The Litigation Food Chain

22nd Mar 2016

Even in the animal kingdom occasionally the hunter becomes the hunted and the predator becomes the prey.  The Australia-based international law firm Slater & Gordon is facing a shareholder class action lawsuit supported by both an Australian-based and London-based litigation funder.

Slater & Gordon is in a unique position of being a law firm facing a shareholder suit.  In 2007, the firm became the first in the world to go public, listed on the Australian Securities Exchange.  The firm has used this easy access to capital to fuel major growth through the acquisition of a number of other firms.  In 2012, the firm entered the UK market and has since become one of the country’s largest consumer law firms.

In the UK, Slater & Gordon relies heavily on personal injury cases.  In order to expand this practice in March 2015, the firm acquired the professional service division of Quindell, a business specialising in exactly this type of case.  The acquisition was said to increase the firm’s market share of UK personal injury law to 12%, from 5% at that time, and make Slater & Gordon the largest personal injury firm in the country.

Instead, the move had the opposite result, causing the firm’s stock to suffer a major decline—catastrophically dropping from AUS$8 in April 2015 to an all-time low of 26c at the beginning of March 2016.  On 29 February, Slater & Gordon reported a £493m loss for the six months prior to 31 December 2015, largely due to write downs in relation to the Quindell acquisition.

Enter the Australian law firm ACA Lawyers.  The firm filed suit on behalf of Slater & Gordon’s shareholders who purchased stock between 1 April and 17 December last year.  But ACA Lawyers is not bringing the suit by itself.  The shareholder dispute is being funded by the British company Woodsford Litigation Funding and the Australian funder Justkapital Litigation Finance.

Litigation Food Chain

The financing provided by the two litigation funding firms presumably does not come free of cost.  Typical litigation funding arrangements set a price of 30-40% of the total recovery.  Furthermore, the lawyers bringing the suit are not working for free.  If a settlement is reached or damages awarded, the amount shareholders may recover will be drastically reduced by the fees both the litigation funders and ACA Lawyers receive.

This begs the question, who is really benefiting from this shareholder dispute, particularly if stock prices are offset by any recovery awarded to the shareholders in the class?  Or is it potentially serving to shift money from one group of investors to another, while providing a large pay out to the lawyers and funders?

Slater & Gordon responded by revealing a major restructuring of their UK operations.  It is expected the firm will settle a number of cases in Australia to improve their cash flow.  According to the Sydney Morning Herald, Westpac and National Australia Bank have given Slater & Gordon until 30 April 2016 to prove they can improve their cash flow.

In the meantime, a firm that brings lawsuits for its survival is being closely followed by larger fish in the litigation ocean.