Legal Opinions in Business Transactions (Excluding the Remedies Opinions) -- May 2005, Revised October 2007. The Corporations Committee of The State Bar of California Business Law Section

II. Definition and Purpose of a Legal Opinion

Commentators have defined the term "opinion" in a variety of ways, depending upon the context in which it is used.25 In business transactions, a legal opinion regarding a particular issue is customarily presented in an opinion letter and is widely understood to express the opinion giver's professional understanding of the legal principles generally applicable to a specific transaction or applicable to a particular aspect of the transaction.26 Many commentators view an opinion letter as a document that provides the opinion recipient with the opinion giver's professional judgment about how the highest court of the jurisdiction whose law is being addressed would resolve the issues covered by the opinion letter on the date of the opinion.27 It is widely recognized that neither an opinion letter nor any particular legal opinion expressed in it is intended to be -- or is -- a guarantee of a particular outcome.28

Some of the more common reasons for the preparation and delivery of an opinion letter include the following:

  1. To address whether an intended course of action is lawful or that certain desirable legal consequences will follow from an intended course of action (or, conversely, that certain legal consequences will not result from the proposed course of action);
  2. To satisfy contractual requirements -- e.g., an opinion given by issuer's counsel to investors in connection with the sale of securities or by borrower's counsel to the lender pursuant to a loan agreement;
  3. To satisfy regulatory requirements -- e.g., an opinion given in connection with the qualification of securities under the California Corporate Securities Law of 196829 (as amended, the "CSL") or their registration under the 1933 Act; and
  4. To resolve questions raised by other professionals and to provide an authoritative basis for statements, reports and opinions with respect to matters on which other professionals are not qualified to make judgments -- e.g., an opinion regarding local law provided to out-of-state counsel.

Lawyers and clients often cite due diligence as the principal reason for requesting opinion letters in business transactions. An opinion letter may be one component of a party's due diligence, but it should not normally be used as a substitute for due diligence performed by the opinion recipient (whether a party to the transaction or a third party that plays a key role in its consummation) and its counsel. While the opinion recipient generally has no affirmative responsibility to conduct due diligence to determine whether an opinion is accurate,30 receipt of an opinion letter is not a substitute for the diligence that the opinion recipient should conduct in a transaction such as, for example, the investigation and related procedures that would provide an underwriter with a due diligence defense under Section 11 of the 1933 Act. Moreover, an "opinion recipient has no right to rely on an opinion if reliance is unreasonable under the circumstances or the opinion is known by the opinion recipient to be false."31

Endnotes

25 For instance, Webster's Third New International Dictionary defines an opinion as "a formal expression by an expert (as a professional authority) of his thought upon or judgment or advice concerning a matter." Webster's Third New International Dictionary 1582 (1964). With respect to opinions in the legal context, Black's Law Dictionary refers to "[a] written document in which an attorney provides his or her understanding of the law as applied to assumed facts." BLACK'S LAW DICTIONARY 1120 (8th ed. 2004). In the current customary usage, that definition would correspond to the "opinion letter." Back

26 As stated in the ABA Guidelines, discussing the closing opinion, the opinion provides "the recipient with the opinion giver's professional judgment on legal issues concerning the opinion giver's client, the transaction, or both, that the recipient has determined to be important in connection with the transaction." ABA Guidelines § 1.1.

Where the lawyer is a member of a law firm, the opinion is typically rendered by and in the name of the firm itself (the "opinion giver"), rather than by an individual lawyer, who is an "opinion preparer." See Remedies Report, Appendix 1 ("Glossary"); TriBar Report § 1.8. As noted in the Remedies Report, in the definition (Appendix 1) of "opinion preparers," if a particular lawyer takes responsibility for a specific opinion within the opinion letter, then that lawyer is an "opinion preparer" only as to that opinion and not as to all other opinions in the opinion letter. Back

27 See RESTATEMENT § 95 comment c; TriBar Report § 1.2. Back

28 Smith v. Lewis, 13 Cal. 3d 349, 358, 118 Cal. Rptr. 621, 627 (1975). See RESTATEMENT § 52, comment b; ABA Principles § I.D. Back

29 CAL. CORP. CODE §§ 25000 -- 25707. Back

30 See TriBar Report § 1.6; ABA Principles § I.E; FIELD TREATISE § 3.9. But see Greyhound Leasing & Fin. Corp. v. Norwest Bank, 854 F.2d 1122 (8th Cir. 1988) (under North Dakota law, a lender's own negligence in not investigating lien status precludes a negligence claim against the opinion giver who relied solely upon a client's representations without conducting a lien search). Back

31 TriBar Report § 1.6. Back

III. Legal Standards Applicable to Preparation of an Opinion / Table of Contents