Divisive mergers move separation risk into the plan of division

Matthew Ploszek and Adam Sanchez, partners at Cravath, Swaine & Moore, describe divisive mergers as gaining popularity with companies that want contractual continuity and a clean separation of assets and liabilities ^[1][19]. The post does not give a count of completed divisions. The structure runs a merger in reverse: one company's assets, liabilities and operations are divided among two or more recipient entities ^[2].

The board-deck version is short. A single plan of division allocates the pieces ^[10]. That version leaves out who pays if a creditor later argues the split left it worse off. The Cravath lawyers write that the flexibility comes with its own fraudulent-transfer risks and remedies ^[4]. The trade-off is between ease at signing and exposure afterward, because both states' statutes expressly preserve creditors' fraudulent-transfer protections ^[14].

Creditors have two routes. Actual fraud requires intent to hinder, delay or defraud creditors. Constructive fraud requires only that the transferor received less than reasonably equivalent value and was insolvent at the time or became insolvent as a result ^[12]. A division separates assets from liabilities by design. According to the authors, that opens it to constructive claims that an entity received less than reasonably equivalent value or was rendered insolvent by the division ^[17]. On that route a creditor does not have to prove intent ^[12].

The two statutes then differ on what a creditor can reach. The usual remedy is to avoid the transaction as to the creditor, who recovers against the transferred asset or takes a lien on it ^[13]. Texas keeps that and every other creditor right intact ^[15]. Delaware's joint and several rule reaches further ^[16]. In my view it deserves the most weight in a Delaware decision. It extends past the transferred asset to the entities the division was meant to keep clean.

The choice of state also sets the sequence. Texas lets all entity types divide, including corporations, partnerships and LLCs, and the resulting entities can take a different form from the original ^[6]. Delaware allows division only for LLCs, limited partnerships and limited liability limited partnerships, and the successors must keep the dividing entity's form ^[7]. A corporation can convert first to use the Delaware statute ^[8], so a Delaware corporation faces at least two steps: a conversion, then the division ^[1]. The form a board picks this quarter decides which creditor remedy applies if the deal is challenged later ^[15][16].

Drafting carries the rest of the risk. Because unallocated liabilities default to every successor ^[11], an omission in a Delaware plan and a fraud finding end in the same place, with liability shared across the resulting entities ^[2]. Cravath's advice is to make division plans comprehensive, with specific allocation of assets and liabilities ^[18]. "Specificity is critical," the authors wrote ^[20].