Law firm challenge
A law firm that does a mix of hourly and contingent fee work is approached by one of its existing corporate clients with a new case. Because the client has already exhausted most of its litigation budget for the year, the client asks the firm to take the case on risk.
Based on the strength of the merits and what the firm expects to be the ultimate damages, the firm decides that it is willing to risk its hourly fees. But the firm’s CFO has been exploring finance solutions to help the firm run more efficiently. The CFO has concerns about the negative tax implications of the firm’s practice of self-financing expenses. Unlike salaries and overhead, expenses are not tax-deductible, meaning partners effectively cover the cost using after-tax dollars—ultimately reducing firm profits.
Burford legal finance solution
A litigation financier gives the firm CFO a proposal that will ease the burden of paying ongoing expenses while enabling the firm to keep most of its contingency from a successful case outcome:
- The litigation finance provider will provide $3 million of financing to be used only to pay out-of-pocket litigation expenses
- In exchange, the litigation finance provider receives its outlay back and a 1.5x multiple return on its invested capital, collected only from future case proceeds
Legal finance impact
The financing frees up capital that the firm can redirect into the firm at year-end as expected. But the firm’s CFO also recognizes another advantage of the arrangement: By dedicating outside capital to cover expenses, partners no longer have to contribute after-tax dollars to cover case costs—which (at a 39.6% top marginal tax rate) the CFO expects to increase firm profits by $5 million in the current year.
This is a hypothetical example of one type of matter Burford routinely encounters and finances. It is meant to help demonstrate different use scenarios for our capital and the associated quantitative benefits.