Financing corporate legal costs: Self-finance vs. outside finance

Among the most common questions lawyers ask Burford is how to talk about legal finance with clients. My answer is simple: Help them do the math.

In the course of Burford’s nearly eight years in business and in talking to thousands of lawyers about financing billions of dollars of fees and expenses associated with commercial litigation and arbitration, it’s been my experience that quantifying and comparing the relative costs and benefits of financing models is the most effective way to talk to clients about legal finance. Once they appreciate that external financing addresses several of the perpetual pain points associated with litigation—such as its negative accounting impact and its potential influence on share price—the decision to use legal finance seems simple. Clients who use litigation finance, who “get it”, are united less by their need for cash to pay for legal costs than they are by their understanding of the comparative benefits of paying out-of-pocket versus working with a finance partner.

The many variables associated with complex commercial litigation make it nearly impossible to provide off-the-shelf pricing, and no single comparison will apply to every scenario. However, for the purposes of educating in-house counsel about the relative advantages of self-financing versus outside financing, and so that lawyers can help clients “do the math”, we offer the following hypothetical comparison.

 

Case study: ACME Co. competition claim[1]

ACME Co. is a company engaged in the manufacture, distribution and sale of widgets. Several of the company’s suppliers are acting as a cartel and have infringed on antitrust laws—so ACME Co. considers whether to bring a competition claim against its suppliers.

Given the type of case and the jurisdiction, ACME Co.’s general counsel estimates the total cost to litigate the claim to be $5 million spread over the course of five years, with an estimated potential recovery of $70 million in damages. By all accounts, ACME Co. has a viable, NPV-positive legal claim with strong legal merits, substantiated damages, defendants that can afford the judgment awarded, and sufficient cost-to-damages ratio given the expected duration.

ACME Co.’s general counsel recommends moving forward with the claim. However, the general counsel’s budget is already under considerable stress, and ACME Co. also needs to consider the negative impact of litigation spending on ACME’s P&L and market value. Thus, ACME Co.’s external counsel recommends the company consider using litigation finance. ACME Co. contacts a third-party litigation finance provider, explains its case, and receives the following proposal:

  • The litigation finance provider will pay the entire cost of the $5 million budget
  • In exchange, the litigation finance provider receives its outlay back and 25% of the net proceeds from the lawsuit if successful

After receiving the proposal, the accounting team at ACME Co. conducts the following analysis:

Litigation finance eliminates the need for ACME Co. to choose between sacrificing company profits or foregoing a valuable legal claim that will potentially bring a significant sum of cash into the business. Instead, ACME Co. can pursue a profit-generating legal claim while enabling the company to realign budgets so that more cash can be allocated to value-increasing activities—effectively turning the legal department from a cost center to a profit center.

Corporate Legal Cost Comparison

Click image to enlarge

 

For more information about Burford’s litigation finance solutions for firms and clients, contact Aviva Will at awill@burfordcapital.com.

 


[1] The data and application scenario in this example are fictional and offered for illustrative purposes only.


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