Pursuing claims without driving down share prices

Market - 24.09.19
A company’s 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 a company pursuing litigation or arbitration raises concerns of a costly and unpredictable process that may have a negative impact on earnings and share prices.

Dispute resolution finance from IMF Bentham can alleviate these concerns for companies.

Our financing is non-recourse. We only receive a return on our investment if the dispute is successfully resolved (by settlement, judgment or award). We assume the risk of having to pay any adverse cost orders if the case is unsuccessful. Risks of the litigation or arbitration are also reduced when our investment capital is used to hire the company’s chosen counsel and the best possible experts to handle the case, maximising the likelihood of success and the potential recoveries.

An additional benefit of funding is the opportunity for companies to assert their rights in the marketplace and pursue meritorious claims that may otherwise be abandoned for cost and or risk imperatives. Shareholder interests are thereby protected without capital being drained or share value being diluted.

The accounting quandary
Litigation or arbitration 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 typically require these expenses to be recorded on an accrual basis, as incurred and no asset for potential proceeds from the litigation may be booked prior to final resolution of the case. This is true regardless of how strong a claim is or the likelihood of success. As a result, profits and share prices can suffer if a dispute drags on for many years.

In some cases, companies are required to provision for adverse costs prior to the conclusion of proceedings if it appears likely that they will be unsuccessful. This causes additional expenses to be recognised by those companies and can further lower their profitability.

However, the financial picture changes dramatically with dispute resolution finance. Because the funding is non-recourse, a company’s obligation to the funder is generally not considered a liability for accounting purposes. Unlike a traditional bank loan, the claimant owes nothing to the funder if the case is lost.

With external funding in place, a company is able to use its own capital for business as usual or other priorities. The litigation or arbitration expenses are assumed, at least in part, by the funder. If the claim is successful, income can be recorded without having incurred any net downside costs or risk along the way.

Reducing risk with portfolio funding
The benefits of dispute resolution finance are even greater in the context of portfolio funding. When a company has more than one meritorious case to pursue, they may be grouped into a single package. Portfolio investments diversify a funder’s risk and therefore attract more competitive financing terms than single-case investments.   

A portfolio approach also allows a company to pursue several cases simultaneously instead of “putting all its eggs in one basket” or staggering them for budgetary reasons.

With dispute resolution finance, companies can ease shareholder fears about pursuing litigation or arbitration. Claims are leveraged as assets and companies can protect their interests without negatively affecting profitability. Funding, therefore, provides opportunities for substantial recoveries with mitigated costs and risk.