Sale and Purchase of Litigation Proceed Rights

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The sale and purchase of Litigation Proceed Rights tracks the typical language of stock purchase agreements used in venture capital, modified to reflect the basic requirement to fund through to a Milestone:

5.2 Purchase of Litigation Proceed Rights: Subject to the limitations of Section 6 and Subsections 5.4, 5.5, 5.6 and 5.7, at each Closing [the/each] Funder shall purchase Litigation Proceed Rights by depositing its Investment in the Litigation Account, such Investment being the Funder’s committed capital amount specified on Schedule [ ] less any Accelerated Investments previously made from that committed capital. [The/Each] Funder may invest more than such amount only with the prior written agreement of the Plaintiff.

5.3 Sale of Litigation Proceed Rights: Subject to the terms and conditions of this Agreement, at each Closing the Plaintiff shall sell to [the/each] Funder the number of Litigation Proceed Rights [the/each Funder] is due based on the applicable purchase price and the total amount of capital [the/each Funder] deposits in the Litigation Account at such Closing. At each Closing the Funder[s] shall receive Litigation Proceed Right Certificates evincing its purchases.

Other than the Accelerated Investments concept, which will be discussed with contract language in a separate post, a key point to note is the last sentence of 5.2, namely that a Funder cannot invest more at a Closing than the amount previously agreed with the Plaintiff. That restriction reflects the fact that the Plaintiff’s capital needs are not unlimited; selling more Litigation Proceed Rights than necessary to fund the Claim disadvantages the Plaintiff.

The restriction also reflects core value and security issuance differences between startups and claims. A startup has the potential to increase its value by an order of magnitude or more across its development, while nearly all claims (outside of potential class claims that are later certified as classes) do not. (See here for more discussion of this issue.) In addition, a startup can increase the number of shares it can sell, restricted only by its certificate of incorporation and the investment documents. By contrast, a plaintiff only ever has 100 Litigation Proceed Rights to sell. Under the model, in fact, the plaintiff has even fewer, because the plaintiff is guaranteed a (negotiated) minimum percentage to guard against unconscionability determinations. The fact that a plaintiff is dealing with a relatively fixed asset value and a rigid limit on its ability to issue securities means the plaintiff must have the ability to restrict investment in a way most entrepreneurs would not wish to. Indeed, based on the contingency fee analogy, a plaintiff may strive to sell no more than 33.3 Litigation Proceed Rights.

Another component of the basic transaction that tracks normal stock purchase agreements for staged venture financing is the concept of “Committed Capital”. That amount is the money a given Funder has indicated it is willing to invest during the financing round, provided each milestone is met along the way. Reflecting the model’s treatment of the litigation’s financing as a single venture financing round, Committed Capital is used thus:

5.1. Committed Capital: Subject to the terms and conditions of this Agreement, the Funder[s] commit[s] [$ ] to finance the conduct of the Claim through to the Conclusion of the Claim as specified on Schedule [ ].

To complete the terms of sale of Litigation Proceed Rights, both the events at which the sale occurs (Closings) and the price to be paid for each right need to be described. Because the model includes the concept of accelerated and supplemental investments, which deserve explanation in a separate post, the closings associated with them will be described in that post. In addition, the components of the price, namely the Initial Claim Value and the Risk Discount Factor, will be discussed in a their own post. For now, here are the two basic Closing terms:

5.3.1 The Initial Closing: At the Initial Closing the Plaintiff will sell [10] Litigation Proceed Rights. The Litigation Proceed Right Purchase Price for the Initial Closing is [$ ] /Litigation Proceed Right.

5.3.2 The Discovery Closing: At the Discovery Closing the Plaintiff will sell [20] Litigation Proceed Rights. The Litigation Proceed Right Purchase Price for the Discovery Closing is [$ ] /Litigation Proceed Right. Subject to the limitation imposed by Section 5.7, if the Plaintiff chooses, in its sole discretion, it may sell more than [20] Litigation Proceed Rights at the Discovery Closing.





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