Third Party Legal Opinions are addressed to persons or entities other than one’s own client, and have only been used routinely for a generation or two. Initially, opining attorneys rendered opinions to their own client (e.g., lender’s counsel to his/her client). Lenders’ counsel, however, realized that the borrower’s attorney is typically in a much better position to address certain matters concerning the borrower. Consequently, they began reallocating the risk by demanding the borrower’s attorney address opinions to the lender directly. Simply put, this became a game in which firms had: 1) opinions they gave, which said little; and 2) opinions they demanded, which said a lot.
Style and form
A very long opinion which spells everything out, complete with lengthy lists of exceptions, qualifications and assumptions, often gives rise to lengthy negotiations, greatly reducing the cost efficiency and usefulness of the opinion process. The alternative, of course, is found in short opinions, typically only a few pages long. With respect to these “short” opinions, two approaches are used: 1) The contract or prescriptive approach (e.g., ABA Accord); or 2) the “custom and practice” or “customary practice” approach (which are significantly more successful).
There have been a series of articles on opinion practice which attempt to facilitate the opinion process, including, most recently, the Legal Opinion Principles, Tri-Bar II and Restatement of the Law Governing Lawyers published in 1999, each focusing on the customary practice approach. Unfortunately, one cannot simply look up the meaning of the words found in an opinion letter in the dictionary, but rather must read them in the context of the general understandings developed between opinion givers and recipients. This does not mean that such frequently-used terms can only be used in this context and opinion givers certainly have the opportunity to disclaim customary practice, but if customary practice is to be invoked, customary language must be used. Thus, lawyers often state that an opinion should be “interpreted in accordance with the ABA Legal Opinion Principles” in order to invoke customary practice as a substitute for specific words, exceptions, qualifications and assumptions.
Facts set the stage
An opinion applies law to facts, and if the facts are wrong, the opinion is likely wrong. Opinions are not an investigation or a method to sort out fraud. If fraud is suspected, the transaction won’t close. The opinion giver obtains credible information gathered from appropriate people, and relies on it. The opinion giver must determine the information required, the appropriate source for such information, the vehicle to be used for obtaining the information, and the source’s reliability under the circumstances in which the opinion is being rendered. The question is “Does somebody know this?,” and if they don’t, fact has not been established.
Certificates from the client to their attorney
A certificate should contain the building blocks of facts that allow the rendering of an opinion (e.g., regular stock checks; confirmation by the corporate secretary that the corporate minute books were kept in a regular way and are complete; or that the resolution authorizing and approving the issuance of the stock was adopted at a meeting of the board of directors, properly noticed and at which a quorum was present). It should not rest upon “ultimate” facts which simply restate the opinion sought (e.g., “the transaction has been duly authorized”, or “the stock has been validly issued”). The certificate may have legal terms (e.g., “notice was duly given”), but it should not give legal conclusions (e.g., the legal consequence of giving notice). Public officer certificates, however, may have ultimate facts and conclusions (except “due incorporation”), because it is often the only form obtainable and it is fair to presume public officials rendering certificates understand the meaning of the legal conclusion.
The certificate must be obtained from a person (not the entity) reasonably believed to be an appropriate representative of the entity involved, with responsibility for the matters covered by the certificate. For example, the corporate secretary has access to, and is the keeper of, the corporate books and records, and would properly sign a certificate as to issuance of stock, not the treasurer. This rule is sometimes broken as a result of the chain of command. An individual who does not know the information may have someone working for her with access to the information, and thus may have the ability to discuss and verify the information before signing the certificate.
A certificate is not necessarily reliable simply because it states a fact. Since most information comes in a certificate or representation from individuals interested in the transaction (and represented by the opinion giver), questions as to the integrity of factual materials are often raised. Nevertheless, formality of certificates lends seriousness of focus, and often eliminates the problem of fading memories as may arise with an oral conversation.
Other counsel’s opinions
In a complex financial transaction the opining counsel may be requested to render an opinion beyond its expertise or more easily rendered by other counsel. In such circumstances, the opining counsel may assume or rely on the opinion of other council as one of the building blocks of the subject opinion. Lenders often prefer to receive only one “umbrella” legal opinion, but un-bundling the opinions (having two separate opinions) seems to reduce transaction costs. The opinion giver must believe the other counsel’s opinion is reasonable in its professional judgment, ordinarily ascertaining their reputation for competence in the process of engaging that other counsel. This reasonable professional judgment standard does not change when the opinion giver states that he or she believes it “justified” to rely on the other counsel’s opinion, in that the other counsel’s opinion is “satisfactory in form and scope.” This may be contrasted with the statement that the other counsel’s opinion is “satisfactory in form and substance,” which goes further and requires some independent investigation of the law. The diligence required by the latter is not fairly established by customary practice.
A certificate is not always obtainable, and a common fallback position is to assume a fact. Assumptions are typically used in three situations: 1) Information is not available (e.g., stock will be issued on exercise of a warrant and it is assumed consideration called for will be paid); 2) Relating to an opinion recipient who knows the facts in question better than the opinion giver; and 3) It would be expensive to ascertain the facts and the likelihood the assumption is false is low (e.g., documents conform with the original, signatures are genuine). Tri-Bar II takes the position that stated assumptions are analogous to an opinion exception, and the opinion giver is not responsible for the fact assumed, thereby shifting responsibility to the opinion recipient.
A stated assumption that is wrong may be included in the opinion (e.g., that the agreement is governed by the law of the opining lawyer’s own state, when in fact the agreement expressly states the law of another state applies). The more common assumption known to be wrong arises where the fact to be assumed can not be verified (e.g., assuming solvency in a leveraged buyout where the lender is seeking a fraudulent conveyance opinion). This is really a risk allocation, and the lender has either decided to rely on a third-party’s analysis or do the financial analysis itself to become comfortable with that assumption.
Tri-Bar II takes a very different position for unstated assumptions: The opinion giver is not entitled to rely on an unstated assumption if he or she knows it to be wrong, or if reliance under the circumstances would be unreasonable. Factual questions that leave one uneasy should be stated in the opinion to make it very clear that the opinion recipient is responsible with regard to that subject.
Duty not to mislead
Generally, the recipient is not the client (closing opinions outside the represented situation are an exception to this rule). The opinion giver must give fair answers to the posed questions, but is not required to make up new questions or try to figure out what else the other side might be interested in. It is a risk allocation issue, and represented opinion recipients are assumed to be making conscious decisions as to what opinions should be requested. They may be aware that a particular opinion is hard to give, and prefer to take the risk and make their own decision about that issue. The opinion giver can assume the other side knows and understands customary practice and will seek the advise of their counsel.
An all together different standard is applied if the opinion giver knows his client is about to commit fraud. A technically accurate opinion will not prevent the opinion giver from being deemed a participant in fraud. A legal opinion which is correct within the four corners of meaning established by customary practice may still be misleading, and customary practice (aside from any ethical duty) imposes a duty not to deliver a legal opinion that would be misleading under the circumstances. The easy solution is disclosure. Difficulties usually do not arise from express nonstandard exceptions and assumptions, which put the recipient on notice there may be a problem, but more frequently arise where a standard exception masks a problem more serious than commonly understood. For example, giving the opinion that “no litigation has been asserted in writing,” where the opining counsel was present two days before in heated discussions during which a complaint was put on the table, and litigation was threatened but not actually initiated by written document, would be misleading.
While the law firm gives the opinion, the firm acts through individual lawyers, and it is the knowledge of these individuals that is used to actually prepare the opinion letter, not the knowledge being imputed from every lawyer in the office. The preparer is not required to go through firm files or consult with everyone in the office (Paragraph 3A and 3B of the Principles). Certain opinions, (e.g., “no breach” or “no litigation”), are really law firm statements of fact, and law firms frequently try to limit the scope of the opinion by adding the phrase “to our knowledge.” Tri-Bar II has concluded, however, that this phrase does not add or subtract from customary diligence or effort in assembling facts for an opinion. Additional language, such as “without investigation” is needed to signal to the recipient that the opinion giver has not exercised customary diligence under the circumstances and has relied precisely on his or her personal knowledge and has gone no further. Even where such limiting language is used, however, the opinion giver is still required to have at least talked to the client and the people who worked on the transaction at issue. Thus, this situation provides a classic example of words in an opinion not having the same meaning as would be found in a dictionary.
What law is covered
Opinions expressed are generally limited to laws of the state of the opining attorney currently in effect. Which particular laws within a jurisdiction are covered by opinions creates confusion and often leads lawyers to worry what exceptions to take. A list of exceptions is never complete and invariably gets negotiated at great cost. Customary practice is to do a cost/benefit analysis and not expect an opinion on every aspect of law, and some areas are excluded. The first level of inquiry is the common understanding of the local bar as to what might conceivably apply (Principles § 2B), and second (the tricky part), identifying areas not covered. Tri-Bar II looks to which laws are essential to the opinion and reasonable under the circumstances for the recipient to conclude are intended to be covered. Customary practice understands municipal or other local laws (Principals § 2C), and some applicable laws, such as security laws, tax laws and solvency laws (Principals § 2D), are covered only when the opinion refers to them expressly. Statewide laws are covered, federal law may be covered. Tri-Bar II anticipates covering a regulatory matter applicable to the transaction relating to your client, but probably not if it relates to the other client, and there is disagreement if it relates to both clients. Usury laws are generally considered covered, but there is learned disagreement as to whether, e.g., margin rules are covered. The recipient cannot assume gray areas are covered, and if desired should ask expressly for a separate opinion on the matter.
Tri-Bar II identifies 3 broad categories into which almost all the undertakings in particular opinions fall:
- a promise for which there is no specific remedy (e.g., an agreement to pay the money back);
- a promise to which a particular remedy attaches (e.g., a covenant not to compete may be subject to specific performance);
- the various administrative undertakings in any agreement (e.g., choice of law or venue where law suits can be brought, how elements are determined and calculated, or agreement to arbitrate).
The remedies opinion covers all 3 categories.
There are customary understandings and interpretations used among persons who regularly give and regularly receive opinions, and the language used in opinions can not be read literally and without being familiar with that customary practice. Customary practice includes customary diligence (the legal investigation undertaken as part of giving an opinion).
The most basic task is to read the final version of the agreement and consider whether or not the provisions (undertakings) of the agreement are enforceable. Sometimes an opinion problem can be cured by fixing the agreement structure, sometimes not. Some opinion problems turn out to be business problems, and so it is necessary to try to cure them in some way, demonstrating that one purpose of legal opinions is to strengthen the transaction.
The opinion covers everything (the “each and every requirement”) in the document. If an element doesn’t or may not work in any material respect the opinion giver must take an exception pointing it out so the opinion recipient may evaluate the deficiency. The opinion giver need not have a case specifically on point to support the validity of a provision. The point is, “is there a reason to be concerned”. The “California” opinion approach is that the burden of giving the remedies opinion on “each and every” element is too hard, and limits the opinion to what is “material”. The difficulty is for the most part you can not determine if an issue is significant or “material” to the opinion recipient. Alternatively, a limitation is often attached stating that while certain of the provisions may be further limited or rendered unenforceable by applicable law, there will be “practical realization” of the principal benefits intended.
Two standard exceptions exist as a matter of customary practice whether or not expressly stated:
- the “equitable principles” exception dealing with facts that develop after the closing (if a contractual provision is inherently unenforceable it doesn’t protect you); and
- the “bankruptcy” exception, which is very broad and includes federal bankruptcy law, state insolvency laws, and fraudulent conveyance laws, the effect being that “all bets are off in bankruptcy” (The opinion recipient can ask for a specific bankruptcy opinion, see Tri-Bar Report at 46 Business Lawyer 717, 1991). The bankruptcy exception concerns an entire body of law, not just particular proceedings under that law. Under 11 U.S.C. § 109 of the Bankruptcy Code, domestic banks and domestic insurance companies are excluded from becoming debtors under the federal Bankruptcy Code, and state laws cover the insolvency aspects of domestic banks and domestic insurance companies. Custom is no special mention is made of the state laws applying to domestic banks and domestic insurance companies, but for special state laws for other types of debtors it is somewhat unclear. Tri-Bar II‘s position is that it is better practice to mention specifically that those laws exist, thus shifting the responsibility to advise on these issues from an opinion-giver to counsel for the opinion recipient.
As a matter of custom and practice some laws we know apply to the transaction are not considered. Customary practice is in the close cases it is not necessary for the giver to list it unless the recipient asks for it. In the remedies opinion, securities laws are not covered, except the investment company act under certain circumstances. Anti-trust laws and Exxon Florio aren’t covered. Margin rules are probably not covered. Hart-Scott-Rodino may be covered under some circumstances. There are lots of bodies of law out there that could conceivably apply depending upon the nature of the agreement and the transaction, e.g., OSHA, ERISA, and environmental laws, and there is a certain level of uncertainty because the understanding has not developed to the same extent as it has on the securities laws or antitrust laws. While acknowledging its position falls short of being well-established customary practice across the country, Tri-Bar II states a general remedies opinion that says no more or no less on the loan documents is saying that a court in the opinion giver’s state will enforce the choice of law clause selecting another state’s law.
Corporate status opinions
This opinion includes:
- validly existing (looks at today: the Certificate of Incorporation on file, whether the Secretary of State issues a “good standing” Certificate);
- due incorporation (an historical effort reconstructing the state’s statues at the time of incorporation and each amendment, e.g., Massachusetts at one point required a pre-incorporation agreement); and
- due organization (requiring review of the minute books to see whether required activities, such as election of directors, adoption of by-laws, etc., have actually taken place).
That a corporation has the corporate power under its articles, by-laws and corporate law to do the kind of transaction is rarely a problem unless e.g., the transaction involves setting up a bank or insurance company or a trust company where the state might not permit general corporations to have that kind of business. The opinion does not extend to e.g., an illegal dividend or occurrence of an interested transaction, because even though the directors may face liability or penalties, it doesn’t affect corporate power.
Assuming the corporation exists as a corporation and has the corporate power it needs, the issues of “due authorization” and “delivery” of the agreement on behalf of the company require review of corporate law, the certificate of incorporation, by-laws, resolutions (specific to the transaction or general), determining the proper body to act, and that the requisite vote was taken at a properly called meeting with a quorum present or with proper written consent. Due delivery requires:
- intent of the duly authorized officers to make the agreement effective on behalf of the company; and
- delivery of the document intended to be delivered. Faxed closings, signature pages put in escrow, last minute page changes, etc., require specific attention to detail.
The “no approval” opinion
This opinion that execution delivery by the company of the agreement and the performance by the company of the its obligations will not require approval from or any filings with any governmental authority, is directed to governmental approvals, not any kind of private contractual approvals. There is an overlap here with a “no violation of law” opinion, and the no approval opinion gives opportunity to list the approvals that are required, particularly with regulated companies. Care is required as approvals may be required after the agreements are entered into, or if received, there may be an appeal period that has yet to run. The opinions do not cover covenants or representations in a loan agreement e.g., that the company “will at all times conduct its business in accordance with all laws” which may require some sort of permit or approvals after closing, or local law (zoning, building codes) unless expressly stated. We need to look beyond the form of the opinion to whether the opinion is providing the business diligence that the business people need to have. While the overlaying “no misleading opinion” rule may permit saying nothing while knowing, there is no definitive answer outside of the context of the transaction and who the opinion recipient is. Penalties for proceeding in violation under other laws might be serious, e.g., of Securities and Exchange Commission laws, even though not covered by the opinion. One should also think twice about helping a client knit a violation of law.
The “no breach or default” opinion
This opinion covers three things generally:
- certificate of incorporation and bylaws;
- contacts; and
- court orders.
This opinion may require a study of things not studied in the course of closing the transaction, and you have to sit down and read a lot of other agreements. One key is to identify which contact and court orders are covered. The practice is that there is almost always a specific list, and generally almost totally based on company supplied information, i.e., a certificate, exhibit to the agreement, a list, or an exhibit filed with the SEC, etc. There is a future aspect which under custom and practice relates only to obligations under preexisting contracts.
The “no violation of law” opinion
This opinion is a supplement to the remedies opinion, telling the recipient that even though it may be getting what it has bargained for, the transaction may none-the-less subject the company to a fine or penalty for entering into the transaction. Law of the opinion giver’s state and maybe federal law reasonably recognized as being applicable are covered, but law the opinion letter excludes is not. Certain laws (above) are understood as a matter of customary practice not to be covered (local law, as well as Securities law, Antitrust, etc.). In the areas of uncertainty it is understood the opinion recipient should ask for a specific opinion. It is not necessary that every exception taken to the remedies opinion also be an exception to the no violation of law opinion.
The “no litigation” opinion
This opinion is also based primarily on company supplied information, and little is added by outside counsel other than catching the client in a mistake. It covers litigation that might affect the transaction, and sometimes also, litigation that might have an adverse effect on the property. It deals with pending litigation and sometimes threatened litigation (subdivided into written or oral). It is not required that the opining attorney search all court rooms in the country or even throughout the jurisdictions opined on, and searching the opining attorney’s file is probably not required. The litigation department may be consulted if the firm regularly handles litigation. But, you can’t ignore what you know, e.g., a certificate that is obviously wrong. Rarely in third party closing opinions, but certainly not within the context of the standard opinion letter (sometimes in audit opinions or supplemental opinions like a bankruptcy or tax opinion) does the lawyer ever get involved in evaluating litigation.
On receiving what he believed was an unreasonable lender’s opinion request and finding no written support to back his opposition, New York attorney James Fold wrote Legal Opinions and Business Transactions, An Attempt to Bring Some Order Out of Some Chaos (28 Business Lawyer, Page 915, 1973). Next, the New York County Lawyer’s Association, New York City Bar Association and the New York State Bar Association formed the Tri-Bar Opinion Committee to address guidelines for scope and content of written legal opinions in commercial transactions, and after initial attempts the consensus was defining terms was that was not the way to proceed. Jim Fold wrote another article, Lawyer’s Standards and Responsibilities in Rendering Opinions (33 Business Lawyer, Page 1295 in 1978). In 1979, the Tri-Bar Opinion Committee came out with the first comprehensive legal opinion report, Legal Opinions to Third Parties, An Easier Path (34 Business Lawyer, Page 1891), focusing on “customary and acceptable” third party opinion practice, with a goal of achieving meaningful reduction in time and effort devoted to the preparation and negotiation of opinions.
Many other states joined in commenting on legal opinion, perhaps the most prominent being the report of the 1982 California committee on corporations of the business law section (14 Pacific Law Journal 1001), updated in 1989 (45 Business Lawyer Page 2169). Over 70 lawyers representing a cross-section of opinion practice met in spring 1989, at the Silverado County Club in Napa Valley, California, becoming known as the Committee on Legal Opinions of the ABA Section of Business Law, resulting in the November, 1991 Third-Party Legal Opinion Report. It contains guidelines perceived as setting out a sound, fair basis drawn from current custom and practice for the negotiation and preparation of third-party legal opinions, but the heart was a legal opinion Accord that could be adopted by opinion-givers to govern the opinion letter. The Accord report was widely read, but was used more for the resolution of opinion debates than by adoption. States continued to comment on legal opinion practice, e.g., the Tri-Bar Opinion Legal Opinion Committee wrote specialized reports in the 1990s on bankruptcy (46 Business Lawyer Page 717); and UCC Security Interest Opinion (49 Business Lawyer, Page 359).
The Legal Opinion Principles, Tri-Bar II and Restatement of the Law Governing Lawyers, were published in 1998, each focusing heavily on the role of customary practice, and appear likely to be the three (3) principal non-judicial sources on legal opinions for years to come. All three are consistent with each other and basically consistent with past practice. While membership between groups overlapped some and each knew what the other was doing, there was no plan to publish simultaneously and no overall notation of coordination. The Restatement is a broad project studying how lawyers practice law, and applies the Restatement of Torts standard stating the relevant professional community for fixing the practices and standards to which lawyers are held is ordinarily that of lawyers undertaking similar matters in the relevant jurisdiction. This is typically a state, but may also be a national standard depending upon the nature of the issue involved (Restatement § 74(b)). The Principles are only two pages long, and deal with the basic elements of opinion practice, attempting to articulate custom and practice, but not the meaning of specific opinions. Tri-Bar report (I) was widely accepted and used, and was quite manageable and readable. Tri-Bar II is a short treatise based on group consensus, and adopts the same approach on customary practice as the Principles, but makes a helpful distinction breaking customary practice down to two subcategories: 1) Customary Diligence which is the work required to support the opinion; and 2) Customary Usage which is the standard understood meaning of specific words used in a legal opinion.