The five fictions preventing GCs and CFOs from leveraging legal finance

Innovation, risk management and cost containment aren’t just platitudes—they’re mandates for in-house legal teams. That’s one thing I learned working extensively with legal departments—first when I worked with corporate clients as a litigator, then when I transitioned to a position where I managed relationships with in-house leaders at many of the world’s largest companies.

Burford’s 2018 Litigation Finance Survey confirms my observation: Almost half (46%) of in-house respondents identify legal risk as their companies’ greatest business challenge, while three-quarters (74%) say cost management is an urgent issue requiring innovative solutions.

Legal finance is one tool that can help GCs and CFOs manage legal risk and uncertainty, but it’s still not universally understood by corporate legal teams—and that means that some in-house departments aren’t competing in a market that is increasingly using legal finance to unlock value for their companies. Below, I separate fact from fiction, dispel the most common misconceptions and set the record straight on how in-house teams can benefit from legal finance.

 

Fiction #1: Legal finance is only for affirmative litigation—not defense matters.

Fact: Legal finance is used to provide capital to claimants and to finance defense cases.

Defense litigation financing comes in a variety of forms and structures. Most often, defense matters may be included as part of a portfolio where a single set of terms is used to finance a mix of cases, including plaintiff and defense matters. Portfolio financing helps GCs manage the impact of litigation on balance sheets and risk profiles, and their companies benefit from lower-priced capital, given Burford’s ability to diversify risk across multiple cases. In addition to portfolio financing, Burford can also finance defense matters when there are counterclaims involved—and recently helped a startup mount a vigorous defense and bring a counterclaim against the world’s largest razor company. In certain situations, Burford can even pay the entire cost of defending against a weak claim where our return is predicated on the company achieving a mutually predefined success. Irrespective of its form, although defense financing is a minority of all funded matters—29% of survey respondents who have used legal finance report having done so in the context of a defense claim—every forward-leaning legal department should consider its benefits.

 

Fiction #2: Legal finance is only for companies that can’t afford to pay legal fees out-of-pocket.

Fact: Legal finance is used by companies that have litigation budgets—but recognize that tapping into that expense line isn’t always wise.

When a company elects to pay for its legal spend out-of-pocket, it is doubly penalized: The spend is recorded as an expense on its P&L, and settlements or awards are treated as below-the-line or “one-off” items that do not positively impact the company’s valuation. When a company uses legal finance, it moves litigation expenses off balance sheet, which can materially protect company earnings and therefore enhance its valuation. Indeed, 39% of in-house survey respondents believe these reporting and accounting benefits are among the most important that legal finance has to offer. Further, should a company have a sufficiently sizable claim, Burford’s capital may offset not just its litigation expenses, but also the expense line across the entire legal department. In short, there are both better uses of your capital than self-funding and real benefits to be gained from third-party financing for even highly liquid companies.

 

Fiction #3: Legal finance is just for cost management—not risk management.

Fact: Legal finance manages both the cost and risk of litigation.

Based on my experience, it is often risk that prevents companies from moving forward with meritorious claims. It comes as no surprise that few GCs or CFOs are willing to pursue potentially lengthy and expensive legal matters with uncertain outcomes. Legal finance gives companies an alternative, enabling them to pursue claims with the confidence that they will have funding in place for the long haul—without harming balance sheets. And because legal finance is typically provided on a non-recourse basis, invested capital is not due back to the funder in the event of a claim losing. In addition, funding can be provided at any stage of a proceeding, allowing companies to de-risk or monetize even outstanding judgments.

 

Fiction #4: Capital providers don’t have ready and transparent access to capital.

Fact: Burford has over $3.3 billion invested in and available to invest in law.

The largest capital provider in the industry by far, Burford is a public company that’s traded on the London Stock Exchange. We have been in business for nearly a decade and boast a long history of successfully funding both top law firms and companies. We operate on a transparent basis and fund our investments from a permanent capital base. It’s a matter of public record, for instance, that in October 2018 we raised $250 million from the equity market in less than 24 hours. We’re able to fund matters quickly and deploy up to $200 million on a single deal, and our scale and experience give comfort to clients—especially those that may be new to the industry—that Burford is a committed long-term partner equipped to finance the most complex and lengthy litigation.

 

Fiction #5: Working with a finance provider raises litigation control and privilege concerns.

Fact: Litigation finance does not impact privilege or control.

When considering using legal finance for the first time, in-house leaders often have a handful of so-called “peace of mind” questions about using outside capital. In short, they want to be reassured of two things: First, that they won’t have to cede control of litigation and settlement decisions to a funder; and second, that attorney work product remains protected. When a client decides to work with Burford, doing so does not in any way impact control. Burford structures all of its arrangements to leave complete control of the underlying legal matter with the client. We are passive investors—we do not control strategy, settlement or other litigation-related decision-making. GCs can also rest assured that legal finance, inclusive of case-related information shared with funders and details of financing arrangements, is protected as attorney work product. Burford takes great care to ensure that only relevant case information is exchanged between client and funder during the diligence process, and only after Burford and its counterparty have executed an NDA. As a matter of course, Burford avoids privileged materials that aren’t strictly necessary to evaluate a case.

 

Conclusion

Ultimately, companies have an obligation to shareholders to pursue the best solutions possible for their businesses. But according to the latest research, 70% of in-house lawyers report forgoing a meritorious claim because of the possible impacts on balance sheets—and 59% report having uncollected recoveries and unenforced judgments valued at over $10 million.

In-house leaders that take a small step to distinguish facts from fiction will achieve big results. Your competitors are hunting for any advantage they can find: If they are not using legal finance now, they will be soon. While legal finance is sometimes misunderstood, it certainly will not remain misunderstood forever. Make sure you do not get left behind.


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