Case Study: How Litigation Funding Can Preserve Corporate Solvency During a Bet-the-Company Battle

April 12, 2018

Case Study: How Litigation Funding Can Preserve Corporate Solvency During a Bet-the-Company Battle

In the second of our illustrative four-part series covering hypothetical litigation finance case studies, we explore how Bentham IMF helps companies pursue their meritorious claims—and preserve their solvency—by providing litigation funding and working capital to maintain operations during protracted legal battles.

Here’s how a funding scenario might work under such circumstances. Acme Company projects that over the course of the next few years, it may face ruin due to the anti-competitive behavior of a larger rival, Bugle Company. Acme Company is now left with two choices: pursue litigation against Bugle Company or potentially file for bankruptcy at some point in the future.

Acme Company has good reasons to fight. Its lawyers have advised that the company’s claims against Bugle are strong and have an excellent chance of success—should they make it to court. Recoveries could reach as high as $100 million, which would be a huge boost to the struggling company and send a strong message to competitors that Acme will stand up for its rights.

Unfortunately, the projected costs associated with the litigation will be far greater than the cash Acme Company has on hand, or can realistically hope to earn, during the life of the case (in large part due to Bugle Company’s anti-competitive activity). Acme’s lawyers anticipate the case will cost at least $8 million in attorneys’ fees plus $500K in costs and will stretch out for at least three years. Due to its difficult financial position, Acme has no assets against which banks are willing to lend.

Without financial assistance, Acme Company may not be able to pursue the litigation, and may well wind up filing for bankruptcy if it cannot turn things around on its own.

By working with a litigation funder like Bentham, however, Acme’s circumstances can change dramatically. Acme would ensure that it can pursue its claims for the duration of the litigation. Funding allows it to hire the best possible counsel, which, in turn, should help the company maximize the proceeds from the litigation. In addition, Acme’s large potential recovery on its strong litigation claim is an asset—one that can be immediately monetized by a litigation financier. Specifically, Bentham may provide Acme working capital to strengthen its core operations and avoid potential bankruptcy during the litigation. Acme can have the breathing room it needs to stabilize its business, as well as the financial aid it needs to prosecute its claims against Bugle Company.

Bentham provides non-recourse financing, which means that it receives a return on its investment—usually either a multiple of its investment or a percentage of the recovery—only in the event the litigation succeeds. If the case against Bugle is lost, Acme will owe Bentham nothing.

In this scenario, let’s assume that Acme hires counsel willing to take the case on partial contingency, being paid 50% of the $8 million in projected attorneys’ fees in exchange for 20% of the recoveries. Assume also that Bentham provides funding in the amount of $4.5 million ($4M for the attorneys’ fees and $500K of costs) plus $3 million in working capital, in exchange for 25% of the recovery.

A successful $100 million result in the case would position Acme to earn $58 million in net revenue after paying the agreed-upon returns to its lawyers and to Bentham (taking into account the $3 million working capital Acme already received from Bentham). It would also enable Acme to preserve its solvency while assuming no financial risk, since the company will have invested nothing to pursue the case. In fact, the company will have gained $3 million in working capital to help keep its operations on track—capital that would not need to be repaid if the case against Bugle is lost.

As this case study demonstrates, companies facing tough times stand to gain numerous benefits when they have a litigation asset that they can use as collateral for non-recourse litigation funding. However, even well-capitalized companies are availing themselves of opportunities to unlock the hidden value of litigation assets. To learn more about this topic, please visit our first case study in this four-part series, “Generating Multi-Million Dollar Revenues with Litigation Funding.”

For information on how Bentham can assist your company with creative solutions to fund your meritorious claims and preserve your rights against anti-competitive or other activities giving rise to commercial suits, contact us for a consultation.

See more examples about how litigation finance benefits companies and firms by visiting all four parts in our case study series:

Part One: Generating Multi-Million Dollar Revenues with Litigation Funding
Part Two: How Litigation Funding Can Preserve Corporate Solvency During a Bet-the-Company Battle
Part Three: How Law Firms Can Use Portfolio Financing to Broaden Fee Arrangement Options for Clients
Part Four: How a Hybrid Portfolio Can Help Firms Extend Discounts on Defense-Side Cases