Third party litigation funding

Læs artiklen på dansk ved at ændre din sprogpræference øverst til venstre af den grønne boks.

In recent years, we have seen several examples of plaintiffs in a lawsuit before the Danish courts receiving financial support from a third party. The phrase litigation funding covers the fact that an third party finances a compensation case in exchange for receiving a share of the compensation payment. This makes it possible to finance lawsuits that, due to the costs of the case, might not otherwise be brought before the court. There are a number of international companies that specialise in financing litigation and this is relatively conventional in the US and partly in the UK. Litigation funding has also gained ground on the European continent, which has set in motion legislation on this at EU level.

We here give a summary of the status in Denmark.

Litigation funding in Denmark

In Denmark, a number of listed companies and directors and board members of such companies have been met with claims for compensation financed by a third party. It is characteristic of the cases that they are complicated and relate to claims for compensation with great economic value. Often, all or part of the claim is covered by insurance.

Litigation funding of Danish lawsuits raises several questions; how is it regulated? Will it affect the way in which the cases are conducted? Will this lead to an increase in the number of complex lawsuits (e.g. cases of shareholder claims against listed companies or more cases of consumer rights) in Denmark?

The regulation

Litigation funding is unregulated in Denmark and must be considered legal, as long as both the general rules of procedural law and the rules of legal ethics are complied with.

Procedural financing is often used by bankruptcy estates, where the trustee has the opportunity to get the estate's creditors to finance a reversal case or a compensation case against the management. The estate's creditors may condition a share of the proceeds of a lawsuit against financing the lawsuit. An example is a case from 2012, where it was agreed that a creditor should provide security for the costs of the case against receiving 50% of the proceeds that the estate could obtain at the trial. The question of the validity of the agreement went all the way to the Supreme Court, which in U2017.1815H approved the agreement without emphasising that the financing originated from a creditor in the estate. The judgment can be read as an acceptance that litigation funding may also be relevant outside bankruptcy estates.

Although a third party is allowed to condition its financing of a lawsuit on receiving a share of the compensation payment, lawyers are not allowed to calculate their fees as a share of a compensation. The remuneration of the third party and the lawyer must therefore be kept separate.

The lawyer represents the plaintiff(s) making use of the financing, and not the third party. The lawyer must therefore be aware of any conflicts of interest.

Status in the EU

Also under the auspices of the EU, litigation funding is largely unregulated. The legal framework depends on whether the company or the fund, offering the financing, is listed or not. The European Parliamentary Research Service has published a study examining litigation funding in the EU and recommends to develop and implement legislation . The study focuses in particular on the rules of legal ethics and potential conflicts of interest as well as the establishment of some minimum standards in order to avoid “forum shopping” so that litigation funding primarily takes place in the countries where the rules are most advantageous. Specifically, the study proposes that a provision regarding litigation funding be inserted in “The Code of Conduct for European Lawyers”. It is also recommended to establish protective measures, such as to give the winner of a case financed by a third party access to recover the costs of the case from that party.

What types of claims are typically funded by third parties

As mentioned, the lawsuits will typically be about compensation claims with high financial value and with the possibility of insurance coverage. What we have seen so far in Denmark are lawsuits about alleged misinformation to the stock market and about alleged misleading in formation in a public offering circular or a prospectus. .

Both types of claims can be raised against a company as well as against the company's executive management, whereby the board's (and executive management's) liability insurance and/or the IPO insurance are activated.

IPO/ prospectus claim

Belgian Deminor is financing a shareholder claim against two international investment banks that have advised on a stock exchange listing of a Danish company. The case is not closed.

Lawsuits in USA & DK

In 2011, a number of shareholders filed a lawsuit in the US against a Danish C20 company and some of the members of its management. The case ended with a settlement, but resulted in some of the shareholders filing a class action lawsuit in Denmark against the company. The lawsuit was funded by Deminor. The plaintiffs withdrew the lawsuit in 2020. Australian IMF Bentham is currently financing a lawsuit in Denmark on behalf of a number of shareholders, which also stems from a claim for damages raised in the US by dissatisfied shareholders.

Kennedys’ comments

One should probably neither shame nor praise the use of litigation funding in Denmark. It seems too early to say anything about the significance to the litigation process, just as it is not yet possible to assess whether there will be more and larger compensation cases against e.g. listed companies solely due to the possibility of external financing. In recent years, there have been quite a number of very complex compensation cases in Denmark - even without the use of litigation funding. The bank cases that came in the wake of the financial crisis are good examples of this. Litigation funding, however, has the potential to change the balance of power between consumers and shareholders on the one hand and companies and their insurance companies on the other. More cases financed through litigation funding can mean increased litigation costs for large companies and their management, which will typically be the target of claims for damages. As such legal costs are often wholly or partly covered by insurance, the spread of litigation funding as a financing method should also have the attention of Danish insurance companies. The funds or companies that provide litigation funding operate globally, and it will be interesting to observe any regulation initiatives that may follow the EU Commission's recommendations for EU legal regulation of litigation funding.

Read other items in Professions and Financial Lines Brief - July 2021