For PE sponsors, a target’s potential exposure to mass tort litigation can present a significant challenge in an acquisition, given the potential for the substantial, ongoing and unpredictable costs associated with defending and resolving a large volume of claims—including defense costs, settlements and trial verdicts—that may persist for the foreseeable future. Traditionally, PE sponsors, using econometric modeling to assess the ongoing costs of the mass tort litigation, have sought to ring-fence these risks through a combination of indemnities, escrows and insurance products. More recently, litigation liability transactions, in which an entity sells its litigation exposure to a liability management company, have emerged as an innovative vehicle by which PE sponsors (and strategic companies) can offload mass tort exposure. These transactions also present an attractive opportunity for buyers that acquire mass tort exposure at a premium over the expected costs and then successfully invest the assets available to cover the liability and the associated litigation for a healthy return on capital.

Liability transfer transactions typically are structured as follows: the seller uses a divisional merger or similar transaction to segregate the relevant mass tort liability into a new legal entity and contributes an amount of cash equal to the present value of the liability. The buyer typically agrees to contribute an amount of cash of its own to provide additional coverage for the liability and reflect its confidence in the long-term viability of the transaction. The buyer typically then acquires the new legal entity, which includes the liability being transferred and the assets supporting the liability. The buyer will also provide the seller with an indemnity so that the seller is protected in case mass tort plaintiffs seek to pursue the original owner of the liability. Such transactions typically include detailed protocols to mitigate against the risk of fraudulent conveyance allegations, including: (i) obtaining a solvency opinion by a respected firm regarding the entity being sold; (ii) restrictions on the types of investments the buyer can make with the funds obtained via the transaction (typically for a period of at least seven years); and (iii) limitations on the buyer’s ability to distribute the proceeds of invested funds for a period of time and/or in circumstances in which the remaining funds are insufficient to cover anticipated future exposure.

For example, in August 2022, Crane Holdings formed a subsidiary that contained all of Crane’s asbestos and related legacy liabilities and then sold that subsidiary to Spruce Lake Liability Management. To fund the transfer, Crane contributed about $550 million, while Spruce Lake added $83 million of its own capital. After closing, Spruce Lake took full control of the subsidiary and assumed responsibility for all of Crane’s asbestos liabilities, fully indemnifying Crane and removing those obligations from Crane’s balance sheet. Crane’s President and CEO stated that the deal “provides finality and certainty to investors regarding asbestos obligations, and it removes the distraction of asbestos related risks. Further, eliminating ongoing payments for asbestos related defense and indemnity costs will increase annual free cash flow available for us to invest in our business, both organically and inorganically.” Similarly, Ingersoll Rand Inc. transferred equity interests of three wholly owned subsidiaries that held its asbestos liabilities to Onyx TopCo LLC. According to its September 2024 Form 10-Q, the three entities were capitalized with a total of $188.5 million. SPX Technologies entered into a similar transaction with Canvas Holdco LLC (an entity formed by a joint venture of Global Risk Capital LLC and an affiliate of Premia Holdings Ltd). As reported in its December 2024 10-K, SPX contributed $138.8 million to the divested subsidiaries, and Canvas made an $8 million capital contribution to the divested subsidiaries.

Liability transfer transactions originally became popular in the context of asbestos liability because purchasers can predict asbestos-related costs with a relative degree of confidence. Asbestos-related liabilities can usually be reliably estimated through an econometric analysis because: (i) decades’ worth of data regarding the characteristics and behavior of asbestos plaintiffs exist, allowing for reliable estimates of the aggregate liability, and (ii) most companies ceased using asbestos decades ago, so the exposed population is contained and will ultimately decline over time.

Increasingly, however, liability transfer transactions are being used to manage mass tort risk beyond the context of asbestos, particularly where there is sufficient data to conduct a reliable econometric assessment of litigation exposure. As these types of transactions may involve large sums of money, the deal teams for each side—supported by experienced counsel who understand mass tort litigation and complex transactions—will generally want to design bespoke arrangements that meet the specific needs of the deal.

For PE sponsors, liability transfer transactions may be an appropriate strategy at different points in the lifecycle of a portfolio company. If the sponsor wishes to have the target company offload mass tort liability at the time of acquisition, a liability transfer transaction can be synchronized with a closing—provided that the sponsor is comfortable with making the large capital outlay (directly and/or through the acquired entity) that is necessary for such a transaction. However, synchronizing a liability-transfer transaction with a closing can be challenging—particularly regarding deal confidentiality—if it requires searching for a party to acquire the liability at the same time as broader deal negotiations are taking place. Alternatively, a sponsor may consider a liability transfer transaction at some point after the purchase, including to remove litigation overhang before sale or IPO.

Liability transfer transactions also present a lucrative opportunity for a company that is willing to purchase such risks, because the buyer receives a large sum of investment capital upfront and can charge fees to manage both the investment capital and the underlying litigation. The transaction can thus be highly profitable if the return on capital exceeds the costs associated with the acquired mass tort litigation. It is critical for the buyer to have experienced national coordinating counsel who can employ strategies that mitigate litigation risk, which typically include arrangements with leading mass tort firms with the goal of resolving most cases via settlement rather than potentially costly mass tort litigation. 

Private Equity Report Fall 2025, Vol 25, No 3