Litigation Finance and Corporate Risk Management
Business enterprises of all kinds are looking for new and more sophisticated ways to effectively manage their assets and liabilities, especially with an eye towards minimizing risk. Of course, litigation involves significant potential for incurring liabilities or acquiring assets. But too often enterprises don’t effectively manage the upside and downside risks associated with litigation. Third-party litigation finance provides a way to make that kind of risk management much more effective.
Litigation of all kinds, especially high stakes litigation, is becoming an increasingly prevalent part of reality for companies of all kinds. In the United States federal courts, about a half million new cases are filed every year. For businesses, some of these cases involve significant risks. According to a recent survey of legal officers at public and private companies in the United States and United Kingdom, nearly a quarter of such companies had recently initiated a lawsuit with more than $20 million at stake.
As litigation exposure increases, it becomes more important for companies to manage their exposure to legal liabilities and realize the latent value in legal claims. Litigation funding companies can offer solutions towards these ends. The availability of third-party litigation finance is changing the way companies view legal claims and making it possible to treat them in the same way as other contingent assets and liabilities.
Financing arrangements related to commercial litigation can take many forms. In the most commonly known form, a third-party advances funds to a company involved in litigation so that the company can cover its litigation costs without using any of its operating funds. The funder receives a share of the litigation proceeds if the case is successful and receives nothing if the company loses. When a company’s litigation budget is tied up defending lawsuits and fighting regulatory battles, the availability of litigation financing makes it possible for the company to pursue claims that would otherwise have been outside of its financial capacity.
Litigation financing can also allow companies to convert their legal positions into immediately available funds. For example, if a company has won a judgment but is waiting for appeals to conclude before cashing in, an advance from a litigation funder makes it possible for the company to convert a contingent, intangible asset into cash that can be redeployed into more productive uses. And, at the same time, the risk of loss in the appellate process can be minimized or eliminated.
Topics: risk management, litigation financing, third-party litigation funding, corporate law
Works Cited:
Adam Gerchen, et al., Litigation: The Newest Corporate Finance Tool, Financier Worldwide Magazine (September 2014), available at https://www.financierworldwide.com/litigation-the-newest-corporate-finance-tool/#.WGQVErGZP_Q
