We are frequently asked why a well-capitalized corporate entity would use litigation funding. A recent article published by Institutional Investor provides some answers. The article features recent cases where two large U.S. institutional investors, CalSTRS and Texas Teachers, partnered with Bentham IMF to recover losses they suffered as shareholders in Danish companies accused of fraud.
The rationale behind their decision to use funding applies to other well-resourced litigants. The following reasons are often mentioned by well-capitalized businesses when deciding to partner with a funder:
1) Large claims are assets. Good corporate governance requires that a business at least explore whether it should expend resources to go after that asset.
2) When making this assessment, corporations will consider the investment and what ROI they will derive from it. The investment includes all of the costs to bring a claim to completion and enforce it, including lawyers' and experts' fees, but also the potential liability arising from a loss (exposure to adverse costs).
3) If a corporation would obtain a better ROI by investing those funds in its core business rather than in the litigation, funding is an option which should be explored.
4) Management may experience budget fatigue along the way. Working with a funder ensures that the capital is available to see the case through to the end, regardless of business priorities that might change.
5) By using the funder's money to pay for the litigation, a corporation can take the litigation expenses off its balance sheet. When a claim is successful, revenues can be recorded (typically as an exceptional item) without the company having incurred any cost along the way. If the claim is unsuccessful, as capital was provided by the funder on a non-recourse basis, the company pays nothing.
This risk-free model can be very attractive, especially for in-house counsel who are being asked to trim costs and find creative solutions to do more with less. Litigation funding allows legal departments to become profit centers. As the assistant general counsel at Texas Teachers put it in the article linked above, "when does legal get to say we made money?"
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