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Litigation Finance Considerations for Large Corporate Clients

September 28th, 2014 by Charles Agee on September 28th, 2014

When large corporations are involved in litigation, they are usually defending claims. These defensive expenditures are (unfortunately) part of a company’s routine legal budget, and the decision whether to incur them is not exactly elective.

Allocating Capital to Litigation is a Tough Choice for Companies

When a company needs to assert a claim, however, the analysis changes. In large-budget assertion matters, companies face a decision to allocate capital toward an investment in a future litigation outcome that, in all likelihood, is not as well understood as an investment in a company’s core business. The prospect of incurring certain losses today for a potential recovery a few years from now can be a difficult proposition to a board or a CFO.

The Solution: Contingent-Fee Litigation Engagements

Contingent-fee engagements may represent an attractive alternative to the company, but often a company’s preferred law firm has a finite appetite for these risk-sharing arrangements.

The commercial litigation financing market is teeming with innovative solutions for companies facing these types of budgetary dilemmas. Using litigation financing to assert a claim, companies can move these expenditures off their balance sheets, thereby minimizing exposure to these unpredictable expenses, hedging against an adverse outcome, and paying based on their ultimate satisfaction with the outcome.

Any solution that possesses these attributes has obvious appeal. The following are some of the major considerations for large corporate clients when contemplating a commercial litigation financing transaction.

BUDGETARY FLEXIBILITY, ENHANCED  ROIs & FAVORABLE  ACCOUNTING TREATMENT

For companies of any size, budgetary discipline is a key component of strong management, and budgets for cost centers like legal departments are usually constrained and under pressure to be reduced further. Even if a budget surplus exists for a major assertion matter, companies must consider their return on investment in light of alternative uses of the capital that would otherwise be invested in the litigation. In lieu of a major expenditure toward the litigation, a company using litigation finance merely forgoes a portion of the claim’s contingent upside, which, per accounting rules, is not even recognized as an asset on its balance sheet.

SPECIALIZED CORPORATE FINANCE MARKET, NOT AN ARSENAL FOR THE PLAINTIFFS’ BAR

The commercial litigation financing market (as opposed to consumer litigation finance) is staunchly pro-business. Managers of the specialty private equity funds that provide commercial litigation financing have prestigious law firm pedigrees and are often backed by prominent institutional investors, none of whom have any interest in financing frivolous or abusive claims.

A CAUTIOUS APPROACH MINIMIZES RISKS OF CONFIDENTIALITY/PRIVILEGE WAIVER

As the body of law on litigation financing has developed, it is clear that work product protection extends to information disclosed to third parties in the context of litigation financing as long as reasonable precautions are taken. While arguments exist as to non-waiver of privileged information, reputable providers of CLF simply do not seek privileged information. The risks of waiver (however remote) must be weighed against the benefits of commercial litigation financing. At a minimum, litigation budgets should include the costs of a satellite discovery dispute even though the financed party expects to prevail.

PROCESS FOR CONSUMMATING A TRANSACTION CAN BE COMPLEX & TIME-CONSUMING

Exploring the commercial litigation finance market, negotiating financing terms, and cooperating with litigation funders’ diligence requirements can be quite laborious, akin to the process for raising private equity capital. In-house and outside counsel can expect to devote significant time to this process. While partnering with knowledgeable advisors can streamline this process, the benefits of a litigation financing transaction must be substantial to offset this investment of resources.

Assess the Benefits & Costs of Litigation Finance

The cost-benefit analysis of litigation financing is, of course, specific to each situation. Many variables must be considered, including the company’s transactional goals and the range of options and structures available in the commercial litigation financing market (which is now quite sophisticated). Parties highly experienced in litigation finance, like Westfleet Advisors, can help senior executives and their outside legal counsel conduct this analysis. In fact, Westfleet’s free Guide to Litigation Financing is designed specifically for that function. Please download it to learn more about litigation finance.