3M has placed a subsidiary facing billions of dollars in legal claims over allegedly faulty military earplugs into Chapter 11 bankruptcy protection and announced the spin-off of its healthcare unit in an attempt to unlock shareholder value.
More than 100,000 US military veterans have sued the Minnesota-based conglomerate, which is best known for making Post-it notes, face masks and Scotch tape, claiming their hearing has been damaged because of the earplugs. Litigants claim 3M’s own testing found the earplugs could become loose during use, allowing noise to pass through.
The bankruptcy filing by 3M’s Aearo Technologies marks the latest in a series of controversial bankruptcy manoeuvres deployed by US companies, which legal experts say typically halt cases, aim to cap future payouts and pressure claimants to settle.
3M has denied its combat earplugs were faulty when used properly, but said the claims could potentially take decades to litigate on a case-by-case basis. The company plans to pay $1bn into a trust to resolve all legal claims in a more efficient and equitable process.
“It’s really about us, 3M, stepping up to do what’s right here — do right by veterans and drive more certainty, drive better clarity for everyone involved,” said Mike Roman, 3M chief executive.
But lawyers representing earplugs litigants said the sum of $1bn would leave the trust “woefully underfunded” and they would fight the bankruptcy filing in court.
Bryan Aylstock of Aylstock Witkin Kreis & Overholtz, the lead plaintiffs’ counsel in the earplug litigation, said plaintiffs would argue that the bankruptcy court should deny 3M’s petition, accusing the company of an “underhanded attempt” to delay justice for those its products harmed.
“Instead of negotiating in good faith, 3M decided to move its relentless attack on US soldiers from the civil courts to the bankruptcy system,” Aylstock said, describing the bankruptcy plan as “further proof that [it values its] profits and stock price more than the wellbeing of veterans”.
Aylstock said juries have ruled in favour of 13 out of 19 service members whose cases went to trial and awarded nearly $300mn in damages so far.
3M’s use of bankruptcy to manage liabilities linked to personal injury cases follows a significant ruling by a judge in February which allowed Johnson & Johnson to proceed with a bankruptcy strategy to help it manage 40,000 claims that its baby talc causes cancer. Talc litigants in this case are appealing against the ruling.
The healthcare spin-off and corporate restructuring at 3M follows several years of share price underperformance, which analysts say has been caused at least in part by concerns over the potential liability linked to the earplugs litigation. 3M shares surged 7 per cent to $143.49 following the announcement on Tuesday before closing up 4.9 per cent at $140.75.
Julian Mitchell, analyst at Barclays, said the market would welcome 3M’s efforts to resolve the earplugs litigation, but he noted that it did not relieve the company of responsibility or liability.
“The legal path may not be completely straightforward,” he said.
Founded as the Minnesota Mining and Manufacturing Company in 1902, 3M has long touted the advantages of sharing scientific expertise between its diverse divisions.
The decision to spin off of its health division comes after a number of global companies, including food brand Kellogg, industrial group General Electric and J&J, announced plans to spin off parts of their businesses.
3M’s healthcare unit, which focuses on oral care, healthcare IT and biopharma filtration, generated $8.6bn in sales last year. The remaining company, with $26.8bn in revenues, will continue to focus on its traditional business including office supplies.
GE said last November that it would become three new public companies focused on healthcare, energy and aviation by 2024. On Tuesday it said it had incurred “separation costs” of about $207mn in the second quarter as it moved towards the three-way split.
Larry Culp, GE chief executive, said the growing number of companies spinning off their healthcare divisions probably reflected a recognition that healthcare companies tend to operate in a non-industrial orbit, especially among investors.
“If the business is going to be in a position to realise full value, you probably need that dedicated investor base,” he said.