Timing is often a key issue for litigants and lawyers seeking litigation financing. Litigation funders strive to accommodate this concern. Indeed, some industry leaders, like Bentham IMF, are staffed by very experienced former trial attorneys who have firsthand experience with the time pressures of litigation. As a result, these funders prioritize making their due diligence process as efficient and streamlined as possible. Still, lawyers and claimants who are unfamiliar with the funding process may fear that it will cause unnecessary delays and inconvenience.
In this part of our litigation funding series, we lift the veil on the litigation funder’s due diligence process. We answer common questions such as: how fast can a litigation funder close a deal, what documentation is a claimant expected to provide, and how do funders maintain privilege and confidentiality throughout the process?
Preserving confidentiality and proposing a term sheet
Protecting privileged and confidential information is a top priority for all litigation funders. Accordingly, funders like Bentham insist that the parties execute a non-disclosure agreement before commencing substantive discussions about a case. Among other things, an NDA is designed to help defeat defense-side efforts to discover materials exchanged with litigation funders down the road.
A well-drafted NDA ensures that communications with a funder will be protected by the attorney work-product doctrine by memorializing the intent of the parties to maintain confidentiality over shared information. Courts in various jurisdictions have confirmed the integrity of this practice, reasoning in part that the “zone” of privacy created by the work-product privilege is only waived when disclosure makes it more likely the materials will fall into an adversary’s hands, which is not the case when an NDA is in place.
After executing an NDA, the funder, claimant and lawyers can commence their substantive discussions about the case. These discussions typically focus on case fundamentals, such as the factual background, the nature of the claims, the damages claimed and the procedural posture of the case. Funders will also ask questions about the financial terms of the transaction, such as the projected budget, requested funding amount and the proposed funding terms (such as will the claimant use the funding to pay fees, costs or operating expenses).
The goal of these initial discussions is for the funder to determine whether a case meets its basic investment criteria. If it does, and the funder is interested in moving forward, it can generally propose a term sheet that outlines the economic terms of the investment soon after executing the NDA. If a case fails to satisfy a funder’s requirements, the funder will inform the claimant of its inability to proceed.
These preliminary discussions also allow claimants to efficiently identify funders that are equipped to handle their case and to eliminate those that are not. Because each funder’s investment criteria may differ, a case may be attractive to one funder even though it fails to satisfy another’s parameters. For example, Bentham IMF typically requires a minimum investment of $1 million and a minimum realistic damages projection of approximately $10 million. Other funders invest in much smaller cases and may have lower requirements for investment-to-damages ratios. Understanding these basic constraints early on will help claimants efficiently utilize their time and resources while they explore funding.
The exclusivity period
For reputable funders like Bentham, a fully executed term sheet is non-binding except for a limited exclusivity period, which generally lasts from 21 to 45 days. While some claimants are reluctant to commit to exclusivity, the practice ultimately benefits all parties to a funding transaction. Exclusivity is valuable for the funder because it protects the often substantial investment of time and resources a funder makes during its due diligence. For example, the funder may hire outside experts or consultants to assist in its evaluation, particularly if the case involves a complex damages model or specialized legal issues. Many funders bear all costs associated with this due diligence, including fees for outside experts.
Exclusivity benefits the claimant because it motivates the funder to reach its funding decision quickly and within the exclusivity period. Exclusivity also encourages the claimant’s lawyers to prioritize their work on the funding transaction in light of the short-term deadline. The lawyers’ active participation in the due diligence process is crucial, both in communicating the merits of the case and negotiating the terms of the deal.
Digging in: The funder’s due diligence
While each funder’s diligence process differs, there are several common requirements that claimants should anticipate during due diligence. For example, most funders will evaluate the strength of the documentary evidence supporting the case. This typically requires the claimant to provide copies of the key documents that will be used as evidence, such as relevant contracts and correspondence. Funders also seek to understand the legal and factual risks that have been identified in the case, often by reviewing the key pleadings or legal memoranda prepared by the attorneys, who can take comfort that such materials will remain protected as privileged work under the funder’s NDA.
Additionally, funders typically request and evaluate information related to damages. Commercial litigation funders look for sound damages theories that will result in an amount sufficient to cover the funder’s return, the law firm’s contingent fee, and leave enough remaining for the claimant to recover the majority of any award or settlement. Experienced funders usually ask claimants to share any preliminary damages analyses supporting their projected recovery. Ready access to this information will streamline the funder’s process and help generate confidence from an investment standpoint.
Another key aspect of the diligence process for reputable funders like Bentham is to analyze the likely time to resolution and realistic settlement prospects. As part of this assessment, Bentham strives to understand the claimant’s goals and expectations and to assess whether the funding transaction is likely to accommodate those goals as well as those of other interested parties. Bentham generally requires an introduction to the claimant, either in person or by telephone, in furtherance of this effort.
Finally, depending on the defendants, a funder may want to conduct a separate analysis into collectability. For instance, if the defendants are small or have a history of financial instability, the funder may require evidence that they have sufficient assets to support a recovery.
Claimants who are eager to expedite a funder’s due diligence should prepare for the process in advance by gathering and organizing materials to facilitate the funder’s analysis. If the materials to be shared are voluminous, the claimant should set up a data room or file sharing account and provide access soon after the term sheet is signed.
Negotiating a funding agreement
Another key step in a litigation financing transaction is negotiating the funding agreement itself. Bentham conducts this process in tandem with its due diligence. Dual-tracking these processes accelerates the transaction by ensuring that the parties do not waste time and expense on a case if they cannot agree upon transaction terms.
Generally, reaching transaction terms is not a sticking point for Bentham, which prioritizes proposing fair and straightforward funding agreements. All of Bentham’s funding arrangements are non-recourse, meaning that a contracting party has no liability to Bentham beyond the recovery from the litigation itself. Bentham’s funding agreements also explain in clear terms how Bentham’s financial return is calculated and provide for the filing of a security lien to protect Bentham’s investment.
The culmination of a funder’s investment process is “final approval,” a process that differs from funder to funder. For Bentham, final approval of a matter is subject to the vote of its Investment Committee. Bentham’s Investment Committee is comprised of retired senior judges and seasoned attorneys from around the world, all with significant experience as litigators and litigation funders.
Before Bentham’s Investment Committee votes on a matter, its members receive a comprehensive case memorandum from the investment manager and legal counsel who were assigned to conduct due diligence. The Investment Committee usually discusses and votes on a funding decision within days after receiving the case memorandum.
Bentham’s investment managers maintain regular contact with members of the Investment Committee as they conduct their due diligence. This helps ensure that major obstacles and issues in a case are identified as early as possible. Investment managers also work with Bentham’s legal counsel to prepare a comprehensive case memorandum for the Investment Committee, which analyzes the case’s key facts and legal issues. The Investment Committee usually discusses and votes on a funding decision about one week after receiving the case memorandum.
Closing and funding
Once a matter is approved by Bentham’s Investment Committee, Bentham can typically wire funds within days of closing. Depending on the terms of the deal and the needs of the claimant and its lawyers, this may be deployment of the entire amount of Bentham’s committed funding, or a smaller amount deployed at closing. Because Bentham only receives returns on funding that has been deployed, rather than on the amount committed, claimants should carefully consider whether they require an immediate lump-sum distribution, or whether it makes economic sense to withdraw funds as needed for the case.
Once funding begins, Bentham, like most funders, requires that it be kept informed of its investment, but it does not exercise control over litigation decisions such as strategy or settlement. Still, Bentham’s qualified investment managers and legal counsel remain engaged and available to offer their experience as an additional resource, with the ultimate goal of achieving a successful outcome for all parties.