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

Introduction

This report ("Report") is a commentary on the use of legal opinions in business transactions, with particular consideration of the impact of California law and practice on such opinions. It has been prepared by the Corporations Committee (the "Committee") of the Business Law Section of the State Bar of California (the "Business Law Section") and issued by the Committee with the approval of the Executive Committee of the Business Law Section. This Report supersedes the opinion report prepared by the Committee in 1989 (the "1989 Report"),1 which itself updated and restated the opinion report prepared by the Committee in 1982.2 This Report is not intended to prescribe specific forms of legal opinions expressed in opinion letters or required procedures for rendering them, but rather is intended to reflect current opinion practice in California as understood by the Committee. The views set forth in this Report represent a consensus among the Committee members listed on pages (i) and (ii) of this Report, but do not necessarily reflect the positions of individual members or their respective firms or organizations.

Since the 1989 Report was published, there have been several important contributions to the commentary on legal opinions and their content. In 1991, the Legal Opinions Committee of the American Bar Association (the "ABA Committee") published its Third-Party Legal Opinion Report, including the Legal Opinion Accord (the "Accord").3 Rather than summarizing opinion practice, the Accord proposed to govern the terms and conditions of opinions that adopted the Accord. An Accord opinion would therefore incorporate all assumptions and conditions set forth as standard terms of the Accord, without having to restate those assumptions or conditions.4 In 1992, the Business Law Section issued a report designed to provide guidance to members of the State Bar of California who wished to adopt the Accord for opinions.5 The Accord did not gain widespread acceptance in California but is still used as a resource in preparing opinion letters, much as the 1989 Report was intended to be used.

In 1998, the TriBar Opinion Committee issued its report on Third-Party Closing Opinions (the "TriBar Report")6 and the ABA Committee issued its Legal Opinion Principles (the "ABA Principles").7 In 2002, the ABA Committee published an update to its Guidelines for the Preparation of Closing Opinions (the "ABA Guidelines"),8 which were originally published in conjunction with the Accord. Unlike the Accord, these reports were intended to provide guidance on opinion practice rather than to delineate a set of standards that could be adopted to govern an opinion. The foregoing reports, along with the 1989 Report, have become important sources of information regarding opinion practice for lawyers.9 In 2000, the American Law Institute published the Restatement (Third) of the Law Governing Lawyers (the "Restatement"), which includes a number of sections relating to third-party legal opinions.10

The 1989 Report, the TriBar Report, the ABA Principles and the ABA Guidelines, as well as this Report, summarize what the drafters of those reports observe to be customary practice. Those reports and this Report are not intended to have a prescriptive effect on the standards applicable to legal opinions for purposes of liability. Nonetheless, as acknowledged by the Restatement, customary practice on such issues as the scope of diligence underlying third party opinions is articulated in bar association reports, treatises, and articles.11

In 2002, the Business Law Section and the Real Property Law Section of the State Bar of California published a collection of their various opinion reports (the "2002 Opinion Reports").12 Even prior to that, the Business Law Section had initiated an overall project to update or replace the segments of the 2002 Opinion Reports originally prepared by standing committees of the Section, including the Committee. In that connection, the Section issued its report on Third- Party Remedies Opinions, prepared by the Section's Opinions Committee, in September 2004 (the "Remedies Report").13 The Uniform Commercial Code Committee of the Section is in the process of updating its UCC 1988 report. This Report should be read in conjunction with the Remedies Report and the 2002 Opinion Reports, as updated.14

This Report is based upon California statutory and case law and the Committee's view of current opinion practice among California lawyers. Accordingly, readers are cautioned that the discussion of legal principles and suggested opinion language contained in this Report should be evaluated in light of any subsequent legislation or judicial decisions and the normal evolution of customary opinion practices.

For convenience, this Report uses the following definitions and conventions in describing opinion practice: (1) following the convention of the Remedies Report and the TriBar Report, "opinion giver" refers to the lawyer or law firm in whose name an opinion letter is signed, "opinion preparer(s)" refers to the lawyer(s) in the law firm who prepare an opinion letter, and "opinion recipient" refers to the addressee of the opinion letter and others, if any, expressly granted permission by the opinion giver to rely on the opinion letter;15 (2) the business entity16 that is the subject of the opinion is referred to as the "Company"; (3) the contracts and/or other written instruments evidencing obligations of the Company that the opinion addresses are collectively referred to as the "Agreement," which includes both the singular and plural as applicable to a specific situation; and (4) the list of contracts and other written instruments that are the subject of specific portions of the opinion are referred to as the "Material Agreements." As used in sample texts of opinion segments set forth in this Report, capitalized terms are "markers" for the actual corresponding term as defined in the opinion letter itself. For a glossary of the defined terms used in this Report, see Appendix A.

Endnotes

1 Comm. on Corps., State Bar of California, 1989 Report of the Committee on Corporations Regarding Legal Opinions in Business Transactions, 45 BUS. LAW. 2169 (1990) [hereinafter 1989 Report]. Back

2 Comm. on Corps., State Bar of California, Report of the Committee on Corporations Regarding Legal Opinions in Business Transactions (1982), reprinted in 14 PAC. L.J. 1001 (1983). Back

3 Comm. on Legal Opinions, American Bar Association, Third-Party Legal Opinion Report, including the Legal Opinion Accord, of the Section of Business Law, American Bar Association, 47 BUS. LAW. 167 (1991) [hereinafter Accord]. The 1991 Third-Party Legal Opinion Report includes not only the Accord but also "Certain Guidelines for the Negotiation and Preparation of Third-Party Legal Opinions." These guidelines have been superseded. See note 8. Accordingly, references in this Report to the Accord do not include the guidelines published in 1991 with the Accord. Back

4 The Accord does provide for "private ordering," which allowed for modifications to the Accord's provisions for a specific opinion letter. Back

5 Business Law Section, State Bar of California, Business Law Section of the State Bar of California Report on the Third-Party Legal Opinion Report of the ABA Section of Business Law (1992). The 1992 report also offers a summary of the differences between positions taken in the 1989 Report and the Accord. Back

6 TriBar Opinion Comm., Third-Party "Closing" Opinions, 53 BUS. LAW. 591 (1998) [hereinafter TriBar Report]. Back

7 Comm. on Legal Opinions, Section of Business Law, American Bar Association, Legal Opinion Principles, 53 BUS. LAW. 831 (1998) [hereinafter ABA Principles]. Back

8 Comm. on Legal Opinions, American Bar Association, Guidelines for the Preparation of Closing Opinions, 57 BUS. LAW. 875 (2002) [hereinafter ABA Guidelines]. Back

9 In January 2001, the Business Law Section of the State Bar of California issued a statement advising that the 1989 Report was out of date on some issues, and recommended that lawyers use the 1989 Report in conjunction with the Restatement, the ABA Principles, the ABA Guidelines and the TriBar Report. Back

10 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS (2000) [hereinafter RESTATEMENT]. Back

11 RESTATEMENT § 95, comment a. Back

12 Business Law Section & Real Property Section, State Bar of California, CALIFORNIA OPINION REPORTS (2002). The 2002 Opinion Reports include the following reports:

  • Statement of the Business Law Section of the State of California (January 2001);
  • 1989 Report of the Committee on Corporations of the Business Law Section of the State Bar of California Regarding Legal Opinions in Business Transactions (August 1989);
  • Report Regarding Legal Opinions in Personal Property Secured Transactions (December 1988);
  • Report on the Legal Opinion Report of the ABA Section of Business Law (May 1992);
  • Report on Legal Opinions Concerning California Partnerships (February 1998);
  • Report on Legal Opinions Concerning California Limited Liability Companies (February 2000);
  • Statement of the Joint Committee of the Real Property Law Section of the State Bar of California and the Real Property Law Section of the Los Angeles County Bar Association (May 2001);
  • Legal Opinions in California Real Estate Transactions (1987);
  • Legal Opinions in California Real Estate Transactions: An Addendum (March 14,1990);
  • 1995 California Real Property Legal Opinion Report;
  • First Supplement to 1995 California Real Property Legal Opinion Report (1998);
  • Inclusive Real Estate Secured Transaction Opinion in which are Incorporated the Principal Concepts of the ABA Section of Real Property, Probate and Trust Law and the American College of Real Estate Lawyers Report on Adaptation of the Legal Opinion Accord.
  • Back

13 The Remedies Report is available on the Section's website at http://www.calbar.ca.gov/calbar/pdfs/sections/buslaw/opinions/2005-01_remedies-opinion.pdf. Back

14 The Committee's 1989 Report is superseded by this Report and the Remedies Report. Back

15 See Appendix 1 ("Glossary") to the Remedies Report. Back

16 Many of the specific opinions covered in this Report will be applicable to transactions undertaken by business entities other than corporations. As it relates to the form of entity and the concepts governing them, however, this Report assumes that the Company is a corporation and specifically addresses issues applicable to California corporations. Practitioners rendering opinions where the Company is a partnership or limited liability company are encouraged to consider the separate reports specifically applicable to such entities, which are included in the 2002 Opinion Reports. Back


I. Purpose of This Report / Table of Contents