Chris Bogart and Craig Arnott of litigation financer Burford react to news that FTSE 100 companies set aside £31.3 billion for anticipated legal bills in 2015, the largest amount ever.
That’s £31.3 billion in cash that the FTSE 100 won’t have available to invest in R&D, pass on in savings to customers or return to shareholders.
It doesn’t have to be this way. FTSE 100 companies can lower their legal costs.
Corporate leaders in the FTSE 100 can also avoid tying up precious capital by getting smart about how they pay for legal fees and expenses. They can finance those legal fees and expenses—just as they do any other aspect of their business operations.
Litigation finance—which uses the asset value of commercial litigation or arbitration to secure specialist capital—is a fast-growing area of the global legal marketplace, used by clients and law firms for both claimant and defense matters. Increasingly, the savviest in-house lawyers are working with sophisticated providers of legal finance to secure financing on a portfolio basis, which has the advantage of providing companies the ability to secure financing for multiple matters on a linked basis—and move a significant portion (if not all) of their legal fees and expenses off their balance sheets.
For example, earlier this year, Burford Capital crafted a $45 million financing arrangement for a FTSE 20 company that encompassed a portfolio of pending litigation matters. Previously, the company paid for the significant legal fees and expenses associated with litigation out of its own revenues, thus reducing operating profits. With the Burford arrangement, it transformed how it managed litigation expense. The structure of the arrangement allowed the client to use Burford’s capital either to relieve legal expense budget pressure or for corporate purposes unrelated to the litigation matters. Capital was provided on a non-recourse basis, entitling the client to book it as income as received, without waiting for the result of the underlying litigation matters. In turn, Burford receives a portion of the proceeds from the litigation matters in the portfolio on a cross-collateralised basis.
In-house lawyers and CFOs predict that litigation finance will become an increasingly common practice. In the US, for example, 75 per cent of those surveyed pointed to growth in the next five years. In the UK, however, litigation finance is still under-utilised by corporates. According to a survey of UK lawyers released earlier this year by Burford Capital and The Lawyer Research Services, 67 per cent of UK GCs were not aware they could use litigation assets as collateral for financing; only 2 per cent had successfully done so. Interestingly, private practice lawyers are more aware of the benefits of litigation finance as corporate finance; law firms can continue to demonstrate their value as partners by informing clients about the availability of litigation finance.
FTSE 100 companies should increasingly finance their litigation and arbitration fees and expenses.
And those in the UK should note that they are lagging their US counterparts, where more use is made today of litigation finance – to the benefit of corporate P&Ls.
Doing so effectively moves these legal costs and associated risks off their balance sheets—and in the process transforms these burdensome expenses from a drain on corporate profitability.
Christopher Bogart and Craig Arnott are, respectively, chief executive officer and managing director of Burford Capital, a global finance firm focused on law and the world’s largest publicly-traded provider of litigation finance.