In Robins Case, the Bankruptcy Laws Worked
A. H. Robins Co., the pharmaceutical company facing almost 200,000 claims of injury because of the Dalkon Shield birth control device, will go into a bankruptcy court in Richmond, Va., today and choose one of the three corporate suitors willing to pay $3.1 billion or more for the company.
And if it seems odd that Robins, which has been denounced by a federal judge for “monstrous mischief,” should be contemplating takeover bids rather than liquidating its assets to pay claimants, credit the workings of the bankruptcy law and the courts that administer it.
The law is not perfect, but in the Dalkon Shield case it does appear to be securing for victims benefits that might otherwise not be available. At the same time, the law has allowed Robins to continue operating since 1985, when it sought protection from creditors in Chapter 11 bankruptcy, and it may even make possible a profitable settlement for Robins shareholders.
The Dalkon Shield, an intrauterine device made by Robins from 1971 to 1974, has been charged with causing pelvic infections and sterility for thousands of women and resulted in $530 million in liability insurance payments to 9,500 claimants even before Robins entered bankruptcy. Considering all that, the company isn’t doing badly these days.
It is being pursued by two American drug companies--Rorer Group and American Home Products --and a French firm, Sanofi S.A. Each bidder is willing to put $2.48 billion into a trust fund to settle Dalkon Shield claims and to pay at least $600 million more for Robins stock, a premium over its current price on the New York Stock Exchange.
Why do they want to do that? Because Robins has valuable brand name products, including Chap-Stick lip balm, Robitussin cough medicine and Sergeants flea and tick collar as well as a prescription drug business. But it was the bankruptcy court that made the bids so high. Judge Robert R. Merhige set $2.48 billion as the amount that would be needed to satisfy the claims; the company believes that they can be settled for $700 million less.
No Immediate Decision
Which is one reason the Robins board, led by members of the Robins family, which owns 41% of the stock, decided last week to accept the French company’s bid, and will so inform the court today. The Sanofi plan not only calls for letting the family continue to run the company, but stipulates that any leftover funds after claims have been satisfied should revert to the Robins company. The Rorer and American Home Products plans call for the leftover monies to be distributed among claimants in lieu of punitive damages, which are not permitted in a bankruptcy reorganization.
The winning bidder won’t be decided until at least Feb. 19, when the judge renders his decision, and legal committees representing both claimants and non-family shareholders will have much to say before that.
Shareholders prefer the plans of Rorer or American Home, which give them tradable stock, rather than the Sanofi proposal, which would create new stock of uncertain value. Claimants are impatient because all plans involve delayed payments--the French plan would settle claims over five years, the American companies over six or seven years.
Why the delays? To make the plans affordable. The bidders are taking advantage of the time value of money. That is, $2.5 billion paid out over so many future years is less than $2.5 billion put on the table today. The Rorer plan, for example, pledges to put $700 million into the trust fund now and ultimately to add $500 million more for a total of $1.2 billion. The assumption is that the money will earn more than 10% interest, turning $1.2 billion into $2.5 billion in seven years. The other bidders are making similar calculations about discounted cash flow and the tax deductibility of claims payments.
Delays and lawyers, tricky accounting and judges--wouldn’t claimants be better off if Robins were shut down tomorrow and its assets sold to pay off claims? No, they would not. The assets of the Robins company probably couldn’t bring $2.5 billion on the open market. One of the bidders, Rorer, has put a sale price of $950 million on Chap-Stick and the other brand names. And the rest of the company might bring another $1 billion, leaving claimants at least half a billion less than they’re entitled to now.
Claimants would fare no better if Robins were not protected by the bankruptcy law. A free-for-all of individual lawsuits against a non-bankrupt Robins would have resulted in early litigants getting paid but later ones finding the cupboard bare as Robins went bankrupt anyway.
Moreover, the process would be dragged out just as long, because Robins would have fought as nastily as it did before the 1985 bankruptcy, when it impugned the motives and the morals of claimants. Federal Judge Miles Lord, four years ago, angrily called Robins’ behavior “corporate irresponsibility at its meanest.”
It’s tempting to hiss the villains, but righteous anger didn’t get Dalkon Shield victims as much compensation as the workings of the bankruptcy law are doing today.
“On balance,” says leading bankruptcy lawyer George Treister, partner in the Los Angeles firm of Stutman, Treister & Glatt, “the law is working good compromises and is excellent.”
