A company’s litigation claims are an often-overlooked asset with the potential to attract millions of dollars of investment capital without diluting shareholders’ interests. Yet for many investors, the prospect of litigation stirs little but angst. Litigation, they fear, is unpredictable, costly, and may have a negative impact on earnings and share prices.
Litigation finance can help assuage these legitimate concerns. Bentham IMF provides non-recourse financing to companies in exchange for a return received if (and only if) the litigation is successfully resolved. The companies in turn can reduce their litigation risk by using our investment capital to hire the best possible counsel and experts to handle their cases, maximizing their likelihood of success and their potential recoveries. They also achieve more accurate financial forecasting, an improved ability to manage cash and operations, and less earnings volatility.
An additional benefit of funding is the opportunity it affords for companies to assert their rights in the marketplace and pursue meritorious claims that may otherwise wither on the vine. Shareholder interests are thereby protected without capital being drained or share value being diluted.
The Accounting Quandary and How Funding Helps
Litigation can take several years to resolve. During this time, the related costs flow through the income statement and impact the company’s “bottom line.” Accounting standards require litigation expenses be recorded on a cash rather than an accrual basis; no asset may be booked prior to final claim resolution. This is true regardless of how strong a claim is or the likelihood of success. As a result, profits and share prices can suffer as multi-year disputes drag on.
However, the financial picture around litigation changes dramatically with a funding agreement in place. Because litigation funding is non-recourse, a company’s obligation to Bentham is generally not considered a liability for accounting purposes. Unlike a traditional bank loan, the claimant owes nothing to Bentham if it loses its case.
Moreover, litigation funding allows a company to reallocate capital earmarked for litigation to other company priorities. Litigation expenses are now assumed, at least in part, by Bentham and wiped from the company’s income statement. And the investment dollars provided may be counted as revenue, helping boost profitability.
Meanwhile, a company can use funding proceeds to hire the best possible counsel and experts to handle its case, maximizing the likelihood of success and the potential payout from any recovery.
Reducing Risk with Litigation Portfolios
The potential upside of litigation finance is even greater in the context of portfolio funding, which involves grouping several high-value litigations into a single collateral package. Bentham views portfolio investments as less risky than single-case investments. This allows us to offer better financing terms for portfolio investments and yields more non-recourse capital inflow for the company.
A portfolio approach also allows a company to pursue several cases simultaneously instead of “putting all its eggs in one basket” when it comes to litigation. For numerous reasons, a company that possesses several meritorious litigation claims is best served by vigorously pursuing each of them, rather than staggering them for budgetary reasons. The non-recourse nature of Bentham’s capital means that the company also realizes revenue from the litigations, even if it loses every case.
With litigation funding, companies can ease shareholder fears about proactive litigation and leverage their claims to unlock the value of their litigation assets. Funding also helps companies protect their interests in the marketplace without negatively affecting profitability. And it opens opportunities for payouts in the form of substantial recoveries that can also be used to grow the business.
To learn more about litigation financing and how your company can benefit from using it to unlock the value of litigation assets, contact us for a consultation.
And visit our Litigation Finance Education Center to learn about the CLE seminars we offer to companies interested in working with funders. There, you also will find our recent client podcasts, blog posts and videos.