Even though the number of class action lawsuits brought to court is growing in mature jurisdictions around the world, the United States is still the largest market for securities and antitrust class action litigation. This is not least due to a number of crucial, and favourable, differences in the legal system that distinguish it from Europe, Asia and Australia. Raising funds for class actions in the form of litigation funding is therefore becoming an increasing trend as it effectively creates a U.S.-style scenario for group plaintiffs who bring a claim in another jurisdiction.
Noah Wortman, Managing Director, Americas and Global Head of Class Action Services at Goal Group of Companies and Jeremy Marshall, Chief Investment Officer at Bentham Europe Ltd
The U.S. is a particularly class action-friendly jurisdiction in comparison with other advanced legal regimes globally due to a number of distinct characteristics. First, group actions can be very profitable in the U.S.: it is not unusual for lawyers to act on a contingency fee basis on behalf of the lead plaintiff and the class. Upon a successful resolution to the litigation, lawyers may then apply to the court for attorneys’ fees and reimbursement of expenses. This is not the case in most other jurisdictions; contingency fee litigation is almost regarded with suspicion outside the U.S. as it may create a bias or perceived conflict for the lawyers. Second, there are no adverse costs in the U.S. Most other jurisdictions operate under a so-called “loser pays rule” which means the side that loses an adversary civil proceeding must pay some or all of the winner’s fees and expenses. Even though in such jurisdictions After-the-Event (ATE) Insurance may be able to cushion big losses and mitigate some of the risk, this also means that expenses to begin with are relatively high.
For that reason we have witnessed a global blossoming of a certain type of investment focused on mature jurisdictions that offer a viable legal framework for securities class actions; you will already have guessed that we are referring to litigation funding. This form of finance can take the form of private equity or funds. When tracing back the history of litigation funding we’re going to have a look ′down under′, because it’s in Australia where it all began. Established in 2001, litigation funding group IMF Bentham has been funding class actions and multiparty group actions throughout the country. Since then the business has expanded across the globe and offers its services in many jurisdictions, including the U.S., Canada, New Zealand, Hong Kong and Singapore.1 Today, London-based Bentham Europe Ltd. – originally formed in early 2014 as a joint venture between IMF Bentham and U.S. hedge fund Elliott Management Corporation, and solely owned by Elliott since July 20162 – is funding legal action on behalf of shareholders against supermarket chain Tesco3 and is funding legal actions against car manufacturer Volkswagen in Germany.4
But who does litigation funding really serve? As with all investments, the first and foremost goal of the financier is to get paid at the end. For a litigation funder to get involved in a case four major prerequisites need to be fulfilled: first, no jurisdictional risk should be involved with funding the case, i.e. local laws should allow for funding in a legal fashion. Second, the case should be a strong one and, third, a big one: damages awarded should account for at least ten times of what it will cost. And fourth, the issue of recoverability is an important one to consider. Defendants should be able to pay the damages otherwise even the strongest and biggest case doesn’t bring any financial merits to the investor. This means money will flow into cases that promise a positive outcome for the investor. At the same time the rule that higher risks mean higher returns also applies here and it may still be possible to get multiple litigation funders on board for more challenging cases if the potential rewards are high enough. This is especially true in territories where adverse costs apply. For instance Australian and UK funders tend to charge around 20-35% return on top of their investment to cover risk of loss. Nevertheless, for the plaintiff, litigation funding creates the same level of comfort and protection in a jurisdiction where U.S.-style contingency fee litigation is not allowed as they would enjoy in a U.S. class action litigation. Effectively, the funded litigation doesn’t “cost“ anything, meaning the plaintiff should not be out of pocket for any expenses because the funder covers all of them. Other key benefits to the plaintiff are that a litigation funder comes on board having a true alignment of interest and a litigation funder can often add value in terms of case management expertise and strategic and financial discipline.
The rise of litigation funding on a global scale correlates with a growth in securities and antitrust class actions worldwide. The idea of taking on a case outside of the U.S. is not a scary one any longer. At the same time, more and more legal systems comprise the necessary mechanisms to allow for collective redress in some form. This development is fostered by increasingly complex global markets in which shareholder litigation against global corporates will be brought in the country where the defendant company is headquartered, as we now see with the Volkswagen case in Germany. The same is true for the RBS5 and Tesco cases in the UK. Other jurisdictions with a high growth potential for litigation funding are Canada, France and the Scandinavian countries. In Asia, Hong Kong and Singapore are poised for growth because of international arbitration increasingly being brought here.
In the U.S. the notion of litigation funding is still a somewhat mysterious one compared to countries such as Australia, Canada and some European countries where it is regarded as standard procedure. In fact, class actions are not the type of case financed by litigation funders in the U.S.; here, the focus is on intellectual property and B2B claims. However, given the size of its legal market, the U.S. is one of the areas with the biggest potential for growth for litigation funding. Due to the structure of the legal system, what has become more prevalent in the U.S. are so-called portfolio deals where investors provide law firms with capital for various cases across the firm and profits are dependent on any case the law firm is running. This practically resembles a loan from the litigation funder to the law firm. Similarly, because the U.S. system has become so successful, law firms have been able to build capital reserves that can be used towards litigation funding at home or abroad. When taking a case overseas they now pair with a local firm and act as a litigation funder themselves. There is a risk here though: lawyers are not necessarily business people and therefore might prove less successful in assessing the benefits of getting involved in one particular case.
Another important distinction between jurisdictions has to do with opt-in vs. opt-out systems. Whereas in the U.S. plaintiffs would have to opt-out in order not to be included in a class action, countries like the UK or Germany have an opt-in system (although the UK has now dipped its toe into the opt-out world in relation to certain types of competition claims) . The opt-in/opt-out distinctions complicate the process somewhat. For instance Australian courts have stated that a funder cannot finance an opt-out case. This is because a funder is required to have a contract with every class member which is not provided for in an opt-out case. In Australia, litigation funding is therefore only available for opt-in lawsuits. Given that Australia is the most advanced country for litigation funding, it is likely that the matter of how to fund an opt-out case will be a future issue in the U.S., too.
Due to the peculiarities of its legal system the U.S., as a relatively new market for litigation funding, it differs substantially from heavyweights like Australia and newcomers to the scene such as Germany. Despite its differences, however, the U.S. represents a burgeoning potential market, its already well-established legal industry providing the perfect springboard for growth. Shifting structures in funding have seen a rise in portfolio cases, common to the U.S., which spread risk as with other investments and increase the appeal of litigation funding for investors. The U.S. can therefore become a model case for a highly dynamic niche segment of the financial market being driven by savvy investors. In the rest of the world, litigation funding is likely to be more strongly determined by a need to yield returns in excess of the initial expenses.
1IMF Bentham, http://www.imf.com.au/about#ourhistory
2Bentham Europe Ltd, http://www.benthameurope.com/
3Bentham Europe Ltd, “Shareholder Action against Tesco PLC“,
4Bentham Europe Ltd, “Proposed Volkswagen AG Shareholders‘ Legal Action“,
5Financial Times Online, “RBS at the sharp end in High Court litigation”, 19 October 2015, http://www.ft.com/cms/s/0/10d140c4-6c2a-11e5-8171-ba1968cf791a.html#axzz4CykBfJvQ
Transforming Saudi Arabia’s Capital Markets
This article is sponsored by State Street.
– Vision 2030 and the Aramco privatization mark a decisive point to advance Saudi Arabia’s financial sector — a critical ingredient to the country’s economic transformation
– Saudi’s “Financial Triad” remains partially incomplete with a sound banking system and a rapidly emerging equity market, but an immature bond market.
– The privatization of Saudi state assets (including Aramco) could deliver a boost to the depth and sophistication of the Saudi equity market and — if cleverly designed— have positive spillover effects into other areas of finance and policy.
– The timing is ideal to launch an accompanying systematic drive to build local currency bond markets, which is a prerequisite for achieving the broader economic goals of Vision 2030.
Saudi Arabia’s Vision 2030 is remarkable in its aspiration to engineer far-reaching economic transformation. As a global asset manager, we note that one of the three pillars of this vision sets out the aim to make the country a “global investment powerhouse.” 1
While Saudi Arabia has a strong legacy as a sovereign investor in foreign markets, this ambition also requires its local financial system to deepen across all sectors. Strong capital markets work together with a banking system to channel investment and ensure efficient capital allocation across the economy. In the absence of such channels, many worthwhile business ventures never take place, capital is misallocated and underutilized, and economic growth remains below its potential.
To read the full study please click here.
1 Foreword to Vision 2030, http://vision2030.gov.sa/en/foreword.
Sovereign Wealth Funds as a Driver of African Development
This article is sponsored by Quantum Global.
Sovereign wealth funds (SWFs) are becoming important sources of development in many countries. African SWFs have been growing in recent years, as many countries joined the international trend in establishing SWFs, while many others are preparing to join. Growth of SWFs has been driven by rising commodity prices until 2014 and improving economic growth rates. At the same time, Africa continues to face a number of development challenges, raising the question of whether SWFs can play a role in fostering economic development on the continent. This paper analyses the dynamics and role of SWFs in promoting development in Africa. The paper notes that SWFs can play a more active role in Africa’s development by bridging the infrastructure funding gap, supporting industrial development and economic diversification, reducing macroeconomic volatility and enhancing intergenerational equity. For SWFs to be effective in delivering their mandates and supporting economic development, they need to have clear goals and objectives, improve their governance and transparency frameworks, improve their risk management frameworks and embrace the Santiago Principles. African governments need to develop more attractive frameworks and climates for SWFs to invest in the continent, especially in sectors that contribute more directly to addressing Africa’s development needs.
To read the full study please click here.
Collateral: The New Performance Driver
This article is sponsored by BNY Mellon.
In 2017, the global buy-side community faces considerable liquidity and funding pressures, stemming from market and regulatory reforms that are causing disruption. As a result, access to high-quality collateral, funding and liquidity is not only a pressing concern but has emerged as the essential new performance driver for the buy-side.
This disruption is the result of two opposing forces. Stringent regulatory requirements are forcing market participants to seek collateral — generally of high quality — in order to secure trading exposures. At the same time, the sell-side — or dealer-sponsored financial plumbing used to supply liquidity and collateral to the market — is experiencing challenges due to Basel III capital and liquidity constraints.
A major concern among multiple buy-side firms is that the next market-stress event will occur not because of a lack of collateral in the financial system but rather due to the inaccessibility of this collateral.¹ This scenario is forcing firms to reevaluate their collateralized trading portfolios, recalibrate asset allocation strategies and in some cases review the investment products offered to end clients.
This paper presents the findings from BNY Mellon–PwC outreach to senior buy-side executives from over 120 global firms conducted during the first quarter of 2017. It provides insights on demand-supply imbalances that are being experienced by buyside firms and the possible solutions they are exploring in response to fears that ready access to liquidity and high-quality collateral may become scarce in the years ahead.
The picture that emerged from these discussions was one of a buy-side community both grappling to adjust to its new collateralized trading obligations as well as striving to secure access to sustainable sources of funding and liquidity.
To read the full study please click here.
1. Collateral can be inaccessible due to decreasing velocity of collateral, which indicates how much, on average, a single dollar of collateral is reused over a period of time. This is analogous to the concept of “velocity of money.”
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