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Litigation finance guide for corporate counsel

kokou adzo

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Strategic planning and budgeting are crucial in today’s corporate world. Litigation finance is a game-changer, offering companies an innovative way to transform legal claims into strategic assets.

This approach supports achieving business goals and optimizes budget management by turning legal challenges into opportunities.

Litigation finance enables businesses to pursue justice and strategic growth simultaneously without compromising their financial stability, marking a significant evolution in corporate finance and legal strategy.

What, Exactly, Is Litigation Finance?

Litigation finance provides capital to claimants, law firms, and companies collateralized solely by the future proceeds of their meritorious cases and legal claims.

Unlike traditional financial instruments, litigation finance offers a unique model that aligns risks and returns without needing upfront collateral or dealing with variable interest rates.

Here are its key features:

  • Non-Recourse Nature: The funder assumes all the risk of litigation. If the case is unsuccessful, the funder loses its investment, making this a no-risk option for the claimant.
  • Directly Tied Returns: In the event of a win, the funder’s return is directly tied to the case proceeds. It can be significantly higher than the original investment, often resulting in a return of one to three times the original amount.
  • Access to Justice: It enables individuals and companies who might be deterred by the high litigation costs to access the legal system.
  • Strategic Financial Management: Offers a strategic tool for managing financial risks and optimizing potential returns on investment, providing an alternative to traditional loans or investments.

How Can Businesses Use Litigation Finance?

Litigation finance isn’t just a theoretical financial tool. Without the burden of upfront costs in legal cases, it’s a practical solution applied across various industries to:

  • mitigate risk
  • manage balance sheets
  • pursue justice.

Below, we present some examples to illustrate how businesses can leverage litigation finance in real-world scenarios:

Example 1: Technology Start-Up Protects Intellectual Property

A technology start-up finds itself in a David vs. Goliath battle, needing to defend its intellectual property against a larger competitor.

With limited resources, the start-up faces the tough choice of fighting a potentially expensive legal battle or letting its rights be infringed upon, potentially losing market share and future revenue.

By partnering with a litigation finance firm, the start-up can pursue the case without depleting its operational funds. The financial partner covers legal expenses in exchange for a portion of the settlement or judgment, enabling the start-up to protect its IP and continue innovation.

Example 2: Manufacturing Company Recovers Damages for Breach of Contract

A manufacturing company encounters a supplier’s breach of contract, which results in significant operational delays and lost profits. The company hesitates to pursue legal action because it fears legal expenses will overshadow the potential recovery.

Through litigation finance, the company secures the necessary funds to cover legal fees and court costs, allowing it to pursue the case without impacting its cash flow.

The litigation finance agreement is structured so the financier is compensated only from the judgment or settlement proceeds, aligning the financier’s and the company’s interests.

The case ultimately settles in favor of the manufacturing company, leading to a recovery far exceeding the cost of financing.

Example 3: Healthcare Provider Fights Unfair Practices

A healthcare provider faces unfair competition practices that threaten its business viability.

Legal action is necessary to address the issue, but the provider is concerned about diverting resources from patient care to fund the lawsuit.

By securing litigation finance, the healthcare provider can take legal action against the unfair practices without compromising its mission to provide quality care.

The litigation financier covers all associated legal costs and, in return, receives a pre-agreed portion of the settlement.

This action enables providers to stand against unfair practices and secure a healthier competitive environment.

How Can Litigation Finance Help Manage Corporate Balance Sheets?

Litigation financing offers a unique approach to managing a company’s financials, particularly its balance sheet.

By monetizing legal claims, businesses can access capital without the immediate liabilities of traditional loans.

This capital influx can be used for various purposes, including:

  • funding ongoing litigation,
  • supporting operations or
  • reinvesting in core business activities.

Case Scenario: Before and After Litigation Finance

Before Litigation Finance

XYZ Corp., a mid-sized manufacturing company, is embroiled in a patent infringement lawsuit.

The legal costs are mounting. To sustain its legal fight, XYZ Corp. has had to dip into its operational funds, leading to a strained balance sheet.

The legal costs are classified as current liabilities, increasing the company’s liabilities and reducing its working capital.

This financial strain limits XYZ Corp.’s ability to invest in new projects or technology, directly impacting its growth potential and operational efficiency.

After Litigation Finance

XYZ Corp. partners with a litigation financing firm, which agrees to fund the ongoing legal expenses in exchange for a portion of any potential settlement or award.

This partnership allows XYZ Corp. to remove legal costs from its balance sheet. The litigation finance is not recognized as a debt but rather as a non-recourse funding arrangement.

The immediate effect is a healthier balance sheet, with reduced liabilities and improved working capital.

This change enables XYZ Corp. to redirect funds into core operations and strategic investments, fostering growth and stability despite the ongoing litigation.

Outcome

By leveraging litigation finance, XYZ Corp. alleviates the financial burden of its legal challenges and strengthens its balance sheet.

It enhances the company’s overall financial health and operational capacity.

This strategic financial management demonstrates litigation finance’s decisive role in maintaining business continuity and growth, even in costly legal disputes.

Practical Considerations and Selection Criteria

When navigating the complexities of litigation finance, having a roadmap can be invaluable.

Before diving in, consider this essential checklist of questions to ask potential litigation financiers. These inquiries will help you gauge a financier’s suitability for your specific needs and the potential for a successful partnership.

  • Experience and Track Record: How long has the company been in the litigation finance industry? Can they provide case studies or examples of previous investments similar to yours?
  • Financial Stability: What is the source of their funding? It’s crucial to ensure that the financier has a solid financial foundation and can support your case through to its conclusion.
  • Investment Approach: How do they evaluate cases? Understanding their selection criteria and evaluation process will give you insight into your case’s likelihood of acceptance.
  • Terms and Conditions: What are the terms of the funding agreement? Pay close attention to the repayment terms, interest rates (if any), and what happens if the case is unsuccessful.
  • Communication and Transparency: How will they keep you informed about your case’s progress and any financial implications? Regular, transparent communication is critical to a strong partnership.
  • References: Can they provide references from previous clients or partners? First-hand accounts of their experience can offer invaluable insights into working with the financier.

By meticulously vetting potential partners through these questions, you’ll likely find a litigation financier that aligns with your needs and objectives.

What Are Some Attributes of Reputable Litigation Finance Companies?

Identifying a reputable litigation funding company involves more than just examining its success stories. It’s about understanding the nuances of their operations and ensuring they align with ethical and professional standards.

Here are key attributes to look for and red flags to be wary of:

  • Professional Integrity: A reputable company will have a straightforward, transparent process for case evaluation, funding, and repayment. It should also be willing to discuss its methods openly and provide detailed information about its operations.
  • Client-Focused Approach: The best financiers prioritize their clients’ needs and interests. They should be flexible, responsive, and committed to creating a funding solution that meets their requirements.
  • Expertise in Legal Matters: Look for companies with a team of professionals who understand legal processes and can contribute valuable insights into your case.
  • Transparency in Fees and Conditions: Be cautious of any company that is not upfront about its fee structure or includes hidden charges in its contracts. A trustworthy partner will ensure you fully understand all the terms and conditions before signing.
  • Avoid Overreach: A red flag is a financier who seeks to influence the legal strategy or control the direction of the case. Your legal team should always maintain complete control over legal decisions.
  • Positive References and Testimonials: Reputable companies will have a record of satisfied clients and successful case outcomes. Feel free to ask for references or contact them to hear about their experiences.

Kokou Adzo is the editor and author of Startup.info. He is passionate about business and tech, and brings you the latest Startup news and information. He graduated from university of Siena (Italy) and Rennes (France) in Communications and Political Science with a Master's Degree. He manages the editorial operations at Startup.info.

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