Our third installment of this four-part blog series on how to get a case funded will focus on the do-or-die moment for an investment: the diligence process.
Litigation funders put each potential investment through rigorous diligence, which typically takes 30 to 45 days. Given that a typical case might last two and a half years and involve a commitment of a few million dollars, a funder’s in-depth review is essential. This process includes meeting with the party seeking funding, reviewing relevant documents, and possibly hiring outside experts (especially if the case revolves around a highly-specialized area of law).
Claimants should prepare for this process early. Funders will ask for pleadings that best summarize the legal and factual arguments from each side, and documentary or other evidence that both supports the claims and refutes any facially strong arguments from the adversary. A legally sound and objectively measurable theory of damages – even if preliminary – is important, and a pre-litigation damages analysis conducted by the lawyers or their consultants is a huge plus from a funding perspective. If materials are voluminous, a claimant should set up a data room or file sharing account with this information and provide it soon after the term sheet is signed. Funders will invariably seek access to the legal team to discuss liability and damages issues in depth. If the case involves a niche practice area that requires the funder to engage outside expert consultation, ask whether this additional expense will be borne by you or the funder when negotiating the term sheet. Bentham IMF incurs all such costs as part of its diligence process.
Preparing for and assisting with a funder’s diligence process may be tedious for a claimant and its lawyers. But it can be very helpful to strengthen the merits of the case, including identifying and shoring up any perceived weaknesses. Funders often reduce a case to somewhere north of its “worst-case scenario” and seek an explanation of the best arguments available. Lawyers are often very appreciative of the process because it forces them early on to analyze the pitfalls in the case, identify the best evidence available, and crystallize counter-arguments sooner than they otherwise would do in the litigation process.
While each case presents a unique set of issues, funders at a minimum look for the following in any investment opportunity:
1) a cogent liability theory supported by documentary evidence, indicating strong prospects of success;
2) a sound damages theory that results in sufficient damages to cover the funder’s return, the lawyers’ contingency stake (if any), and (in Bentham’s case) enough remaining for the claimant to recover at least 50 percent of any award or settlement; and
3) a high likelihood of collectability.
Being frank, realistic and dispassionate during the diligence process is important. Litigation finance is a multi-year partnership. Thus, it is best for all parties involved if the funder has the essential information to make an accurate underwriting decision. Once an investment decision has been made, you can expect to finalize and execute a funding agreement.
For more information on what to expect during the diligence phase of the funding process, please contact us for a consultation. Our last installment in this four-part series will look at some key terms to consider in the agreement and what to expect once your case is financed.
Visit all four parts in our how to get your case funded series:
Part One: Choosing a Funder and the Importance of the NDA
Part Two: Getting to the Term Sheet
Part Three: Presenting a Matter for Funding
Part Four: Closing and Monitoring a Litigation Finance Transaction