23 The Asbestos Inst., What is Chrysotile?, at http://www.chrysotile.com/en/ chryso.htm (last visited March 13, 2003); BARRY I. CASTLEMAN, ASBESTOS: MEDICAL AND LEGAL ASPECTS 1-2 (4th ed. 1996). 24 EPA, The Asbestos Informer, at http://www.epa.gov/region04/air/asbestos/ inform.htm (last visited April 5, 2003). 25 See RAND REPORT, supra note 10, at 13. 26 See ASBESTOS FACT SHEET, supra note 14, at 1; The Asbestos Inst., Chrysotile Product, supra note 15. 27 The Asbestos Inst., Chrysotile Products, supra note 15. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 631 B. Hazards of Asbestos Asbestos is abundant, cheap, and useful, but it can also be extremely hazardous. While the scientific community debates the relative hazards associated with chrysotile, amosite, and crocidolite,28 all types of asbestos are classified by the United States Department of Health and Human Services as carcinogenic when in their airborne or “friable” state.29 Friability can occur when asbestos blocks are sawed, when rock is mined for asbestos, when asbestos is sprayed on a surface, or when a material containing asbestos crumbles or is otherwise exposed to the air.30 Such conditions may release asbestos dust that, unless effectively controlled, can become airborne and enter the lungs. Inhalation of asbestos fibers, especially from the straight fibrous family of asbestos that includes brown and blue asbestos, may increase an individual’s chance of contracting lung ailments such as mesothelioma, lung cancer, and asbestosis.31 Superficial damage to the lungs, such as pleural thickening, can also result from exposure to asbestos fibers.32 Physicians, scientists, and epidemiologists have studied the possible carcinogenic effects of asbestos inhalation since the early 1900s.33 Despite extensive research, however, asbestos exposure was not expressly linked to its signature disease, mesothelioma, until 1960.34 Mesothelioma is a fatal cancer of the outer lung and 28 PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01 ; Lemen testimony, supra note 17. Because of its curled structure, researchers hypothesize that chrysotile does not lodge in the lungs as effectively as its straight-fibered cousins. This relative lack of lung penetration may reduce the risks of disease. See, e.g., McDonald, supra note 17, at 2-3. For our purposes, we will use the term asbestos to refer to all known forms of the material. 29 NAT’L TOXICOLOGY PROGRAM, REPORT ON CARCINOGENS, CAS No.1332- 21-4 (10th ed. 2002). The Department of Health and Human Services established the National Toxicology Program in 1978. Nat’l Toxicology Program, NTP Mission, at http://ntp-server.niehs.nih.gov (last modified Nov. 15, 2002). 30 EPA, The Asbestos Informer, supra note 24. 31 See McDonald, supra note 17, at 2-3; DOBRA, supra note 17, at 10; RAND REPORT, supra note 10, at 17. 32 RAND REPORT, supra note 10, at 17. 33 PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[a]-[c]; CASTLEMAN, supra note 23, at 1-4, 49-50. 34 PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[c]; J. C. Wagner et al., Diffuse Pleural Mesothelioma and Asbestos Exposure in North Western Cape Province, 17 BRIT. J. INDUS. MED. 260, 269 (1960). See also RAND REPORT, supra note 10, at 14. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 632 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 chest cavity, and can occur up to 40 years after exposure to asbestos fibers. Mesothelioma tends to cause death within a year or two of onset.35 To date, asbestos inhalation is the primary and most well-established cause of mesothelioma.36 It has also been hypothesized that exposure to asbestos may cause lung cancer and cancers of the mouth, stomach, kidney, and other organs.37 Other health and environmental factors may exacerbate the effects of asbestos inhalation.38 For example, smoking and asbestos have been independently linked to lung cancer, but persons who both smoke and are exposed to asbestos are fifty times more likely to develop lung cancer than their nonsmoking and unexposed peers.39 Asbestos exposure may also result in asbestosis, a more common condition linked to the inhalation of fibers.40 Asbestosis is the scarring of lung tissue that results when the body secretes acid to dissolve the asbestos fibers lodged in the lungs.41 A progressive disease, asbestosis is a chronic condition that impairs breathing function in those who suffer from it. 42 Severe asbestosis can also cause death.43 Aside from serious injury, exposure to asbestos fibers may also create pleural thickenings or plaques on the lungs of those who inhaled the fibers. While not often impairing lung function, pleural plaques or thickenings represent scars on the outer lung membrane that alter the natural state of the lung and provide an indication that one has been exposed to asbestos. 44 35 RAND REPORT, supra note 10, at 17. 36 Id.; DOBRA, supra note 17, at 10. Erionite, a curly fibrous material not classified as an asbestos has been linked to mesothelioma cases in Turkey. See id. 37 RAND REPORT, supra note 10, at 17. See also PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01; CASTLEMAN, supra note 23, at 132-36. 38 RAND REPORT, supra note 10, at 17. 39 Id.; PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01  [f]. 40 RAND REPORT, supra note 10, at 17 41 See EPA, General Information: Asbestos—What is It?, at http://www.epa.gov/asbestos/asbe.pdf (last visited April 5, 2003). 42 RAND REPORT, supra note 10, at 17. 43 Id. See also PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.01[a]. 44 RAND REPORT, supra note 10, at 17-18. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 633 C. Total U.S. Asbestos Exposure Asbestos has created “the worst occupational health disaster in U.S. history.”45 In all, the RAND study estimates that twenty- seven million workers in the United States were exposed to significant amounts of asbestos dust from 1940 to 1979.46 An unknown number of the those who encountered the mineral in less risky environments may also have contracted or in the future be diagnosed with the disease.47 More than 225,000 asbestos-related deaths from cancers are predicted from exposures that occurred from 1940 to 1979.48 In the 1970s, the United States government began regulating asbestos, but a 1989 proposed ban of the mineral was overturned judicially.49 While asbestos consumption has declined, the material is still legally permitted in the United States for traditional uses such as roofing shingles and friction reduction materials.50 Because of the long latency of asbestos-related disease, known cancer claims stem primarily from exposures in the 1950s and 1960s; cancer claims arising from the peak usage years of the 1970s have yet to be brought. In his recent testimony before Congress, David Austern, the executor of the Manville Trust, which was established to pay claims against asbestos manufacturer Johns-Manville, predicted that defendants could face significant liability for another twenty-six years.51 The continuing use of asbestos appears likely to result in additional claims of asbestos exposure and related injury. 45 Id. at 16 (quoting Dennis Cauchon, The Asbestos Epidemic: An Emerging Catastrophe, USA TODAY, Feb.8, 1999, at 4). 46 Id. at 13. 47 Id. 48 Id. at 16. 49 Id. at 13. 50 Id.; The Asbestos Inst., Chrysotile Product, supra note 15. 51 Senate Asbestos Hearing, supra note 8 (testimony of David Austern, General Counsel, Manville Personal Injury Settlement Trust). The trust will operate until 2049. Id. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 634 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 II RECENT DEVELOPMENTS IN ASBESTOS LITIGATION A number of new trends mark the current state of asbestos litigation. After a dip in litigation in the mid-1990’s, the pace of asbestos litigation has skyrocketed.52 The type of plaintiff and defendant involved in asbestos litigation has also evolved. An increasing number of plaintiffs have no physical impairment. In the past, claimants tended to allege more severe asbestos-related injury.53 In addition, plaintiff’s attorneys are targeting more peripheral defendants, with over eighty-five percent of U.S. industries facing asbestos claims.54 With costs estimated to total between $200 billion55 and $275 billion,56 asbestos litigation has produced two other trends of note: an increased numbers of high- profile bankruptcies and intense and widespread calls for reform.57 A. Increased Filings Since litigation began in 1966, and as of the year 2000, at least 600,000 individuals have filed suit against asbestos manufacturers, employers, and other defendants.58 The overall pattern in claim filings shows a sharp increase in claims beginning in the late 1990s. After a period of stabilized claims rates, hundreds of thousands of new claims were filed on behalf of asbestos victims starting in 1999.59 For example, the Manville Trust reported a claims spike beginning in 1999, with claims 52 RAND REPORT, supra note 10, at vi, 40, 44. 53 Id. at 41, 44. 54 In Today’s UK Papers, Chem. News & Intelligence (Reed Bus. Info.), Sept. 10, 2002, LEXIS, Chemical News & Intelligence; RAND REPORT, supra note 10, at 49-50. 55 Tillinghast-Towers, a U.S. actuarial firm, calculated the $200 billion figure last summer. Press Release, Tillinghast-Towers Perrin, Tillinghast-Towers Perrin Estimates Claims Associated with U.S. Asbestos Exposure Will Ultimately Cost $200 Billion (June 13, 2001) (on file with author) [hereinafter Tillinghast-Towers Estimate]. 56 AM Best estimated losses at $275 billion in September 2001. Raji Bhagavatula et al., Asbestos: A Moving Target, BEST’S REV., Sept. 1, 2001, at 85. 57 See Business Center, supra note 13. 58 RAND REPORT, supra note 10, at 40-41. 59 Id. at 42. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 635 jumping from approximately 30,000 in the mid-1990s to 58,041 claims in 2000 and 89,438 claims in 2001.60 The trust received over 42,000 claims for 2002 by of the end of October of that year. This was despite a four-month moratorium on claims earlier in 2002.61 Other affected defendants have reported the recent filing of similarly large claims. Georgia-Pacific reported 32,200 new claims in the first nine months of 2002,62 and Swedish engineering company ABB’s Combustion Engineering unit reported over 29,500 new claims for 2002.63 While trying to manage new claims, many companies are wrestling with thousands of older claims that have yet to be resolved. Figure 1 lists the number of pending claims against some of the most heavily affected defendants in asbestos litigation. 60 Senate Asbestos Hearing, supra note 8 (testimony of David Austern). 61 Id.; Letter from Robert A. Falise, Chairman and Managing Trustee, Manville Personal Injury Settlement Trust, to Judge Jack B. Weinstein, U.S. District Ct (E.D.N.Y.), and Judge Burton R. Lifland, Bankr. (S.D.N.Y.) 2 (Oct. 30, 2002) (on file with authors). The moratorium was established to allow time for the trust to develop an electronic claims filing system. Senate Asbestos Hearing, supra note 8 (testimony of David Austern). 62 Wood, Paper Business Stays Slow, DULUTH NEWS-TRIB., Oct. 18, 2002, available at LEXIS, Minnesota News Sources. 63 Corporate and Business, 28 CONN. LAW TRIB., Oct. 14, 2002, at 4, available at LEXIS, Connecticut Law Tribune. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 636 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 FIGURE 1: SELECTED EXAMPLES OF PENDING ASBESTOS CLAIMS AGAINST PUBLIC COMPANIES COMPANY APPROXIMATE NUMBER OF PENDING CLAIMS 3M64 43,000 Combustion Engineering65 94,000 Dana Corporation66 116,000 Georgia-Pacific67 66,800 Halliburton68 329,000 Honeywell69 166,000 Pfizer Inc.70 117,957 Viacom71 125,600 B. Decreased Injuries The increase in claims filings observed by asbestos defendants is attributed primarily to an increased number of claims by unimpaired or only mildly-impaired plaintiffs.72 As an example, an unimpaired person exposed to asbestos may have developed pleural thickenings that are detectable on a chest x-ray but otherwise exhibit no symptoms of disease. A mildly-impaired plaintiff, in contrast, may have acough or shortness of breath that may be attributable, in whole or in part, to asbestos exposure. The RAND study calculated the number of claims associated with 64 3M CO., Quarterly Report, [Form 10-Q], SEC File No. 001-3285, at 47 (Nov. 14, 2002). 65 ABB LTD., [Form 20-F], SEC File No. 001-16429, at 97 (July 27, 2002). 66 DANA CORP., Quarterly Report, [Form 10-Q], SEC File No. 001-1063, at 15 (Oct. 30, 2002). 67 GEORGIA-PACIFIC, Quarterly Report [Form 10-Q], SEC File No. 001- 03506, at 25 (Nov. 12, 2002). 68 HALLIBURTON CO., Quarterly Report [Form 10-Q], SEC File No. 001- 3492, at 11 (Nov. 12, 2002). 69 HONEYWELL INTERNATIONAL, INC., Quarterly Report [Form 10-Q], SEC File No. 001-08974 (Nov. 13, 2002). 70 PFIZER INC., Quarterly Report [Form 10-Q], SEC File No. 001-03619 (Nov. 13, 2002). 71 VIACOM INC., Quarterly Report [Form 10-Q], SEC File No. 1-9553, at 19 (Nov. 13, 2002). 72 RAND REPORT, supra note 10, at 44. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 637 mesothelioma and other cancers and compared malignant claims to nonmalignant claims. The researchers determined that nonmalignant claims accounted for ninety percent of the annual claims filed each year, an increase from the eighty percent reported in the late 1980s.73 As an overall proportion of claims, asbestos- related cancers have decreased over the years.74 C. Peripheral Defendants In addition to changes in the type of plaintiffs involved in asbestos litigation, asbestos litigation is currently focusing on different defendants than in the past. The initial tier of defendants included asbestos manufacturers, insulation companies, and shipyards.75 Asbestos manufacturers, such as Johns-Manville, were named defendants early, followed by large shipyards and railroad companies that used asbestos in boilers and shipbuilding.76 As bankruptcies of the traditional defendants occurred, as will be discussed later in this Article, the plaintiff’s bar has targeted so- called peripheral or nontraditional asbestos manufacturers that used asbestos in their products. 77 In addition, workplace defendants that allegedly exposed workers to asbestos on-site have become named defendants in asbestos litigation.78 In 1983, approximately 300 defendants were implicated in asbestos suits; today that number is 6000.79 According to the RAND report, asbestos defendants are involved in seventy-five of the eighty- three classifications for industry affecting virtually all parts of the U.S. economy.80 Nontraditional defendants pay approximately sixty percent of the costs associated with asbestos liability.81 Reading “like the Fortune 500”, current defendants include companies such as Gerber Products Co., best known as a baby food manufacturer; Sears, Roebuck & Co., a department store; General Electric 73 Id. at 44-46. 74 Id. 75 Id. at 47. 76 See PRODUCTS LIABILITY PRACTICE GUIDE, supra note 15, §78.02; CASTLEMAN, supra note 23, at 225. 77 RAND REPORT, supra note 10, at 47-50. 78 Id. 79 Id. at 49. 80 Id. at 50. 81 Id. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 638 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 Company; Ford Motor Company and General Motors Corporation; Viacom Inc.; 3M Co.; and Exxon Mobil Corporation.82 Chemical and pharmaceutical manufacturers, such as Pfizer and the Dow Chemical Company, also have significant asbestos claims exposure.83 D. Large Settlements and Even Larger Verdicts As of 2000, asbestos claims have cost companies and insurers an estimated fifty-four billion dollars.84 Experts estimate that the total costs of asbestos liability, between $200 billion85 and $275 billion,86 will be shared by foreign insurers, U.S. insurers, and asbestos defendants. Foreign insurers are expected to pay thirty- one percent of the cost and U.S. insurers thirty percent, with asbestos defendants paying the remaining thirty-nine percent from their own funds.87 Large verdicts and settlements drive up the cost of asbestos litigation, both on an aggregate basis and for individual defendants. Statistical information available for jury verdicts shows a substantial cost to proceeding with litigation to the verdict stage. In 2001, thirteen jury verdicts in asbestos litigation exceeded ten million dollars, according to the National Law Journal, which tracks jury verdicts in the United States.88 In 1999, only one such asbestos verdict occurred.89 Verdicts for a single mesothelioma case have been recorded as high as $55.5 million,90 and one verdict reached $150 million for claims of lung disease without signs of cancer or asbestosis.91 Figure 2 lists some recent 82 The Asbestos Burden, Editorial, CHI. TRIB., Sept. 25, 2002, at 24, available at LEXIS, Chicago Tribune. 83 Id.; PFIZER INC., Form 10-Q, supra note 70. 84 RAND REPORT, supra note 10, at 53. 85 Tillinghast-Towers Estimate, supra note 55. 86 Bhagavatula et al., supra note 56, at 85. 87 Tillinghast-Towers Estimate, supra note 55. 88 Top Verdicts of the Year: The Big Get Smaller, NAT’L L.J., Feb. 4, 2002, at C3. See also Top Verdicts of the Year: Verdicts at a Glance, NAT’L L.J., Feb. 4, 2002, at C24-C26 (listing the top 100 verdicts of 2001 by dollar amount won). 89 Top Verdicts of the Year: The Big Get Smaller, supra note 88, at C3. Of the top 100 jury verdicts in the country in 2001, eight stemmed from asbestos claims. Top Verdicts of the Year: Verdicts at a Glance, supra note 88. 90 VerdictSearch, Jury Adds to Request, Awards Family $55.5 Million in Asbestos Case, at http://www.verdictsearch.com/news/specials/ 0204verdicts_hernandez.jsp (last visited March 27, 2003). 91 VerdictSearch, Six Asbestos Workers Awarded $25 Million Each, POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 639 large verdicts in asbestos litigation and includes information about the type of injury claimed for each verdict. The data shows that even nonmalignant conditions can be costly to companies facing asbestos liability. FIGURE 2: RECENT LARGE JURY VERDICTS COMPANY VERDICT # OF INJURY JURIS. SIZE PLAINTIFFS 3 M, AC&S $150 6 “Asbestos- MS and million: related lung Halliburton92 10/27/01 disease”; not cancer or asbestosis Halliburton $130 5 Asbestosis, TX and North million: colon cancer, American 9/12/01 lung cancer Refractories Company93 Kelly-Moore $55.5 1 Mesothelioma TX Paint94 million: 8/29/01 Harbison- $40.33 5 Mesothelioma MD Walker, million: AC&S and 12/5/01 A.P. Green95 U.S. $35.2 22 Asbestosis TX Gypsum96 million: 2/13/01 North $29.74 6 Lung cancer, TX American million: asbestosis Refractories 4/25/01 Company97 J-M A/C Pipe $20.5 1 Mesothelioma CA Company98 million: 4/6/01 Hopeman $19.8 3 Mesothelioma MD Brothers99 million: 3/20/01 at http://www.verdictsearch.com/news/specials/0204verdicts_johnson.jsp (last POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 640 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 Settlement costs for an individual plaintiff can also be high for asbestos litigation. Because settlements are often conditioned on confidentiality, information on settlement rates is difficult to obtain. Figure 3 provides examples of settlements received by mesothelioma plaintiffs, as reported by the plaintiff’s bar. Settlement values for an individual claim are typically lower than verdict amounts, but still may reach over one million dollars per claim. visited March 27, 2003). 92 Id. 93 VerdictSearch, Alabama Plaintiffs Awarded $130 Million By Texas Jury, at http://www.verdictsearch.com/news/specials/0204verdicts_bell_dresser.jsp (last visited March 27, 2003); Texas Jury Awards $130 Million to Five Plaintiffs in Asbestos Suit, ASBESTOS LITIG. REP., Sept. 27, 2001, at 3, available at LEXIS, Asbestos Litigation Report. 94 VerdictSearch, Jury Adds to Request, Awards Family $55.5 Million in Asbestos Case, supra note 90. 95 VerdictSearch, Baltimore Jury Awards $40M in Asbestos Case, at http://www.verdictsearch.com/news/specials/0204verdicts_cargile.jsp (last visited March 27, 2003). 96 Texas Refinery Workers Awarded $35.2 Million, NAT’L L.J., Feb. 26, 2001, at A12-A13. 97 VerdictSearch, Steel Workers and Survivors Obtain $29.7 Million Jury Verdict, at http://www.verdictsearch.com/news/specials/0204verdicts_ douglas.jsp (last visited March 27, 2003). 98 Top Verdicts of the Year: Verdicts at a Glance, supra note 88; Jury Awards $ 20.5 Million in Calif. Asbestos Case, NAT’L L.J., April 30, 2001, at A10. 99 VerdictSearch, Toxic Exposure-Asbestos-Shipyard, at http://www. verdictsearch.com/news/specials/0204verdicts_harlow.jsp (last visited March 27, 2003). POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 641 FIGURE 3: RECENT REPORTED INDIVIDUAL SETTLEMENTS 100 OF MESOTHELIOMA CLAIMS CLAIMANT’S OCCUPATION APPROXIMATE JURIS. SETTLEMENT Bystander in home renovation project $4,700,000 IL Construction worker and laborer $4,200,000 TX Navy electrician and Coast Guard $4,000,000 CA Yard supervisor Laborer near blast furnaces in a steel $2,500,000 KY mill Navy machinist mate and worker in $2,500,000 NY HVAC Lumber yard worker $2,400,000 CA Drywall sprayer $2,400,000 ID Plant worker $2,300,000 CT Electrician $2,000,000 MS While verdicts and settlements of individual claims may reach million dollar figures, claim aggregation, in the form of class actions or consolidated lawsuits, can put extreme pressure on a company to settle, causing considerable litigation losses. As an example, nearly 250 defendants, including large companies such as Honeywell, settled approximately 8,000 asbestos claims in September 2002 in a large consolidated action in West Virginia. 101 While the settlement price was not disclosed per defendant, plaintiffs’ counsel announced that the settlement was in the range of hundreds of millions of dollars.102 Halliburton’s settlement of 300,000 claims for four billion dollars overshadows the losses in 100 The following chart is derived from information culled from the website of Early, Ludwick, Sweeney & Strauss, LLC, a plaintiff’s firm with offices in New York and Connecticut. Early, Ludwick, Sweeney & Strauss, EARLY, LUDWICK, SWEENEY & STRAUSS, LLC - Asbestos Disease, Mesothelioma, Settlements, Trial Verdicts, at http://www.elslaw.com/client_settlement.htm (last visited March 27, 2003). 101 Jonathan D. Glater, Many Concerns Settle 8,000 Asbestos Suits, N.Y. TIMES, Sept. 25, 2002, at C12. 102 Id. Dow Chemical, one of the defendants that did not settle the case, was recently found liable for exposing “thousands” of its workers to asbestos. It faces a damages trial in 2003. W. Va. Jury Finds Union Carbide Liable in Asbestos Mass Trial, ASBESTOS LITIG. REP., Nov. 7, 2002, at 3, available at LEXIS, News. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 642 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 West Virginia.103 Recent aggregate settlements have also been proposed by ABB; as part of a possible bankruptcy plan, the Swiss company offered 110,000 plaintiffs $1.12 billion to settle asbestos suits.104 E. Increased Bankruptcies The substantial costs associated with the increase in asbestos claims have driven a number of firms into bankruptcy. Actuarial experts estimate that there have been at least sixty-four asbestos- related bankruptcies since asbestos litigation began,105 including recent bankruptcies by Grace, Federal-Mogul, and Owens Corning.106 The frequency of asbestos-related bankruptcies has also accelerated. Of the sixty-four so-called “asbestos” bankruptcies referred to above, twenty-two firms were initiated between January 2000 through Spring 2002. In contrast, only eighteen asbestos-related bankruptcies occurred in the 1990s and sixteen in the 1980s.107 One reason for the increase in bankruptcies has been the combination of the higher claim numbers, as discussed above, and the magnitude of the losses associated with such asbestos claims. At the time of its bankruptcy filing, W.R. Grace had already paid over $280 million in asbestos claims,108 and the company expects 240,000 claims in the future related to asbestos.109 Likewise, Federal-Mogul chose to enter bankruptcy after paying over $700 103 Halliburton Settles Asbestos Claims for $4 Billion, supra note 11, at C4. 104 Terry Brennan, For Asbestos Relief, ABB Unit Eyes Chapter 11, at http://www.The Deal.com , Jan. 7, 2003, available at LEXIS, The Daily Deal. 105 Letter from Jennifer L. Biggs, Chairperson, Mass Torts Subcommittee, American Academy of Actuaries, to Senator Orrin G. Hatch, Committee on the Judiciary, U.S. Senate 2 (October 2, 2002) (on file with authors). 106 Albert B. Crenshaw, High Court Rejects Delay on Asbestos; Big West Virginia Case Is Cleared for Trial, WASH. POST, Sept. 17, 2002, at E1 (providing a short history of asbestos litigation and bankruptcies). 107 RAND REPORT, supra note 10, at vii. 108 Susan Drumheller, Lawyers in Libby Case Bag Million: Grace Bankruptcy is Among the Largest in the Nation, THE SPOKESMAN-REV. (Spokane, Wash.), Sept. 8, 2002, at A1, available at LEXIS, The Spokesman-Review (reporting Grace had $282 million in asbestos-related expenditures in 2000 and filed for bankruptcy in April 2001). 109 David B. Siegel, Asbestos Liability: Where is it Going Next? 17 (Oct. 2002) (presentation by General Counsel, W.R. Grace & Co.) (on file with authors). POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 643 million in claims.110 In addition, amendments to the bankruptcy code in 1994 provided special forms of relief to companies facing asbestos liabilities, which may make bankruptcy more appealing than continuing litigation of asbestos claims. The asbestos bankruptcy provisions allow companies to create a bankruptcy trust that is specifically designed to pay asbestos claims, both those that have accrued at the time of filing and claims that arise in the future.111 Asbestos claimants must look to the trust for compensation and are generally not allowed to make claims against the post-filing debtor or acquirers of the debtor or its assets.112 F. Current Reform Efforts For at least 15 years, Congress has reviewed asbestos legislation but has not adopted substantial reform except in the area of bankruptcy.113 Currently a number of asbestos reform bills are pending in front of Congress and propose (1) to institute physical injury requirements for claimants, adjust the appropriate statute of limitations for bringing claims, require proportional rather than joint and several liability, and permit ready removal to federal courts of asbestos claims under certain conditions.114 (2)to ban asbestos use,115 (3) to provide funding for Libby, Montana, a community heavily affected by asbestos,116 and (4) to give tax relief for asbestos claim payments.117 110 Terry Brennan, Asbestos, Debt Drives Federal-Mogul Under, at http://www.TheDeal.com, Oct. 1, 2001, available at LEXIS, The Daily Deal. 111 Samuel Issacharoff, “Shocked”: Mass Torts and Aggregate Asbestos Litigation After Amchem and Ortiz, 80 TEX. L.R. 1925, 1938 (2002) (discussing the impact of 11 U.S.C. § 524(g), a provision that allows a bankrupt company to create a separate fund for asbestos claims); 11 U.S.C. §524(g) (2000). 112 Issacharoff, supra note 111, at 1938; 11 U.S.C. §524(g)(3)(A)(ii) (2000); Ralph R. Mabey & Peter A. Zisser, Improving Treatment of Future Claims: The Unfinished Business Left by the Manville Amendments, 69 AM. BANKR. L. J. 487, 499 (1995) (noting that the amendments prevent successors from assuming liability solely by purchasing the assets of the debtor or the trust). 113 Senate Asbestos Hearing, supra note 8, at 10 (statement of Jennifer L. Biggs, Chairperson, Mass Torts Subcommittee, American Academy of Actuaries) [hereinafter Biggs statement]. 114 Asbestos Compensation Fairness Act of 2003, H.R. 1586, 108th Cong. (2003). 115 Ban Asbestos in America Act of 2002, S. 2641, 107th Cong. (2002). 116 Libby Health Care Act, S. 3136, 107th Cong. (2002). 117 S. 1048, 107th Cong. (2001); H.R. 1412, 107th Cong. (2001). POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 644 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 Filings by unimpaired plaintiffs have created an apparent split in the plaintiff’s bar, with at least one prominent plaintiff’s attorney counseling for Congressional intervention to limit such claims.118 Individuals exhibiting mild asbestosis or with non- impairing pleural thickenings often file claims because of restrictive statutes of limitations or out of concern that the defendant responsible will be unable to pay its claims.119 Entrepreneurial lawyering has also been blamed, as attorneys set up free lung screenings and advertise for new claimants on the internet and on television.120 According to critics, the increase in unimpaired claims leads to decreased compensation for those with serious asbestos-related injuries, such as mesothelioma. Reform efforts advocate limitations on unimpaired claimants, proposing medical criteria to eliminate claims by the non-injured or claims based on fear of cancer or future disease.121 In addition, key reform components typically include extensions of the statutes of limitations for asbestos-related diseases and limits on punitive damages. 122 Such reforms would address concerns over “fear of cancer claims” and other payments to unimpaired claimants that reduce and delay payments to those suffering from more severe asbestos-related injuries. In addition, other reform groups call for limitations on case consolidation, successor liability, and forum shopping.123 Some state reform efforts have also been considered, including limitations on punitive damages and jurisdiction restrictions to combat the perceived problems with the current 118 Compare Senate Asbestos Hearing, supra note 8 (testimony of Steven Kazan) with Senate Asbestos Hearing, supra note 8 (testimony of Frederick Baron). Kazan represents cancer victims in asbestos suits and argues for limitations on unimpaired claims: The asbestos companies are really cash cows that we should care for and cultivate so we can milk them for years as we need to. But I have colleagues who’d rather kill them, cut them up and put them on the grill now. We’d all have a great time, but there are people who will be hungry in five years. Lisa Girion, Firms Hit Hard As Asbestos Claims Rise, L.A. TIMES, Dec. 17, 2001, at A1 (quoting Steve Kazan). 119 Plaintiffs’ Bar Now Opposes Unimpaired Asbestos Suits, NAT’L L.J., Apr. 1, 2001, at B14; Girion, supra note 118, at A1. 120 Senate Asbestos Hearing, supra note 8 (testimony of Steven Kazan); Girion, supra note 118, at A1. 121 See, e.g., The Asbestos Alliance, Proposed Legislative Solution, at http://www.asbestossolution.org/solution.html (last visited March 28, 2003). 122 See Biggs statement, supra note 113, at 7. 123 Id. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 645 wave of asbestos litigation.124 One prominent asbestos reform effort being considered collectively by affected companies, insurers, and a small, bipartisan group of United States Senators is the creation of a $100 billion privately financed trust.125 The trust would would compensate asbestos victimsas their claims arose,126 while barring individual lawsuits. The trust planwould permit recovery based on injury, with the most impaired claimants receiving compensation first.127 Although opposition is expected, it has been reported that the American Trial Lawyers of America will not to oppose the trust if, among other things, it offers payments similar to the net amounts that victims currently receive.128 III A CASE STUDY: W.R. GRACE AND THE SEALED AIR LITIGATION A. Grace’s Asbestos Woes Grace acquired most of its asbestos liability in 1963, when it purchased the Zonolite company.129 As part of its operation in Libby, Montana, Zonolite mined vermiculite, which is used in assorted fire proofing and insulation products.130 Though vermiculite is unrelated to asbestos, one of the contaminants found in the vermiculite mine was a straight fibered form of asbestos known as tremolite. 131 In mining the vermiculite, workers were allegedly exposed to tremolite, which was inadvertently incorporated into insulation and other products.132 Scientists 124 Ken Ellingwood, Mississippi Curbs Big Jury Awards, L.A. TIMES, Dec. 4, 2002, at 1. 125 Berenson, supra note 11, at A1. 126 Id. 127 Id. 128 Id. 129 Siegel, supra note 109, at 10-12. 130 Drumheller, supra note 108, at A1. 131 Feds Fear Asbestos Poisoning Spread Beyond Montana, SEATTLE POST- INTELLIGENCER, June 21, 2002, at A10, available at LEXIS, Seattle Post- Intelligencer. See also McDonald, supra note 17, at 3; Grace Bankruptcy 10-K, supra note 3, at 13-14. 132 Feds Fear Asbestos Poisoning Spread Beyond Montana, supra note 131. See also McDonald, supra note 17, at 3; Grace Bankruptcy 10-K, supra note 3, at 13-14. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 646 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 hypothesize that tremolite rivals blue asbestos in carcinogenicity133 and tremolite exposure forms the basis of many of the claims experienced by Grace.134 In addition to bodily injury claims, Grace experienced a significant number of property claims demanding payment for the removal of insulation containing asbestos and restoration of affected properties.135 From 1995 through the time of its sale of Cryovac in 1998, Grace was named in a total of approximately 120,000 asbestos claims.136 Toward the end of the 1990s, the pace of new claims increased for Grace, as it did for many other asbestos defendants.137 Grace received approximately 50,000 new claims in 2000, nearly double the number of claims received in 1999, and experienced an increase in bodily injury claims of approximately eighty-one percent.138 This increase in new claims, stemming both from a rise in the number of unimpaired claimantsand the willingness of courts to permit claims by thousands of asbestos claimants who were not sick, created an increasing burden on Grace’s finances.139 Faced with these worsening difficulties, Grace filed for bankruptcy with the United States Bankruptcy Court for the District of Delaware in April 2001.140 At the time it filed for bankruptcy, W.R. Grace had already paid over $280 million in asbestos claims associated with its mining operations in Libby.141 B. The Cryovac Transaction The sale by Grace of its Cryovac business was structured as a “Morris Trust” transaction.142 Morris Trust transactions are used as a way for corporations to dispose of appreciated assets or 133 See McDonald, supra note 17 , at 3-4. 134 See Grace Bankruptcy 10-K, supra note 3, at 13-14, F23-F24. 135 Id. at 11. 136 Siegel, supra note 110, at 18. 137 Id. 138 Grace Bankruptcy 10-K, supra note 3, at 1, 12. 139 See supra Part II.B; See also Grace Bankruptcy 10-K, supra note 3, at 12. 140 Grace Bankruptcy 10K, supra note 3, at 1. 141 Drumheller, supra note 108, at A1. 142 Soma Biswas, Sealed Fate?, at http://www.TheDeal.com, Sept. 12, 2002, available at LEXIS, The Daily Deal [hereinafter Biswas, Sealed Fate?]; In re W.R. Grace & Co., 281 B.R. 852, 868 n.5 (Bankr. D. Del. 2002). See also Sealed Air 1998 8-K, supra note 1. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 647 businesses without incurring tax liability on the built-in gain.143 They are accomplished by spinning off the business that is not to be acquired to the stockholders in a tax-free transaction, leaving the old corporation consisting of only the assets to be sold. Following the spin-off, the acquirer then merges with the old corporation, which now consists of only the assets to be disposed of, in a stock-for-stock merger.144 Diagram 1 follows the transaction undertaken by Grace and Sealed Air. In the case of the Grace-Sealed Air transaction, Grace spun out its specialty chemical business (i.e., the business to be retained by the Grace stockholders and the business that had the historical asbestos liabilities) to its stockholders and called the new company New Grace, as shown in Steps 1 and 2 of the diagram.145 In the next step of the transaction, represented by Step 3 of the diagram, the “old Grace,” consisting only of Cryovac, the business to be sold, merged with Sealed Air.146 In the acquisition, Sealed Air and Cryovac paid approximately $1.2 billion in cash to New Grace.147 In addition to cash compensation, the shareholders of Grace, who originally owned stock in Grace at the time when Grace contained both the specialty chemical business and Cryovac, received shares of Sealed Air common stock and preferred stock representing sixty-three percent of the outstanding shares of Sealed Air.148 The value of the Sealed Air stock, approximately $3.7 billion, accounted for the remaining purchase price for Cryovac.149 At the end of the transaction, New Grace was renamed to Grace and the Sealed Air-Cryovac entity became Sealed Air.150 The final resulting structure from the Morris Trust is shown below in Step 4 of Diagram 1. The transaction documentation included indemnification provisions in which New Grace agreed to indemnify the old Grace against any asbestos liabilities. 151 143 Peter C. Canellos, New IRS “Morris Trust” Regulations Bring Some Clarity, But Caution Still Advised, THE M & A LAWYER, June 2002, at 15. 144 See Canellos, supra note 143, at 15; Biswas, Sealed Fate?, supra note 142. 145 Sealed Air 1998 8-K, supra note 1. 146 Id. 147 Id. 148 Id. 149 Id. See also Sealed Air to Cut 750 Jobs and Take $112 Million Charge, supra note 1. 150 Sealed Air 1998 8-K, supra note 1. 151 W. R. GRACE & CO. ET AL., DISTRIBUTION AGREEMENT 23-24 (Mar. 30, 1998). POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 648 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 DIAGRAM 1: THE CRYOVAC TRANSACTION Step 1. Grace owns two types of assets: assets it wants to keep (A) and Cryovac (CY). Grace shareholders CY A Old Grace Step 2. Grace spun off A into New Grace. CY remained part of the Old Grace. Grace shareholders received pro rata stock in New Grace. Grace shareholders CY A Spin-off Old Grace New Grace POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 649 Step 3. Sealed Air then merged with the Old Grace, i.e. CY, retaining the name Sealed Air. New Grace, which contains A, is renamed Grace. Sealed Air shareholders race G shareholders race G shareholders SEA LED Grace AIR CY ith ) (w A Merger ld race O G Step 4. After the transaction, Grace shareholders owned 63% of Sealed Air, Sealed Air shareholders retained 37% of Sealed Air stock, and Grace itself received $1.2 billion. S ealed A ir shareholders G race shareholders 63% 37% SEALED A IR G ra c e (w ith C Y ) (w ith A) $1.2 billion POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 650 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 C. The Sealed Air Fraudulent Conveyance Case In Grace’s bankruptcy, creditor committees were formed to divvy up the assets of Grace and determine the allotments each should receive. In March 2002, the committees representing asbestos claimants in the Grace bankruptcy proceeding brought an action against Sealed Air seeking recovery of Cryovac.152 In addition to demanding reconveyance of Cryovac, the creditor committees sought punitive and compensatory damages as a result of the transfer. The chief allegation was that Grace fraudulently transferred Cryovac to Sealed Air.153 The fraudulent conveyance doctrine generally prevents an insolvent corporation from selling assets for less than fair value before the corporation goes into bankruptcy. 154 Fraudulent conveyance law is typically governed by statute, with most states adopting the Uniform Fraudulent Conveyance Act (“UFCA”), the Uniform Fraudulent Transfer Act (“UFTA”), or minor variations of these acts.155 A successful fraudulent conveyance action may upset the settled expectations of the parties to a transaction by forcing the purchaser to reconvey its acquired assets.156 If a plaintiff cannot show that a seller intended to defraud its creditors, the plaintiff must typically demonstrate that the company was both insolvent at the time of the asset sale and that the seller received less than the reasonable equivalent value of the assets.157 Insolvency, the first element of a fraudulent conveyance, occurs when the company’s debts exceed the company’s assets at fair value at the time of the transaction.158 While the test for insolvency may appear to be quite simple, the determination of when a debt has been incurred may be difficult, as will be discussed below. 152 SEALED AIR, Quarterly Report [Form 10-Q], SEC File No. 001-12139, at 31 (May 14, 2002). 153 In re W.R. Grace & Co., 281 B.R. at 854-855; Biswas, supra note 1. 154 11 U.S.C. §548(a) (2003). 155 J. Maxwell Tucker, The Clash of Successor Liability Principles, Reorganization Law, and the Just Demand that Relief Be Afforded Unknown and Unknowable Claimants, 12 BANKR. DEV. J. 1, 9 (1995). 156 UNIF. FRAUDULENT TRANSFER ACT §7(a)(1) (1984). 157 See id. §§4(a)(2), 5(a). 158 See id. §2(a). POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 651 The second element of a fraudulent conveyance requires that the plaintiff show that the value received for the assets was inadequate. To determine whether reasonably equivalent value was received, courts typically analyze the fair market value of the acquired assets and compare that value to the consideration paid in the transaction.159 On July 29, 2002, Judge Alfred Wolin, the judge responsible for overseeing the Grace bankruptcy proceeding, issued an order that stacked the deck against Grace.160 In his order, Judge Wolin held that Grace’s solvency at the time of the transaction could be determined in light of claims made after the time of the transfer; in other words, Grace’s solvency at the time of the sale of Cryovac could be viewed in retrospect.161 At the time of the transfer, Grace had obtained expert estimates of its existing and future asbestos liabilities, taking into account historical claims rates, epidemiological studies and a variety of other factors.162 Based on these estimates and other factors, both Grace and Sealed Air believed, and continued to assert, that Grace was solvent at the time of the transaction.163 In concluding that post-1998 asbestos claims should be included in the solvency analysis, however, the court greatly increased estimates of Grace’s asbestos exposure at the time of the Cryovac transaction.164 In its decision, the court reasoned that post-1998 asbestos claimants had a right to payment as of the transfer date even if they themselves were unaware of their claim at that time.165 As the court explained in its ruling, exposures before 1998 created the claims faced by Grace after the transfer date: W.R. Grace’s product had already proven dangerous on the transfer date affecting tens of thousands, not hundreds. The post-1998 increase in the claiming rate was not an airplane falling out of the sky nor a melt-down in a reactor. Every element of liability was already present and had been for many years. Nor is this akin to all of an insurer’s policyholders dying 159 See, e.g., Walczak v. EPL Prolong, Inc., 198 F.3d 725, 731 (9th Cir. 1999); Leibowitz v. Parkway Bank & Trust Co. (In re Image Worldwide), 139 F.3d 574, 577 (7th Cir. 1998). 160 In re W.R. Grace & Co., 281 B.R. at 852 (Bankr. D. Del. 2002). 161 Id. at 869. 162 Biswas, Sealed Fate?, supra note 142. 163 Id. 164 Id. 165 In re W.R. Grace & Co., 281 B.R. at 862-63. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 652 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 in one year. W.R. Grace’s asbestos claimants, pre- and post- transfer, are not all dead, thankfully. But the Court has taken as a working assumption that many, and perhaps all, of the post- 1998 claimants had suffered a legally cognizable injury as of the transfer date. 166 By including post-acquisition claims, the court lightened the plaintiffs’ burden in showing that Grace was insolvent by increasing the amount of asbestos liabilities Grace owed at the time of the Cryovac transfer.167 As a result of the judge’s ruling, it became clear that there was a significant risk that Grace would be deemed to have been insolvent at the time of the Cryovac transaction.168 While Grace asserted that it could still prove solvency under Wolin’s test,169 it also faced a potential uphill battle on the second element for fraudulent conveyance: inadequate payment for the assets it sold to Cryovac. In the Sealed Air acquisition, Sealed Air paid $3.7 billion to the shareholders of Grace in the form of stock, but Grace itself only received $1.2 billion.170 Thus, most of the consideration in the Sealed Air transaction passed to the shareholders of Grace rather than to Grace itself. This left Grace with fewer funds available to satisfy the asbestos creditors than it would have had if Sealed Air had made its payment solely to Grace.171 Utilizing that reasoning, Grace was thus effectively paid $1.2 billion for an asset that should have fetched $4.9 billion. On November 27, 2002, a week before the trial was set to begin, Judge Wolin called a pretrial meeting and strongly encouraged the parties to reach a settlement.172 Facing the prospect of having to return Cryovac or pay Grace up to $3.7 billion to fund future asbestos claims, and notwithstanding its view that it would prevail at trial, Sealed Air agreed to settle two days 166 Id. at 865. 167 See Biswas, supra note 1; Biswas, Sealed Fate?, supra note 142. 168 See Biswas, supra note 1; see also Biswas, Sealed Fate?, supra note 142. 169 See Biswas, Sealed Fate?, supra note 142. 170 Sealed Air 1998 8-K, supra note 1. See also Sealed Air to Cut 750 Jobs and Take $112 Million Charge, supra note 1. 171 See In re W.R. Grace & Co., 281 B.R. at 868. Judge Wolin’s opinion addressed only the issue of insolvency. His discussion of inadequate payment, however, suggests that the judge may have considered the tax avoidance device of a Morris trust to place assets out of the reach of the asbestos claimants. 172 See Matthew Haggman, W.R. Grace Creditors Agree to $800 Million Deal, PALM BEACH DAILY BUS. REV., Dec. 3, 2002, at A1, LEXIS News. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 653 later.173 IV METHODS FOR RISK MANAGEMENT: HOW TO AVOID AN $853 MILLION POST-CLOSING PURCHASE PRICE ADJUSTMENT Sealed Air in effect saw the purchase price for Cryovac increase by $853 million more than four years after completing the transaction. While, as a technical matter, the court’s decision only applies to cases brought in jurisdictions assigned to the Third Circuit Court of Appeals (Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands), the Sealed Air result is a cautionary tale for any company contemplating the acquisition of a business from a seller that has asbestos liabilities or other “long-tail” environmental or tort liabilities. It is increasingly important to conduct careful due diligence on the seller, including liability and solvency valuations in the case of troubled companies, and to consider transaction structures that can minimize, if not completely eliminate, contingent litigation risk. While it may be difficult to completely eliminate all risk when acquiring companies tainted with asbestos liability, thorough due diligence and careful acquisition structuring may help to mitigate the risks associated with such acquisitions. A. Due Diligence As always, due diligence is important. Besides conducting traditional thorough investigation into the acquired business, buyers should carefully consider a seller’s financial and legal status. A telling example comes from the history behind Federal-Mogul’s asbestos litigation. Before its acquisition of Turner Newell, a car parts manufacturer, Federal-Mogul knew of the company’s asbestos exposure and yet undervalued the magnitude of the claims.174 By not accounting for the possibility of payments to unimpaired claimants, Federal-Mogul paid hundreds of millions of dollars more than expected and, for these and other reasons, plunged into bankruptcy.175 173 See Biswas, supra note 1. 174 Analysis: Adding Insult to Injury, ACCOUNTANCY AGE, Sept. 26, 2002, at 7, available at LEXIS, Accountancy Age. 175 John Wirebach, Asbestos Chokes Federal-Mogul Finances, Creates Investor Doubt, AFTERMARKET BUS., Sept. 1, 2001, at 11, available at LEXIS, News & Business. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 654 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 Similar acquisition woes affected Grace, which, as noted above, acquired the Zonolite company and its accompanying asbestos liability in the 1960s.176 With respect to asbestos, buyers should pay particular attention to the target’s asbestos claims profile, settlement and litigation history, insurance coverage, and financial reserves. 1. Claims Profiling The first step in investigating an asbestos-laden target is to assess its claims profile. Before even sitting down with the target, it is possible to get helpful preliminary information from public disclosures to the Securities and Exchange Commission, as well as from newspaper and internet sources, that contain information about claims exposure without putting the target on notice of the acquisition interest. Once the target has become involved, however, a more rigorous analysis of the claims profile can begin. Acquirers should consider the total pending and resolved claims against the target and analyze the annual and monthly claims rates. Remembering the lessons learned by Federal-Mogul, acquirers should also determine the “disease mix” of the claim, i.e. the types of injuries that are being alleged. Other considerations in claims profiling include evaluating the jurisdictions that have been the situs for the litigation. Certain jurisdictions, such asTexas and West Virginia, have liberal procedural rules that tend to favor plaintiffs or are known to have jury pools that have a history of making large plaintiff awards; claims originating in such states may expose the target to greater risk.177 Claims profiling also requires review of settlement rates and averages, broken down by the alleged harm. As part of the review of asbestos-related settlements, the due diligence team should inquire into the settlement and litigation strategy of the target. Defendants that fight every case can find that they have created a deep deposition or trial record that contains documents or materials that can be helpful to future plaintiffs. On the other hand, those tending to settle all or virtually all of the cases against them may find that this strategy in fact attracts additional claims, a strategy that amounts to “tossing chum into piranha-infested 176 Siegel, supra note 109, at 10-12. 177 See RAND REPORT, supra note 10, at 34-35. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 655 waters”.178 An evaluation of the plaintiff’s firm’s capabilities is an additional factor related to claims profiling and settlement strategy; the ability of a firm to aggregate and attract plaintiffs may increase pressure to settle claims. Considerations of claim scope and past strategy can be important factors in predicting future asbestos liability and allow acquirers to better understand the liability associated with a given acquisition. 2. Target’s Historical Association with Asbestos In addition to claims profiling, an understanding of the company’s history with asbestos is a necessary step for due diligence. As with claims profiling, newspaper and internet sources can provide a basic understanding of the underlying cause for asbestos litigation against the target. After the target has become involved in the deal, the due diligence team should next construct a corporate tree for the target and attempt to identify the current or former subsidiaries, properties, and operating divisions that are or were in the past responsible for asbestos-containing products or materials. Information about the production volume of asbestos-containing products, their intended markets, and the distribution networks employed will also provide some insights regarding the likely size of the potential claimant pool; in other words, how many individuals may legitimately allege exposure to asbestos at target’s facilities or in target’s products . Complicating the gathering of historical information can be a target’s reluctance to disclose “bad” facts or key documents. There is an incentive for sub-optimal disclosure by a target to an acquisition. Not only may more plaintiffs be attracted to the target should negative facts come to light, but asbestos liabilities frequently deter acquirers from purchase or result in large purchase price discounts. In addition, while companies subject to SEC reporting requirements must make certain disclosures, most companies are sensitive to the potential impact that such disclosures of potential asbestos liability may have on share price and otherwise the ability access money in the capital markets, and may look for ways to minimize any such public statements. 178 Mark Truby, Asbestos Ruined Federal-Mogul: Auto Parts Maker Never Made the Costly Lethal Fiber, DETROIT NEWS, Mar. 31, 2002, at 13A, available at LEXIS, Detroit News. POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 656 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 3. Insurance The next due diligence step is to evaluate the current insurance coverage of the target. The extent of coverage, whether such coverage is confirmed, and the amount of the deductible are items to explore in assessing the asbestos risk. An analysis of the insurer’s capability to pay may also be necessary. The insurance industry has currently paid out twenty-four billion dollars in asbestos claims and is predicted to face a reserve shortfall between ten and thirty-five billion dollars in the future. 179 Because many insurers have borne heavy losses paying asbestos claims, it is crucial to assess the solvency of the target’s insurers and likely ability or willingness to pay future claims. 4. Financial Reserves and Estimations of Asbestos Liability Finally, financial reserves and the reporting of asbestos claims should also be examined in the risk assessment process. Acquirers should carefully assess the assumptions underlying the predicted losses and the reserves that the target has set aside. For example, a company’s reserves may account for losses anticipated only over a short multi-year period, rather than for the complete liability horizon, which could stretch many years into the future. Other assumptions underlying sophisticated reserve estimates may include predictions about (i) inflation, (ii) numbers of claims (both in the aggregate and for individual claim types), (iii) changes in the “disease-mix” among claimants, (iii) settlement amounts (by claim type) and (iv) extent to which past settlements will permit claimants to make additional future claims if their conditions worsen. In addition, the acquirers should recognize that such estimates are subject to substantial additional uncertainties, including the potential amounts and impacts of any future adverse trial verdicts against the target, bankruptcies of other major defendants or reform efforts which could impact the timing and amounts of, and criteria for, future payments, and the ability and willingness of individuals who are not sick to demand compensation. Changes in one or more of these assumptions in particular reserve estimates could require significant adjustments, which in turn could distinctly affect the value of a contemplated 179 Keith M. Buckley, et al., Asbestos: Impact on the U.S. Insurance Industry, FITCHRATINGS, July 25, 2002, at 1, 5, available at http://www.fitchratings.com (last visited March 29, 2003). POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 657 transaction. B. Structuring a Transaction: Basic Lessons Corporate attorneys have traditionally used certain methods of structuring transactions that mitigate buyer responsibility for contingent liabilities.. These include acquiring assets rather than stock, using a special purpose acquisition vehicle for the purchase, and obtaining the strongest possible contractual protections. Those familiar and protective methods should remain important parts of the deal structuring toolkit when acquiring companies with asbestos liabilities. In addition, thought should be given to structures that minimize the potential for successful fraudulent conveyance claims. As outlined below, the Morris Trust structure may have helped to expose Sealed Air to liability by giving value to Grace shareholders rather than to Grace itself. 1. Asset Purchases Asset deals are generally preferable to stock deals, but are not always sufficient to avoid the liabilities of the seller. In a stock deal, the buyer assumes both the assets and the liabilities, stepping into the shoes of the seller and taking on any accompanying asbestos liabilities. In asset transactions, in contrast, buyers generally only acquire specifically enumerated assets, and assume only expressly identified liabilities. The availability of liability avoidance through the mechanism of asset purchasing is limited, however, by the well-established doctrines of successor liability180 and veil-piercing.181 For environmental matters and toxic torts, courts are more willing to impose liability on purchasers than in other contexts. 180 Successor liability has been defined as the following: A corporation may be held liable for the torts of its predecessor if (1) it has expressly or impliedly assumed the predecessor’s tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuance of the selling corporation, or (4) the transaction is entered into fraudulently. . . . See, e.g., Shamis v. Ambassador Factors Corp., 34 F. Supp. 2d 879, 897 (S.D.N.Y. 1999). 181 As a general rule, a properly formed company will shield its stockholders from liability for the corporation’s debts. However, courts may pierce the corporate veil in rare instances and assess liability to a stockholder if the subsidiary is undercapitalized, excessively intertwined with the parent, or has assets intermingled with the parent, to name a few triggers for the doctrine. See, e.g., Worth v. Tyer, 276 F.3d 249, 259-260 (7th Cir. 2001). POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 658 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 In structuring a transaction, choosing the assets to acquire becomes important because, essentially, “you are what you eat.” The goal in asset transactions is to purchase only the assets of a target that are free of asbestos liability. In making its purchase decision, the acquirer should consider the interaction of a “clean” subsidiary with the other businesses in the target’s portfolio. Past co-management, intermingling of assets, and other indications of interactions with a tainted subsidiary may subject an acquirer of a clean target to unexpected liability. 2. Special Purpose Acquisition Subsidiaries and Continued Viability of the Seller In arranging theacquisition, the acquirer may consider ring- fencing its purchase through the use of a special purpose acquisition subsidiary whose sole purpose would be to purchase and operate the acquired assets. In order to minimize the risk that a court would pierce the corporate veil and impose liability on the acquisition parent, this entity should be capitalized sufficiently to complete the acquisition and manage its ongoing operations, and scrupulously observe all corporate formalities (e.g., corporate filings and fees, board meetings, minutes, financial accounting and reporting, etc.). By structuring the transaction in this way, the acquiring parent company may be able to limit its potential exposure to the target’s liabilities to the initial investment amount. With an eye toward the various factors considered by courts in determining whether to impose successor liability on acquirer (either the acquisition subsidiary or the acquisition parent), it would be prudent to avoid, if possible, using the same manufacturing facilities, employees, management or product name. Purchaser should be careful not to hold itself out as a successor or continuation of Seller. If at all possible, Seller should be required or incentivized to continue to operate and/or remain viable after closing. While many of these steps may be difficult or impractical depending upon the goal of a particular transaction, it is important to keep in mind how a court might assess a purchaser’s post-closing operations in the context of a successor liability claim. In addition to the use of a special purpose subsidiary , the acquirer may attempt to require the seller to agree to remain in business, or only deal with sellers who are likely to remain viable for the foreseeable future. This can be important because where a POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 659 seller can fulfill the obligations of tort claimants or at least arguably do so, it is less likely that plaintiffs will look to another party to assume the seller’s obligations, or that a court will seek to impose liability on the acquiror in order to assure that tort claimants can be compensated. If the seller discontinues operations soon after completion of the transaction,, the court may determine that a de facto merger occurred rather than an asset sale,182 Leaving the purchaser responsible for liabilities it was planning to avoid. 3. Contractual Protections: Indemnity, Insurance, and Agreements on Strategy Of course, purchasers should always seek to the strongest possible contractual protections, including in particular a broad indemnity. In practice, an indemnity can only be as strong as the party backing it. Accordingly, it is crucial to seek protection from a solvent entity that is likely to be in existence and capable of managing claims for the foreseeable future. Where there are questions about the viability of the negotiated indemnity, purchasers may consider purchasing insurance. A number of products are available, which can be costly but may be appropriate in particular cases. Where the costs of insurance are prohibitive and indemnity protection is not likely to be sufficient, purchasers frequently seek a purchase price reduction or escrow. Given the inherent uncertainties in estimating long-tail contingent liabilities, negotiating the amount of a reduction, or the timing and amount of an escrow payment, can be extremely difficult and is, moreover, an approach that sellers will typically resist. Another contractual protection worth considering involves stepped-up purchaser involvement in the asbestos defense strategy. While idemnity claims management approaches can vary, it is typical of most agreements that the party providing the indemnification (typically, the seller) will manage the underlying claims, with some participation from the indemnified party (typically, the purchaser). Where the purchaser has qualms about how claims are being addressed, and fears that seller’s strategy is likely to result in seller’s bankruptcy, or in quick exhaustion of the indemnity limits, purchaser may seek contractual rights to become 182 See, e.g., Dobin v. Taiwan Mach. Trade Ctr. Corp. (In re Victor Int’l, Inc.), 278 B.R. 67, 83-84 n.23 (Bankr. D. N.J. 2002). POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 660 N.Y.U. ENVIRONMENTAL LAW JOURNAL [Volume 11 more involved, or even to control, the litigation defense. This can be a risky strategy, particularly where purchaser wishes to stay awary the asbestos plaintiffs’ target list and considering the successor liability concerns raised above. Nevertheless, it is a position worth considering in some instances, particularly where purchaser reasonably believes that the overall costs are not likely to affect its survival and that it can handle the defense more efficiently and cost-effectively than seller. 4. Fair Value Transactions In the wake of the Sealed Air case, anyone seeking to buy a business from a troubled seller should consider its position carefully before proceeding with a transaction that does not involve payment directly to the seller. The transaction structure chosen in the Cryovac acquisition appeared to impair Sealed Air’s ability to argue that Grace and its creditors received fair value for the business. In Sealed Air, most of the value was delivered directly to stockholders, instead of to Grace. The stockholder payment thus had the effect of reducing the assets available to asbestos claimants upon the bankruptcy of Grace. The Sealed Air case demonstrates that transaction structures that involve payment of consideration directly to stockholders - while tax efficient in some cases - may expose buyers to liabilities of sellers in circumstances where payment of the same value directly to the selling corporation may not. Thus, in structuring a transaction, it may be wise to consider structures that provide value directly to the target rather than to its shareholders if further protections are advisable against successor liability. CONCLUSION This Article summarizesthe history of asbestos litigation, current trends, and possible risk management solutions for would- be acquirers of asbestos-tainted businesses and assets. Notwithstanding the recent surge in asbestos reform activity, asbestos litigation and liability will likely continue to impact corporate America for the foreseeable future. While legislative solutions are possible, it is impossible to predict their timing, or whether they they will achieve their intended purpose. Accordingly, corporate deal makers simply cannot assume that the problem will go away. Before proceeding with any transaction POTTS-RIVLIN MACRO 1 4/28/2003 2:05 PM 2003] NOT SO FAST: THE SEALED AIR ASBESTOS SETTLEMENT 661 potentially involving asbestos liabilities, purchasers must carefully assess the potential risks and, to the extent possible, structure transactions and conduct their post-closing operations in ways that will mitigate potential related liabilities to the maximum extent possible. While absolute protection is difficult if not impossible to achieve, with careful planning, the likelihood of inadvertently assuming massive asbestos liabilities can be reduced.
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