Transaction Structures in Litigation Finance

While the adoption of commercial litigation finance is on the rise, the particulars of the practice are still not widely understood. How are litigation finance deals structured? How do lawyers and clients work with funders without jeopardizing the attorney-client relationship? How are litigation-related assets valued? How relevant are champerty issues?

We at Lake Whillans Litigation Finance will be addressing these and other questions; discuss topics of interest around commercial litigation finance; and spark an informative dialogue. We will kick things off by shedding some light on a few frequently asked questions about the structure of litigation finance deals.

Q. Who are the parties to a transaction?

Generally, litigation finance companies transact directly with the claimholder. While the claimholder’s counsel is typically involved throughout the investment process—helping to answer due diligence questions and providing a case budget, for example—the investment contract is structured as a bilateral agreement directly with the claimholder. The attorney-client relationship remains exclusive to the claimholder and its attorney.

Q. Can litigation finance provide capital for activities other than litigation?

Yes, the capital invested can be used for almost anything. Most frequently, funds are used to pay for litigation fees and expenses, but it is also quite common for claimholders to take additional capital to use toward operating costs such as R&D, payroll, or manufacturing.

Q. If litigation finance can be used for operating activities, what differentiates it from other forms of financing?

One of the most significant features of litigation finance is that in most instances it involves non-recourse capital. That means the financier’s only recourse is to proceeds from the underlying litigation or arbitration, not to any of the claimholder’s other assets. In other words, if the underlying litigation or arbitration claim is not successful, the claimholder owes us nothing. Non-recourse capital not only minimizes or eliminates litigation risk; it also provides the company with a way to raise capital without diluting equity or creating burdensome debt.

Q. What does the economic arrangement look like?

Generalizing the investment structure of a litigation finance deal can be difficult since each transaction is specifically tailored to meet the individual needs of a claimholder. In a future post, we will address the ways in which a litigation financier values various litigation-related assets. For now, let’s tackle one common structure:

• If the arrangement includes covering operating expenses, the litigation financier (i) makes a non-recourse investment directly in the claimholder, and then (ii) establishes a capital facility to be drawn down to pay for fees and expenses related to a litigation or arbitration.

• Any proceeds from the litigation are used to repay the litigation financier for whatever capital has been disbursed. The remaining proceeds are allocated between the claimholder and the litigation financier according to their predetermined economic arrangement.

This basic structure can come in many different iterations. Sometimes a lawyer chooses to carry a contingent interest in the litigation; sometimes a claimholder prefers to pay a fixed dollar return rather than a percentage of the case. All of these arrangements are commonplace. At Lake Whillans, we are amenable to entertain new and alternative structures in order to meet the needs of a given claimholder.