Traditionally, litigation funding has been a popular option for claimant companies facing financial pressures that do not have sufficient capital reserves to engage in litigation which can be a long-term process. This is still true, especially for companies facing financial difficulties related to the pandemic. However, over the past several years, we have seen more and more companies take advantage of litigation funding as a strategic means of mitigating the risks and impact of litigation on business results and financial performance.
Before considering why there has been a move towards the optional use of litigation funding rather than necessity, it is worth considering what litigation funding offers businesses. A funder will pay some or all of the legal fees and disbursements involved in bringing an appropriate legal action. The funder will then be reimbursed for these costs plus a return if successful (whether through settlement or final judgment/award). Funding is non-recourse, and therefore the funder will only be reimbursed for their costs and will only receive their return on any proceeds successfully recovered from the defendant.
With that in mind, litigation funding offers at least five big advantages for companies, even when they are not facing financial pressures.
1. Litigation Risk Mitigation
Risk management is a key part of all business operations, from creating and maintaining risk registers to auditing and mitigating individual risks. Litigation risk is a category of risk that is difficult to predict in the longer term. Disputes often arise from a series of factual circumstances which, if not resolved through negotiation, give rise to litigation or arbitration. Business disputes are almost inevitable at one point or another, but litigation can be risky and costly. As a result, companies with available capital on their balance sheets may still be reluctant to pursue well-founded claims rather than deploy that capital in their day-to-day operations. After incurring high legal costs, the company could still lose the case. In some jurisdictions, the losing party may also have to pay the winning party’s costs, which further increases the financial risk. The board and/or CFO are unlikely to approve significant potential legal fees when it is uncertain whether the claim will succeed and there could be additional costs if the claim is denied.
However, litigation funding offers a way to mitigate this risk. Litigation funding is non-recourse, meaning Deminor’s investment will only need to be repaid if the case is successful. In combination with ATE insurance or by Deminor providing indemnity, the risk of paying adverse costs can also be mitigated. This means that a plaintiff company will not have to pay court costs and will not run the risk of having to pay the costs of the other party (in jurisdictions where the loser pays the winner’s costs) in the event of loss.
Funders can also give companies a deeper insight into the risk profile of the claim. Funders review a large number of cases in a wide range of jurisdictions across multiple industries. They must analyze the risks of these cases and identify those that have a good chance of success. Funders take a different approach to evaluating law firm cases. Not only should the business have good merits, but it should also have a solid economic basis. This means that the potential damages must be high enough to justify an investment in the case and that the defendant must have sufficient assets to pay the damages awarded to them. The defendant’s assets must also be accessible if further enforcement action is required to secure payment. If a funder takes an independent and positive look at a company’s case, it’s often a good indication of its prospects (both legal and financial). Funders should fund cases that win, and strategically assessing a funder’s merits can help a company decide whether it’s worth pursuing a claim.
2. Remove litigation costs from the balance sheet
Legal fees incurred in connection with a funding dispute are recognized as liabilities in a company’s financial statements in addition to provisions that must be recorded to account for future expenses until the case is resolved. When cases can last for several years, litigation can have a longer-term impact on a company’s balance sheet and reported earnings than the expenses incurred in a given fiscal year. Litigation funding means that legal fees and all other litigation costs are borne by the funder and are removed from the company’s balance sheet with no impact on financial performance. If the deal is successful, the revenue will increase a company’s revenue and bottom line without investing the company’s equity in the deal.
There are many sources of litigation funding for businesses, including traditional loans or using its own revolving credit facilities. However, all these other financing structures require the recording of loan repayments on the balance sheet and the creation of provisions for future expenses. Litigation funding removes all litigation costs from a company’s financial statements.
3. Release funds
Businesses have many conflicting demands on their cash reserves and they have strategic goals with planned capital budgets for all of their operations. Few organizations include generating revenue through litigation as part of their strategic objectives. As such, investing in litigation may come at the expense of achieving other business goals during the litigation. Litigation funding can be a solution for companies to continue to achieve their goals while recovering damages owed by third parties.
4. Ensure equality of arms
Litigation funding helps level the playing field when small businesses face claims against large multinational corporations. Large defendants may be able to pursue costly and time-consuming litigation strategies and hire world-class legal teams to outspend their smaller adversary. Litigation funding allows business claimants access to the high-quality legal resources needed to combat and mitigate business strategies designed to prolong proceedings and drain the resources of small businesses.
5. Turn in-house legal teams into revenue generators
Legal claims are not recognized as contingent assets on company balance sheets mainly because of their contingent and uncertain nature. However, sound debts are business assets. Litigation funding can be a way to unlock the value of a company’s receivables in exchange for a proportionate share of the gain. As such, damages earned will go directly to the top line of the company without any liability against them.
Deminor provides funding to corporate claimants with meritorious cases that may result in successful recovery for the claimant, and it can help businesses access the benefits of those claims. We provide our clients with the resources, focus and legal expertise to successfully litigate and monetize their claims, and to offset their litigation risks.