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
IV. Preparation of The Opinion Letter

A. Preliminary Considerations

Before agreeing on the opinion to be rendered in a particular business transaction, the lawyers representing the principals should carefully consider the size, nature and scope of the transaction and the legal issues relevant to it. The opinion giver should also consider whether giving the opinion will create a conflict with its representation of existing clients.51

Generally, an opinion should not be requested or rendered on non-material matters,52 on laws of states or foreign countries with which the lawyer is not familiar, or on issues for which the opinion must be so qualified that it is of little value to the recipient. This Report discusses several (but not all) instances in which, in the Committee's view, it is generally inappropriate to request and, if requested, it would generally be appropriate to decline to render, a particular form of opinion,53 including for reasons of cost effectiveness.54 As a threshold matter, counsel for the opinion recipient should consider whether it would agree to furnish the opinion if requested to do so in a similar transaction. This principle is often referred to as the "Golden Rule" of opinion practice.55

If counsel disagree on the propriety of a requested opinion, the matter should be resolved early in the transaction.

For further discussion of when it is and is not appropriate to request a legal opinion, specifically a remedies opinion, see the Remedies Report, Appendix 4 ("Report of the Threshold Subcommittee").

B. Problem Areas and Inappropriate Subjects for Opinion Requests

Differences between opinion givers and opinion recipients generally arise over (1) the time and expense required to render an opinion on a matter that is peripheral to the transaction or to the primary concerns of the opinion recipient, (2) the appropriate scope of a particular opinion, (3) whether the opinion will cover matters that are essentially factual in nature, (4) whether the opinion will cover matters about which there is some recognized legal uncertainty, and (5) requests for what historically were referred to as "comfort opinions" but are more properly referred to as "negative assurances." In addition to "problem areas" of specific opinions addressed elsewhere in this Report,56 this Section addresses "problem areas" in general.

1. Opinions That Are Not Cost-Effective

As discussed in Part III of this Report, opinion givers are held to certain standards of skill and care in rendering legal opinions. Although the nature and extent of the applicable standards of care are not clearly defined, the opinion giver is obligated to avoid misleading opinion recipients about the scope and depth of any investigation undertaken.57 Moreover, lawyers are responsible for conducting customary legal and factual diligence in rendering legal opinions. For this reason, rendering an opinion letter may be a costly process, even in the context of a relatively straightforward business transaction. In determining whether a particular opinion is appropriate under the circumstances and, if so, what the nature and scope of that opinion should be, the opinion giver must consider the costs of giving the opinion relative to the benefits to the client of satisfying the request of the opinion recipient.

In many cases, the opinion recipient should be satisfied by its own lawyer's review and advice and should refrain from requesting an opinion from counsel for the other party to the transaction. Moreover, this often is more cost-effective because the lawyer for the opinion recipient usually is more familiar with the documentation. Lawyers asked to render an opinion requiring costly preparation typically inform their client at the outset about the issues presented by the request. Unless otherwise instructed by its client, the opinion giver often attempts to limit the opinion in appropriate circumstances, for example when the opinion involves substantial factual investigation or legal principles not within the expertise of the opinion giver.

To avoid unnecessary costs in preparing an opinion, the opinion giver should carefully review the proposed draft opinion (often prepared by opposing counsel) and resist acquiescing to opinions on matters that are peripheral to the transaction at hand. An example of an opinion that often is not cost-effective in a typical transaction is an opinion that all of the issued and outstanding shares of capital stock of the client have been duly authorized and validly issued and are fully paid and nonassessable.58

Opinions of this sort may require legal conclusions that are heavily dependent on a complex set of facts and circumstances or the assistance of special counsel in areas in which the opinion giver is not competent. If the scope of the opinion is not limited, then unrealistic burdens may be placed on the opinion giver.

If the opinion recipient is concerned about a significant legal issue, it may be appropriate to insist that the opinion giver undertake the necessary legal investigation to render an opinion on that specific issue, assuming it is practical and customary to give such an opinion. The matter then becomes the subject of negotiation.

Opinions may be made less burdensome and therefore more appropriate if narrowed in scope. For example, opinions that a particular transaction does not violate specified laws or specified contracts are common. However, the time and financial resources of the parties and their counsel often are better served by appropriate representations and warranties in the underlying agreement and by the concerned party conducting its own due diligence investigation.59

Often, the parties attempt to lessen the burden by allowing the opinion giver to base the opinion upon its "best knowledge" or "current actual knowledge," phrases typically intended to indicate that the opinion giver has not engaged in any factual investigation beyond the facts known to the opinion giver. Generally for such qualifications to be effective in limiting the opinion giver's obligation to exercise customary diligence in rendering an opinion, the opinion giver will include an express statement describing the factual investigation it conducted on a particular point and making clear that no other investigation was conducted. A knowledge qualifier, however, will not generally render an overbroad opinion appropriate because it is properly used only with respect to factual diligence.60

2. Inappropriate Scope

The Committee believes that a number of opinions that were relatively common when the 1989 Report was issued would now be considered inappropriate because their scope is not reasonably within the competence of the opinion giver or they are not cost-justified. Examples of such opinions include the following:

  • the client is qualified to do business as a foreign corporation in all jurisdictions in which its property or activities require qualification or in which the failure to qualify would have a material adverse effect on the client;
  • the client is not in material violation of any federal, state or local law, regulation or administrative ruling; and
  • the client is not in material violation of any contract, indenture or undertaking to which it is a party or by which it may be bound.61

The common characteristic of these examples is that they are essentially open-ended. Requests for opinions of this sort inherently cast into question whether the party requesting the opinion may be effectively seeking legal "insurance" rather than legal "assurance." The Committee believes that an opinion giver may properly refuse to give such opinions.

3. Confirmations of Fact; Negative Assurance

When the 1989 Report was issued, it was relatively common to refer to certain statements of fact included in opinion letters as "factual opinions." As a result of the substantial commentary that has occurred since then, parties to business transactions (and their lawyers) recognize that statements of a factual nature are not properly labeled as "opinions" but instead are actually "confirmations" of facts that may or may not be known to the opinion recipient but that do not, in any sense, constitute a "legal opinion."62 Opinion givers should take care that the opinion letter makes a clear distinction between those portions that constitute actual opinions on matters of law and other portions (including confirmations of a purely factual nature) that do not.

Opinion givers generally decline to provide confirmations of purely factual matters. Although often characterized as an opinion, these confirmations in essence ask the opinion giver to express a view not founded on professional competence. The function of a legal opinion is to provide informed judgments on matters of law, not assurance regarding factual statements that the parties to a transaction are in a better position to verify. As stated in the ABA Guidelines:

An opinion giver normally should not be asked to state that it lacks knowledge of particular factual matters. Matters such as the absence of prior security interests or the accuracy of the representations and warranties in an agreement . . . do not require the exercise of professional judgment and are inappropriate subjects for a legal opinion even when the opinion is limited by a broadly worded disclaimer.63

Two exceptions are generally recognized to the practice of not providing factual confirmations: a confirmation regarding the opinion giver's knowledge of legal proceedings to which its client is a party; and negative assurance in certain contexts on the adequacy of the disclosure in a prospectus or other disclosure document furnished to investors in connection with a sale of securities.

Knowledge of Legal Proceedings. An opinion giver may be asked to state that, to its knowledge, no claims or legal actions are pending or threatened in writing against the client except as set forth on an exhibit to the Agreement.64 Although the requested statement is factual in nature, some lawyers believe that lawyers representing clients in business transactions may have heightened knowledge of pending or threatened legal actions or have the ability to verify the existence or nonexistence of such matters readily from the client's records. Again, the appropriateness of including these confirmations of fact in an opinion letter depends on the circumstances. Consistent with this approach, most lawyers take the position (supported by the Committee) that statements as to factual matters should not be viewed as "opinions" as they do not express a legal conclusion, and therefore refuse to provide them absent clarifying language that they are limited to statements of "knowledge" or "belief" of the opinion giver as to specified factual matters.65 The Committee believes that an opinion giver may properly refrain from including any such confirmations of fact within the portion of an opinion letter that contains the legal opinions and instead provide them in an identifiably separate portion of the opinion letter in which all factual confirmations are presented or include them in a separate letter addressed to the opinion recipient.

The Committee believes that opinion givers generally should not be asked for opinions on the outcome of pending or threatened claims or legal actions.66 Although an argument might be made that a "negative assurance" statement (discussed in detail below) provided by a lawyer in connection with a securities offering implicitly includes this type of conclusion if the disclosure document includes a statement by the issuer/client of the potential outcome of a particular litigation matter, the Committee believes that it is generally understood that it does not.67

Negative Assurance. When the 1989 Report was issued, it was relatively common to refer to a statement included in an opinion letter as to the absence of belief or knowledge of misstatements or omissions in certain disclosure documents as a "comfort opinion." To a certain extent, that terminology continues to be used, although with increasing frequency it refers to such a statement in a separate letter from the opinion giver and thus is more often referred to as a "comfort letter." Another change that has resulted from substantial commentary since the issuance of the 1989 Report is the characterization of these statements as "negative assurance" statements. As with confirmations (formerly called "factual opinions"), such statements are not actually legal opinions at all but rather statements of knowledge or belief of the lawyer or firm providing the "negative assurance." The Committee believes that it increasingly is customary for lawyers (as well as opinion recipients and their counsel) not to use the term "comfort opinion"68 but to refer to such a statement as a "negative assurance."69

In a "negative assurance" statement, the opinion giver states that, based upon its participation in the matter at issue, it is not aware of any misstatement or omission in the disclosure document of its client. The opinion giver providing the "negative assurance" generally expresses limitations on the scope of the statement by the use of introductory language describing its role in the transaction and the extent of its investigation or independent verification of facts. The Committee believes that it is consistent with opinion practice for such qualifications to appear in the text of an opinion letter as well as in any accompanying documents describing the opinion letter or its contents and likely to be viewed by other parties to the transaction. The Committee supports the growing practice of providing "negative assurance" (if it is to be given) in a separate letter rather than in the text of an opinion letter.70

There are certain limited and specialized situations in which lawyers typically provide "negative assurance". In securities underwritings involving publicly held companies, the lawyers providing "negative assurance" will typically have participated in the preparation of the Company's registration statement filed with the Securities and Exchange Commission ("SEC").71 The lawyer typically confirms to the recipient of the "negative assurance" statement, based upon this participation, the following:

Nothing has come to our attention that has caused us to believe that the [disclosure document] contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein [, in the light of the circumstances under which they were made,] not misleading.72

An opinion giver providing "negative assurance" typically qualifies it with a statement of the extent of, or more typically, the absence of the opinion giver's independent verification of the facts.73 As a general rule, the Committee believes that it is inadvisable for an opinion giver to provide negative assurance other than to a recipient to assist the recipient in establishing a "due diligence" defense to a claim of liability based on the adequacy of the disclosure made as part of such transaction.74

4. Opinions Regarding Issues of Significant Legal Uncertainty

A fourth common area of disagreement involves legal issues that, although potentially appropriate for inclusion in an opinion, are subject to significant legal uncertainty. If the uncertainty extends only to one of the opinions expressed, the question is frequently resolved by a "qualification" to that opinion. The "qualification" may be a statement that the particular opinion does not cover the effect of a certain law or laws or may identify the uncertainty. Such qualifications are usually acceptable to the lawyer for the other party if they relate to demonstrable legal uncertainties.

In accordance with the "Golden Rule" described in Part IV, Section A of this Report, opinion practice has evolved to a common understanding that lawyers should not ask for legal opinions that they would not be prepared to render under substantially similar circumstances. Similarly, an opinion giver should not be asked to render an unqualified opinion on an issue as to which there is significant uncertainty. If there is disagreement regarding the existence or degree of the legal uncertainty, a compromise is sometimes reached in the form of a "reasoned" opinion.75 In that situation, the opinion giver does not simply express a legal conclusion but also presents a discussion of relevant statutory and judicial authorities, often (but not always) indicating that the matter is uncertain or "not free from doubt," and stating a prediction of the likely judicial resolution of the matter if the issue were appropriately presented to a court of competent jurisdiction.76 By their nature, these opinions can require substantially more time and effort in their preparation than would ordinarily be the case. As a result, issues of cost effectiveness are particularly highlighted in connection with reasoned opinions.77

There are several customary formats for reasoned opinions. Historically, "would hold" opinions (expressing a view as to what a court "would hold") were generally regarded as expressing the strongest degree of conviction, and "should hold" opinions were regarded as expressing a somewhat lesser degree of conviction and as more appropriate for areas involving a relatively high degree of legal uncertainty or involving significant policy issues. Recent reports take the position, however, that there is no difference in meaning between a "would hold" and a "should hold" opinion.78 Some reasoned opinions may use a "more likely than not" standard, which may be appropriate where the relevant authorities are divided, unclear or not directly on point.

Where an issue of legal uncertainty exists, the opinion giver should discuss the matter with its client before agreeing to issue the requested opinion because the opinion may influence the form or even the viability of the transaction as proposed. Matters of this nature are often more appropriately resolved when the party requesting the opinion obtains the views and advice of its own lawyer, rather than obtaining a "reasoned" opinion from the other party's lawyer.79

5. Other Problem Areas: Fraudulent or Misleading Opinions and the Limits of Professional Competence

A lawyer should not render an opinion that the lawyer knows would be misleading.80 In addition, a lawyer should not render an opinion based on factual assumptions if the lawyer knows that the assumptions are false or that reliance on those facts is unreasonable.81

In addition, a lawyer should not be asked to render opinions on matters that are outside his or her area of professional competence.82 Where an opinion is appropriate but beyond the competence of the opinion giver, then the opinion giver should associate competent counsel to render the opinion. In no event should a lawyer be asked for opinions that are beyond the professional competence of lawyers generally, such as financial statement analysis or valuation.83

C. The Time to Negotiate the Opinion Letter

Legal opinions in business transactions are typically delivered in satisfaction of a closing condition of the underlying Agreement between the parties to the transaction; for example, a loan agreement, an acquisition agreement, or an underwriting agreement in a securities transaction. Often, the Agreement sets forth in specific terms the legal conclusions that are to be included in the opinion. Sometimes, however, the Agreement may merely describe generally the matters that are to be covered by the opinion.84 In either case, the exact text of the opinion (including assumptions and qualifications) should be agreed upon as early as possible in the transaction, preferably before the parties are committed to proceed with the transaction.

Serious differences often arise among lawyers for the various parties concerning the form and substance of the matters to be covered by an opinion. If resolution of these matters is postponed until a short time before the closing, the result will often be either a form of opinion unfairly based on the superior bargaining power of one party or possible misunderstandings between an opinion giver that is reluctant to render a particular opinion and its client. Resolution of these differences early in the transaction will allow the opinion giver to focus on the matters that involve factual and legal verification and thereby facilitate a timely closing.

D. The Form and Elements of the Opinion Letter

There is no form for a legal opinion prescribed by law or rule. Opinion letters, however, have developed a certain uniformity because of their repeated use in similar business transactions and because the phrasing of common opinions is often contained in bar association reports, such as this Report. In general, a legal opinion will cover the following: (1) introductory matters, such as the date, the identity of the opinion recipient, the role of the opinion giver giving the opinion, and the purpose for which the opinion is given; (2) a general or specific recitation of the documents and other factual and legal matters reviewed by the opinion giver, including in some instances a statement of reliance on various factual assumptions;85 (3) the legal conclusions expressed in the opinion, and any qualifications to the legal conclusions; (4) matters peculiar to the particular opinion, such as matters relative to opinions of local counsel in other jurisdictions and specific limitations on the use of the opinion; and (5) the signature of the opinion giver.

1. Introductory Matters

Date. The opinion letter will commonly be delivered at the closing of the business transaction and bear that date. The opinion speaks as of that date and need not state separately the effective date of the opinion.86 If for some reason a conclusion expressed in the opinion is reached as of a date prior to the delivery of the opinion, the opinion giver may so specify in the opinion letter.87

In some circumstances, the opinion giver may deliver an opinion letter that bears a later date with instructions that the opinion letter is to be delivered on its effective date (generally, the closing date of the transaction). Whether the opinion letter is physically delivered by the opinion giver or by a third party, the opinion giver is responsible for confirming that the factual and legal matters covered in the opinion letter are accurate as of its date (or an earlier date specified in it). This obligation normally includes such tasks as updating any factual certificates and similar matters.88

Addressee. The opinion is normally addressed to a specified party to the transaction in an individual capacity, to a party as representative of a larger group, or to an identified class of persons. Examples of the latter two situations are "XYZ Underwriting Firm, as representative of the several underwriters" and "to the purchasers of the 5% promissory notes of ABC Corp." In all cases, it is customary practice for the opinion recipient to be clearly identified in the opinion letter.89

Generally, the only person or persons entitled to rely on an opinion are the person or persons to whom the opinion letter is specifically addressed. No additional limitation need be expressed in the opinion letter. As a matter of prudence, however, many lawyers include a sentence at the conclusion of the opinion letter to the following effect:

The opinions set forth herein are rendered solely for your use in connection with the above transaction and may not be relied upon, delivered to or quoted by any other person or for any other purpose without our prior written consent.

In some limited instances, an opinion letter is intended to be relied upon by persons other than the stated addressee(s). Examples include an opinion letter addressed to an underwriter concerning the validity of a proposed stock issuance that is also to be relied on by the issuer's transfer agent, and an opinion letter of local counsel on which the principal opinion giver will rely to render its opinion.90 In those cases, the opinion letter normally states specifically who, in addition to the addressee, is entitled to rely upon the opinion.91

The foregoing discussion does not address situations in which the opinion giver knows or has reason to believe that the client will supply to third parties an opinion letter that is addressed solely to the client. In those cases, the opinion giver's responsibility may extend to those additional persons; and limitations expressed in the opinion letter may not have legal effect.92 Because the exposure of the opinion giver to potential liability may be greater in these situations, the opinion giver should consider carefully whether the opinion letter should include a more explicit qualification or whether it should be rendered at all.

2. Description of the Transaction, the Lawyer's Role, Reasons for the Opinion and Definitions

The Transaction and the Lawyer's Role. An opinion letter normally describes the capacity in which the opinion giver is rendering the opinion and the nature of the transaction. This typically can be accomplished in a single sentence, such as:

We have acted as counsel to ABC Corp., a California corporation (the "Company"), in connection with the merger of the Company with and into XYZ Corp., a California corporation ("XYZ"), pursuant to the Agreement and Plan of Reorganization dated as of is Blank line for inserting response is Blank line for inserting response, 20 is Blank line for inserting response, by and between the Company and XYZ (the "Agreement").

The opinion giver may wish to describe further its role as "general" or "special" counsel. Such descriptive terms, however, have no generally-recognized meaning. Therefore, they should not be viewed as a substitute for appropriate substantive qualifications or limitations on the scope of the opinion giver's role in the transaction. Most opinion givers believe that the term "general counsel" should not normally be used, unless the opinion is being given by inside general counsel for the Company. For other lawyers, the use of the term "general counsel" may indicate a continuing knowledge of all corporate affairs that is beyond the scope of the opinion letter.

The term "special counsel" does not limit the opinion giver's responsibility for the opinions rendered by it. 93 Accordingly, if the opinion giver is not involved generally in representing the client and has been asked for an opinion on a limited matter, it may be advisable for it to describe the scope of its limited involvement with the client or the transaction, rather than rely solely upon the implication of limited participation by the reference to "special" counsel.94

The opinion giver sometimes will state that it has participated in the preparation of the Agreement in question and, usually by implication, in the exhibits that are part of the Agreement. By reciting this history, the opinion giver might raise the inference that it is assuming some responsibility for factual matters set forth in the Agreement, including the exhibits. The assumption of this responsibility is commonly understood to be well beyond the opinion giver's role.95 The Committee therefore recommends that a statement of participation in the preparation of the Agreement and its exhibits be avoided.

Reasons for the Opinion. The opinion giver will usually specify why the opinion is being rendered. This typically is accomplished by a simple reference as follows:

This opinion is rendered pursuant to Section is Blank line for inserting response of the Agreement.

Definitions. For purposes of brevity and clarity, it is advisable to define the principal terms used in the opinion. Terms that are defined in the underlying Agreement are most often given the same definitions in the opinion, either by defining each term in the opinion or by a reference to the Agreement, such as:

The terms used in this opinion letter that are defined in the Agreement have the same definitions when used herein, unless otherwise defined herein.

Whenever a term utilized in an opinion letter is derived from statutory law, the opinion customarily uses that term or provides an express definition. For instance, the California General Corporation Law96 (as amended, the "GCL") refers to "articles of incorporation," "shareholders" and "shares," rather than the corresponding terms of "certificate of incorporation," "stockholders" and "stock" as used in statutes of some other jurisdictions, such as Delaware.

3. Diligence, Factual and Legal

The obligation of an opinion giver to exercise customary diligence in determining the factual and legal bases for an opinion is implicit in every opinion letter. In the discussion that follows in this subsection and in Part V of this Report, the Committee addresses the factual and legal diligence customarily conducted by California opinion givers in the preparation of an opinion letter.

Description of Factual Examination. The opinion giver must be satisfied that it has reviewed or assumed (expressly or implicitly) sufficient facts to support each of the legal conclusions expressed in the opinion letter. In most instances, the opinions in an opinion letter can be supported by an examination of documents, either in their original form or copies identified to the satisfaction of the opinion preparers, or of certificates of public officials or officers of the Company relating to factual matters.97

Some opinion givers preface their opinion letters with a reference to a detailed list of the documents and certificates examined, together with either a statement that they have examined such other documents and have made such further legal and factual investigation as they consider necessary for purposes of rendering the opinion98 or, alternatively, a specific disclaimer to the effect that they have not made any other examination or factual investigation.99 Other opinion givers prefer to deliver opinion letters that merely set forth language to the following effect:

We have been furnished with and have examined originals or copies, certified or otherwise identified to our satisfaction, of all such records of the Company, agreements and other instruments, certificates of officers and representatives of the Company, certificates of public officials and other documents as we have considered necessary to provide a basis for the opinions hereinafter expressed. We have not independently established the facts stated therein.

At times, the decision whether to set forth a list of documents and certificates reviewed by the opinion giver is dictated by the opinion recipient. Certain lending institutions and securities underwriters desire the "long-form" opinion letter containing such a list to provide the additional comfort that the opinion giver has reviewed the listed documents for purposes of its opinion. In most instances, however, the decision is based on the preference of the opinion giver, and it is sometimes influenced by whether the opinion giver has represented the Company in general matters for some time or only for purposes of the specific transaction. If the opinion giver intends to limit the scope of the opinion to the documents and certificates listed, it should include an express statement to that effect in the opinion. If no specific limitation is included, a list of documents is not generally understood to constitute a limitation on the general responsibility of the opinion giver to follow customary diligence in rendering the opinion.100

Reliance on Certificates of Public Officials. Usually opinions include legal conclusions concerning the corporate nature and existence of the Company and its ability to transact business in its state of incorporation. They also often include legal conclusions concerning the good standing and ability of the Company to transact business in other jurisdictions. These opinions customarily are based on certificates of public officials in the various jurisdictions involved. For California corporations, the Secretary of State and the California Franchise Tax Board (the "Franchise Tax Board" or "FTB") are the principal sources of such information.101 The principal certificates are as follows:102

  1. Certified Copy of the Articles of Incorporation, together with Amendments. This is a copy of the Company's articles of incorporation, and all amendments, certified by the Secretary of State (the "articles").103 This certification represents conclusive evidence of the formation of the corporation and prima facie evidence of its existence for all purposes other than in an action by the California Attorney General.104

  2. "Bring-Down" Certificate regarding Incorporation and Amendment of Articles. This is a certificate of the Secretary of State setting forth the date the Company was incorporated and listing all amendments to the articles filed on or prior to the date of the certificate. This certificate often is obtained prior to the closing for purposes of confirming that there have been no corporate changes since the date that the copy of the articles was certified.

  3. Certificate of Status. This is a Certificate of Status of a Domestic Corporation furnished by the Secretary of State, which certifies the Company's organization, good legal standing, authorization to exercise corporate powers and ability to transact business in California.105 This certificate also confirms that no certificate of dissolution of the corporation has been filed with the Secretary of State.

  4. FTB Good Standing Letter. This is a letter from the Franchise Tax Board stating that the Company is in good standing with respect to its state franchise tax filings and has no known unpaid tax liability. This letter confirms that no Franchise Tax Board proceedings are pending to suspend the corporate powers of the Company.106

The opinion giver may also verify by telephone with the office of the Secretary of State that the Company is in good standing on the date the opinion is being delivered. The Franchise Tax Board will also confirm by telephone good standing with respect to state franchise tax filings and payments.

Public officials in other states will furnish similar certificates relating to good standing and tax delinquencies, and these certificates can normally be updated (or "brought-down") by telephone or electronically to the date preceding the delivery of the opinion. Many states have implemented websites on which such information can be accessed at any time. The information on any particular website can only be relied upon as current to the extent specified by the state agency responsible for that website. Certificates and confirmations from public officials in foreign jurisdictions are customarily secured through service bureaus and arrangements made for delivery of such certificates and confirmations well in advance of the closing.

Certificates of public officials also support other parts of a legal opinion. For example, licensing bodies, such as the California Departments of Insurance, Corporations and Financial Institutions, will normally provide certificates relating to the existence of particular licenses.

Because certificates of public officials will normally bear a date before the delivery of the opinion, the opinion giver must decide what additional verification, if any, is necessary for purposes of the opinion. Although in some instances telephonic updates can be obtained prior to the closing, this is not always the case. Additional verification may or may not be necessary depending upon the facts and circumstances of the case. In general, customary practice does not require that every certificate be updated. Opinion recipients routinely accept opinions that in part are based on certificates of a reasonably recent date. Sometimes, the opinion giver will specify in its opinion that it is relying upon certificates of public officials of an earlier date without "bring-down" certificates.

Officers' Certificates. Opinion preparers typically obtain two somewhat analogous types of officers' certificates: (1) certificates verifying the authenticity of referenced documents; and (2) certificates relating to factual matters not readily verifiable by the opinion preparers or only verifiable at considerable cost. A common example of the first type of certificate is a certificate of the secretary of the Company certifying that, attached to the certificate, is a true copy of the articles, bylaws and corporate minutes or resolutions pertaining to the transaction. A typical form of such certificate follows:

Certificate of Secretary of XYZ Corporation

I, Pat Doe, certify that I am the duly elected and acting Secretary of XYZ Corp., a California corporation (the "Company"), and that attached hereto as Exhibit A is a true and correct copy of [the articles of the Company as certified by the California Secretary of State on is Blank line for inserting response is Blank line for inserting response, 20is Blank line for inserting response] [the bylaws of the Company] [resolutions of the Board of Directors of the Company duly adopted at a special meeting of the Board held on is Blank line for inserting response is Blank line for inserting response, 20is Blank line for inserting response.] and that the same have not been [amended][rescinded or changed] and are now in full force and effect.

Under Section 314 of the California Corporations Code (the "Corporations Code"), the certificate itself is prima facie evidence of the adoption of the bylaws and resolutions. This officers' certificate is often expanded, or separate certificates obtained, to certify such additional documents and matters as the articles, as amended through the date of closing, or information concerning the Company's outstanding shares.

The signatures and corporate capacities of the individuals executing an officers' certificate may also be supported by an incumbency certificate containing the signatures of various corporate officers who have signed documents pertinent to the transaction. A typical form of such a certificate follows:

Incumbency Certificate

I, Pat Doe, certify that I am the duly elected and acting Secretary of XYZ Corp., a California corporation (the "Company"), and that at all times from is Blank line for inserting response is Blank line for inserting response, 20is Blank line for inserting response to and including [the closing date] the following were the duly elected and acting officers of the Company and their true signatures appear opposite their names:

Title of Officer

is Blank line for inserting signature

Name of Officer

is Blank line for inserting signatture

Signature

is Blank line for inserting signature

   

 

is Blank line for inserting signature

Pat Doe, Secretary

Some lawyers are concerned that a certificate in this form contemplates that the opinion giver will either compare signatures on the certificate for any obvious differences with those on the relevant documents or witness the signing by those officers. To eliminate this concern, some opinion givers use an alternative form of incumbency certificate such as the following:

Incumbency Certificate

I, Pat Doe, certify that I am the duly elected and acting Secretary of XYZ Corp., a California corporation (the "Company"), and that at all times from is Blank line for inserting response is Blank line for inserting response, 20is Blank line for inserting response to and including [the closing date] the following were the duly elected and acting officers of the Company holding the respective offices indicated below at the respective times of the signing and delivery of the [list of relevant documents], and the signature of each such person appearing on each such document is his or her genuine signature.

Title of Officer

is Blank line for inserting signature

Name of Officer

is Blank line for inserting signature

Signature

is Blank line for inserting signature

   

 

is Blank line for inserting signature

Pat Doe, Secretary

 

Whichever approach is used, the certificate customarily ends with an officer other than the secretary attesting to the secretary's signature.

Officers' certificates of this nature are sometimes delivered to the other party at the closing to provide assurance, in addition to the legal opinion, that corporate action has been properly taken. These certificates will often be obtained even though the opinion giver will usually have reviewed the bylaws of the Company, relevant minutes contained in the minute book and the stock records.

The second type of officers' certificate relates to factual matters not readily verifiable or only verifiable at considerable cost by the opinion giver when preparing the opinion. These certificates are used as factual support for legal conclusions expressed in the opinion. The need for them arises, for example, when an opinion giver renders an opinion that the transaction will not cause a breach of the terms of any loan agreement to which the client is a party. The opinion giver is competent to review the loan agreements but may need an officers' certificate to identify the loan agreements to which the client is a party since, typically, the opinion giver is not in a position to know what agreements to review. If the Agreement includes a list of such agreements, the opinion giver may alternatively rely on that list. The opinion giver will usually require an additional certificate of an appropriate officer of the Company that financial covenants and other financial provisions in the agreements covered will not be breached by consummation of the transaction in question.107

Factual certificates are normally prepared by the opinion giver with input from appropriate officers or employees of the Company as to the factual matters they cover.108 The certificate should not simply restate legal conclusions (e.g., that the Company is duly incorporated, validly existing, and in good standing), but instead should recite factual matters reasonably within the competence of the officer signing the certificate. If the certificate merely sets forth legal conclusions, the certificate may be of little assistance in the event that the legal opinion is subsequently questioned.109

Practice differs with respect to the delivery of factual "back-up" certificates at the closing to the opinion recipient. Some opinion givers prefer to attach the certificates to their opinion. Unless the opinion giver expressly limits the scope of its investigation to documents or matters identified by the certificates, the opinion giver does not typically deliver supporting officers' certificates to the other party or its counsel, and the opinion recipient also does not typically request an opportunity to review such certificates. The opinion giver must use its own judgment in determining under what circumstances (and to what extent) reliance on factual matters contained in the certificates can be justified. The opinion giver should also exercise its own judgment in determining those circumstances and matters which reasonably should be supported by an officers' certificate. When officers' certificates are utilized to define and limit the scope of investigation underlying the opinion, however, the lawyer representing the opinion recipient typically reviews the supporting officers' certificates referenced by the opinion giver, particularly when the opinion giver disclaims any investigation beyond such certificates.110

Documentary Examination Assumptions. Opinion givers customarily assume that the signatures on all documents examined are genuine, that copies of documents examined conform to the originals, and that such documents are binding on the other parties.111 Opinion givers often state these assumptions expressly, although the Committee believes that, by customary usage, they are implicit and need not be expressly stated.112 If stated, a common formulation of the assumption is as follows:

In rendering this opinion, we have assumed: the authenticity of all documents submitted to us as originals; the conformity to originals of all documents submitted to us as copies; and the accuracy, completeness and authenticity of all certificates of public officers.113

Law Covered. An opinion letter covers only law that a lawyer exercising customary professional diligence would reasonably be expected to recognize as being applicable to the opinion giver's client, the transaction or the Agreement to which the opinion relates.114 By customary practice, an opinion is understood not to cover such laws as local or municipal law or certain specialized areas of the law (e.g., antitrust, environmental, land use, securities, tax, pension, employee benefit, insolvency, fraudulent transfer, margin requirements and investment company issues) unless the opinion expressly covers them.115

4. Expression of the Opinion

Introduction. The substantive portion of the opinion normally begins with an introductory statement referring to matters upon which the opinion giver has relied. This introductory statement is generally phrased in a manner that does not limit the opinion giver's investigation to the matters specifically described, but rather indicates that the opinion giver has made such further investigation as it considers appropriate under the circumstances. An example of such an introductory statement reads as follows:

Based on the foregoing and upon such further investigation as we have considered necessary,116 it is our opinion that:

The expression of the actual opinion (i.e., "it is our opinion that") varies according to the practice of the particular opinion giver. Other customary variants include the following: "we are of the opinion that;" "we express the following opinions;" or "our opinion is as follows." Sometimes opinion givers will use "we advise you that;" "we believe that;" "we are of the view that;" or "we may state that." These latter formulations may imply that something other than a normal opinion is being given and typically are not used in closing opinions, except in securities law "negative assurance" statements.117

The Operative Language. Closing opinions are becoming increasingly customary and uniform. Part V of this Report provides examples of typical kinds of opinions, with a discussion of the meaning of terms customarily used in such opinions and the uncertainties and special problems existing under California law. Part V also includes suggested procedures to be followed in rendering opinions.

Qualifications. In practice, opinions are frequently subject to qualifications that narrow their apparent scope. 118 Some opinions may be qualified by assumptions or exceptions. Opinions also may be qualified as to scope, particularly when the opinion covers a specialized area of the law. Qualifications take various forms, depending upon the opinion giver's preference and the length of the qualification. If the qualification is short and applies only to one portion of the opinion letter, it often will be included in the operative language of the specific opinion by the reference "subject to is Blank line for inserting response" or "except is Blank line for inserting response". If the qualification pertains to more than one portion of the opinion letter or is lengthy, it will usually appear separately from the operative opinion clauses. Typical clauses introducing such qualifications include the following: "our opinion in paragraph is Blank line for inserting response is subject to;" or "we express no opinion on the effect of;" or "in rendering our opinion in paragraph is Blank line for inserting response we have assumed that [describe assumptions]."

References to the concurrence or consent of the opinion recipient, although not objectionable and often expressly stated in opinion letters, are not necessary to convey the opinion recipient's acquiescence to the qualifications stated in the opinion letter. Instead, to the extent that significant qualifications are set forth in an opinion letter, the opinion recipient (or other third party accepting the opinion letter) will be considered to have accepted them (as well as those customarily understood to be implicit).

Qualifications cover a variety of matters. Qualifications may relate to facts that are particularly within the knowledge of the opinion recipient or to present or future events. An example of the former from commercial law is an opinion relating to the receipt of shares of a corporation free of adverse claims. Under the California Uniform Commercial Code, a purchaser who acquires securities for value in good faith without notice of adverse claims acquires the securities free of any adverse claim.119 If this opinion is given, the opinion giver typically includes an assumption that "the purchaser is acquiring the shares in good faith without notice of any adverse claim." Because these facts are peculiarly within the knowledge of the purchaser, this qualification is customarily viewed as appropriate.120

A typical transaction involving the transfer of a security also provides an illustration of an appropriate qualification with respect to the occurrence of a future event. An opinion giver will sometimes state that an opinion regarding the absence of adverse claims will become operative "upon delivery by the seller of the certificates with all necessary endorsements for the shares and payment therefor." A qualification of this nature is typically acceptable to the opinion recipient.

Another type of qualification may be appropriate when the opinion giver is unwilling to take responsibility for certain laws. For instance, an opinion giver may expressly exclude compliance with laws affecting certain regulated industries -- such as the utility, telecommunications or banking industries -- from its opinion. If the opinion recipient wants an opinion that the opinion giver cannot give, special counsel often will be engaged to render it.121 If, for example, the Company is a public utility and the opinion giver is unwilling to give an opinion on public utility law, special counsel normally will be retained for this purpose.

Limitations on the Basis of Knowledge. Factual confirmations are often limited by reference to the opinion giver's knowledge. These limitations take many different forms, although typical phrases usually include the following: "to our knowledge"; "to our current actual knowledge"; "to the best of our knowledge"; "we do not know of"; "we are not aware of"; or "nothing came to our attention that." These qualifications all indicate some lack of factual investigation by the opinion preparer. What they mean, however, is not entirely clear.122 The Committee, therefore, recommends that opinion givers state the meaning of whatever phrase is used in the opinion, such as by the following:123

Whenever a statement herein is qualified by "known to us," "to our current actual knowledge," "our knowledge" or similar phrase, it is intended to indicate that, during the course of our representation of the Company in this transaction, no information that gives us current actual knowledge of the inaccuracy of such statement has come to [our attention] [or the attention of those lawyers currently in this firm who have rendered legal services in connection with the representation described in the introductory paragraph of this opinion letter]. However, [except as otherwise expressly indicated,] we have not undertaken any independent investigation to determine the accuracy of such statement, and no inference as to our knowledge of any matters bearing on the accuracy of any such statement should be drawn from the fact of our representation of the Company.

Knowledge limitations are different for law firms than for individual opinion givers or inside lawyers.124 In firms with many lawyers, the phrase "our current actual knowledge" or "our knowledge" could be interpreted to mean the knowledge of the entire firm. It may be impractical to expect that the opinion preparers are aware of all other client matters within the knowledge of all other lawyers in the firm. An opinion giver may therefore attempt to expressly limit knowledge to that of the group of lawyers within the firm working on the current transaction, as indicated in the qualification language provided above.

Some commentators note that lawyers are moving away from the use of knowledge qualifiers by limiting opinions that rely upon factual matters, such as the no breach or default opinion, to an identified set of facts, such as a list of contracts identified in the opinion letter.125

5. Special Matters

Foreign Law and Reliance on Local Counsel. The principal opinion giver for a party in a business transaction typically renders an opinion covering the laws of the state of the Bar membership of the opinion preparers and applicable federal laws and sets forth this limitation in the text of the opinion.126 The opinion giver may also be requested to furnish an opinion on matters governed by the laws of some other state or country. Unless the limited nature of the review of another jurisdiction's law is described in the opinion, because the opinion giver would likely be held to the same standard as a lawyer licensed or otherwise competent to give advice on the law of the other jurisdiction, the opinion giver will, in most instances, seek the advice and opinion of local counsel.127

There are certain uncomplicated questions of foreign law on which California lawyers customarily render opinions. Many California lawyers experienced in corporate matters are familiar with Delaware corporation law (including court decisions interpreting that law) and are competent to render opinions that cover matters relating to the incorporation and good standing of a Delaware corporate client and certain other routine corporate matters.128 An opinion giver should, however, always be cognizant of the fact that rendering an opinion based upon legal principles applicable in foreign jurisdictions exposes the opinion giver to liability for a negligent interpretation of that law.

The retention of local counsel to furnish an opinion raises different questions with respect to the principal opinion giver's responsibility for the opinions expressed in the local lawyer's opinion.129 If the principal opinion giver renders an opinion on the same matters as the local lawyer, the opinion giver customarily expresses its reliance on the local counsel's opinion (an example of recommended language is included below) rather than simply restating the local counsel's opinion in the body of its opinion:

In rendering the opinions expressed in paragraphs is Blank line for inserting response, is Blank line for inserting response and is Blank line for inserting response, we have relied [solely] on the opinion of is Blank line for inserting response insofar as such opinions relate to the laws of is Blank line for inserting response, and we have made no independent examination of the laws of that jurisdiction.

When expressly stating reliance on the opinion of local counsel, the principal opinion giver's sole responsibility is to exercise reasonable care in the selection of local counsel (if, in fact, the principal opinion giver selects such counsel).130 The opinion giver is not responsible for independently investigating or otherwise verifying the law of the foreign jurisdiction.131 The principal opinion giver may assume a broader responsibility to examine the statutory and case law of the foreign jurisdiction if the principal opinion giver's opinion letter states that the opinion giver "concurs" with the legal opinions provided in the opinion letter of local counsel or that the local counsel's opinion letter is satisfactory in substance.132 Accordingly, a principal opinion giver's opinion letter customarily does not do so. The preferred and more recent common practice is for the local counsel's opinion letter to be addressed to the recipient of the principal opinion letter (rather than to the principal opinion giver) and for the principal opinion giver not to render an opinion on that subject.

From the principal opinion giver's standpoint, the preferable approach is to separate the opinions set forth in its opinion letter from the opinions set forth in the opinion letter of local counsel.133 In the early stage of discussions concerning the opinions to be rendered, local counsel generally is agreed upon by both parties (regardless of whether already retained). The principal opinion giver prefers that the Agreement provide for independent delivery to the opinion recipient of the local counsel's opinion letter with respect to specified matters as a condition to the closing. The principal opinion giver may consider an express exclusion of the matters covered in the opinion letter of local counsel from the scope of the opinions set forth in its opinion letter, or express reliance (without independent verification) of the opinions expressed by local counsel.134 This procedure will normally be acceptable to the lawyer for the opinion recipient, as both parties have an interest in assuring that a competent local lawyer is retained. If this procedure is used, the principal opinion giver should not be held to have assumed responsibility either for the advice contained in the opinion letter or the selection of local counsel.135

Reliance on Opinion of "Special" Counsel. Considerations similar to those arising in the selection and use of local counsel apply in the retention of special counsel. In Horne v. Peckham, 136 the California Court of Appeal held that a lawyer who has no expertise in a specialized matter should not render an opinion in the specialized area, and should refer the matter to a lawyer qualified in that field. The principal opinion giver normally does not furnish an opinion on the same matters as the specialist, even an opinion rendered solely in reliance on the specialist's opinion. The specialist customarily is retained specifically because the principal opinion giver does not have sufficient expertise to render the opinion in question.

Relationship of the Lawyer with the Client and Others. In some cases, the opinion giver may have a relationship with the Company beyond that of "lawyer-client." For example, the opinion giver or a member of its law firm may serve as a director or officer of the Company, may have a close family relationship with an officer, director or principal shareholder, may have or control a significant investment in the Company, or may have some other significant business relationship with the Company (such as landlord-tenant). These relationships should not bear on the ability of the opinion giver to render an opinion because the lawyer-client relationship is not predicated on independence. It is not unusual, however, for such matters to be brought to the attention of the other party to the transaction and its counsel. If the opinion giver chooses to disclose these and other relationships in the opinion letter, it can be done by a simple reference to the facts such as follows:

We advise you that is Blank line for inserting response, a member of our firm, is a director of the Company [and {in the event material stock ownership exists} that members of the firm own beneficially is Blank line for inserting response {common} shares of the Company].

This declaration does not lessen the opinion giver's duties with respect to the opinion.137

6. Signature

The procedure typically followed by most law firms is for the opinion letter to be manually signed in the name of the firm. Some law firms follow different practices, such as "XY&Z by A, a partner" or "A on behalf of XY&Z." If the opinion letter is signed only in the firm name, the Committee recommends that the firm maintain a record identifying the signatory.

7. "Back-Up Memorandum" and Internal Review

Some opinion givers memorialize the factual and legal review they have conducted in one or more memoranda. This practice gives the opinion giver a permanent record of the procedures followed in the event portions of the opinion are subsequently questioned. A simple and orderly procedure is to describe for each opinion clause the various steps taken to support the conclusions expressed.

Some law firms have adopted policies for internal review of their closing opinions prior to delivery. These reviews take different forms. Some firms require another lawyer or lawyers experienced in the legal matters covered by the opinion to review the underlying Agreement, the various factual certificates and the "back-up" memoranda to confirm that each legal conclusion has been properly reached and documented. Some firms utilize a separate "legal opinion" committee to review each opinion as to form and substance. This approach helps assure consistency in the form of the firm's opinions. Other firms use variations of these procedures, or other procedures as determined to be appropriate for them. The objective of any review should be to confirm that appropriate diligence was performed and to identify issues or problems that may require further thought or review.

Endnotes

51 See Part III, Section D of this Report. See also Appendix 4 ("Report of the Threshold Subcommittee") to the Remedies Report at Part I, Section B; ABA Guidelines § 2.4. Back

52 Other considerations regarding limitations on the scope of an opinion letter are set forth in Appendix 4 ("Report of the Threshold Subcommittee") to the Remedies Report at Part IV. The measure of "materiality" may be an issue in and of itself within one or more of the opinions being requested. Lawyers should use great care in evaluating the materiality of an item and recognize that the cumulative effect of several items may become material or have a material effect on the opinion. Furthermore, materiality may not have the same analytical significance in the context of each opinion for which the term may be used. Back

53 See Part IV, Section B of this Report. Back

54 Id. See also Appendix 4 ("Report of the Threshold Subcommittee") to the Remedies Report which includes examination of issues which should be considered in this context. Back

55 See ABA Guidelines § 3.1. Back

56 See Part VII of this Report. Back

57 See Part IV, Section D.3 of this Report (investigation of factual issues). Back

58 See Appendix 4 ("Report of the Threshold Subcommittee") to the Remedies Report (for a discussion of the issue of cost-effective remedies opinions). See also Part V, Section D.6 of this Report. Back

59 With respect to the more limited request for an opinion regarding specified (or a limited set of) laws, regulations and rulings, see Part V, Section C.4 of this Report. With respect to the more limited request for an opinion regarding specified (or a limited set of) contracts, indentures or undertakings, see Part V, Section C.2 of this Report. With respect to the more limited request for an opinion regarding shares of capital stock to be issued in a specified transaction, see Part V, Section D.3 of this Report. Back

60 See Part IV, Section D.3 of this Report, and note 264 and accompanying text. Back

61 See ABA Guidelines §§ 4.1, 4.3: Part IV, Section B.2 of this Report. Back

62 This is consistent with the plain meaning of the words, an important factor in identifying customary usage of terms. Back

63 ABA Guidelines § 4.4. Back

64 The Committee's formulation of this form of negative assurance uses the qualifier "in writing" to claims or legal actions not filed but "threatened." See Part V, Section C.8 of this Report. Of course, as Ball Hunt teaches, such a formulation of the negative assurance would be inappropriate if the opinion preparers have knowledge of a threatened claim or legal action that is material to the client. See Part III, Section B of this Report, and note 45. Back

65 For customary practice in defining "knowledge" or "belief" when used in factual confirmations, see "Limitations on the Basis of Knowledge" in Part IV, Section D.4 of this Report. Back

66 See ABA Guidelines § 4.7. See also Part V, Section C.8 of this Report.Back

67 See Part V, Section C.8 of this Report Back

68 As to certain securities law matters described below in this subsection, it was also called a "Rule 10b-5 opinion" and occasionally still is. The Committee believes that use of the term "Rule 10b-5 opinion" should also be discontinued. Back

69 See notes 70 and 72. Back

70 In its Negative Assurance Report, the Task Force on Securities Law Opinions, ABA Section of Business Law, states that the negative assurance given in securities law opinions is typically provided in a separate letter or in a separate unnumbered paragraph of a closing opinion. "Either way, counsel's responsibility and the meaning of the negative assurance are the same." Negative Assurance Report, 59 BUS. LAW. at 1516. Back

71 As observed in note 25, the entry in Black's Law Dictionary for "opinion" has undergone substantial expansion since the 1989 Report. This expansion includes the addition of a definition of "comfort opinion" which, in the current edition (8th ed. 2004), is specifically limited to securities law matters and defined as "[a]n attorney's written opinion that there is no reason to believe that a registration statement contains any material misrepresentations or omissions that would violate § 11 of the Securities Act of 1933." The concept of the "comfort opinion" has expanded to other areas of the law. The Committee supports the position implicit in the ABA Guidelines that opinion givers would be fully justified in refusing to provide "negative assurance" in any context other than matters involving the registration of securities under the 1933 Act and certain types of unregistered offerings (e.g., some Rule 144A and Regulation S offerings). See ABA Guidelines § 4.5; Negative Assurance Report, 59 BUS. LAW. at 1513-1514. Back

72 To avoid any possible misunderstanding as to the scope of "negative assurance," it should include statements to the effect that the lawyer is not assuming any responsibility for the contents of the documents mentioned in the prospectus or offering document, except for certain limited portions as expressly stated or specifically identified in the letter, and further state that the lawyer disclaims any opinion with respect to financial statements and other financial or statistical data, in instances when such matters are outside the scope of the negative assurance to be given. Back

73 See Negative Assurance Report, 59 BUS. LAW. at 1517. Back

74 For an illustration of the hazards in providing negative assurance to investors (in this instance, to purchasers of asset-backed securities in a private placement of those securities), see Magistrate Judge Joyner's report and recommendation, recommending denial of a prominent opinion giver's motion to dismiss claims under, inter alia, Rule 10b-5, common law fraud, and deceit (but granting the opinion giver's motion to dismiss plaintiffs' malpractice claims) in Pioneer Ins. Co. v. Chase Securities, 2001 EXTRA LEXIS 425 (N.D. Okla. Dec. 21, 2001). The District Court adopted and affirmed Magistrate Judge Joyner's report and recommendation "in its result." 2002 U.S. DIST. LEXIS 7562 (N.D. Okla. 2002). For further background on this litigation, see In re CFS-Related Securities Fraud Litigation, 256 F. Supp. 2d 1227 (N.D. Okla. 2003). Back

75 See FIELD TREATISE, § 2.4. "Reasoned opinions" are also sometimes referred to as "explained opinions." See also Accord, Certain Guidelines § 11-C; TriBar Report § 1.2(a). Back

76 Applicable judicial authorities suggest that a lawyer will not be held liable for errors in the application or interpretation of legal principles that are debatable or uncertain and "will not be held responsible for failing to anticipate the manner in which the uncertainty will be resolved." Metzger v. Silverman, 62 Cal.App.3d Supp. 30, 39, 133 Cal. Rptr. 335, 361 (1976). Nevertheless, if the lawyer's investigation and research leads to the conclusion that the law is unclear, the lawyer generally informs the client and clearly notes the uncertainty in the opinion. Such care is advisable because uncertainty in an area of the law does not necessarily relieve a lawyer of his or her duty to analyze competently the authority in the area that does exist. See Aloy v. Mash, 38 Cal. 3d 413, 212 Cal. Rptr. 162 (1985).

The very fact of the discussion of relevant statutory and judicial authorities makes the point that the opinion giver's legal conclusion is uncertain or not free from doubt, without an express statement to that effect. See ABA Guidelines § 3.5. Back

77 See Part IV, Section B.1 of this Report. See also Appendix 4 ("Report of the Threshold Subcommittee") to the Remedies Report. Back

78 See ABA Guidelines § 3.5. As a practical matter, it can sometimes be difficult to distinguish between being of the opinion that a particular result "would" or "should" occur. In either case, the operative feature of the statement is that it is an expression of a professional opinion, not a statement of fact. For discussion of the gradations of legal opinions in tax practice, see Jasper Cummings' article, cited in note 21. Back

79 In addition, the advice given to the party requesting the opinion by its own counsel should be protected by the attorney-client privilege. Back

80 See Roberts v. Ball, Hunt, Hart, Brown & Baerwitz, 57 Cal. App. 3d 104, 128 Cal. Rptr. 901 (1976). See also note 45; Appendix 10 ("Exceptions Subcommittee Report") to the Remedies Report at "Final Admonition"; TriBar Report § 1.4(d); ABA Guidelines § 1.5; and Part III, Section B of this Report. Back

81 See TriBar Report § 2.1.4; RESTATEMENT § 95 note (c). See also Appendix 10 ("Exceptions Committee Report") to the Remedies Report at "Further Notes" ("Use of Assumptions to Close Gaps"). Back

82 See Part IV, Section D.5 of this Report. Back

83 See ABA Guidelines § 1.4. Back

84 Counsel for the opinion recipient will sometimes include a provision in the Agreement stating that the opinion will cover "such other matters" as counsel for the recipient "may reasonably request" or, conversely, that the opinion will be subject to customary or reasonable assumptions, qualifications and limitations. These provisions can create substantial uncertainty and place the opinion giver in a difficult position, for example when the lawyer is reluctant to give an opinion on a new matter raised a short time prior to a closing. Such a provision might also be abused by the recipient if the recipient unreasonably demands an opinion on a particular issue and thereby seeks to avoid the closing. Back

85 Lawyers often assume, among other things, the legal capacity of individuals, that copies of documents furnished to them conform to the originals, that the signatures on executed documents are genuine, and the proper corporate power and authorization by the other parties to a contract. The TriBar Report takes the position that these assumptions need not be stated. TriBar Report § 2.3(a). The Committee supports that conclusion. As with other unstated assumptions, the opinion giver may not rely on an assumption if reliance is unreasonable under the circumstances in which the opinion is rendered. See id § 2.1.4. Back

86 See RESTATEMENT § 95, Reporter's Note. Although the Committee believes that it is not necessary, some lawyers specifically disclaim any obligation to update an opinion after it is rendered, particularly where the transaction involved may be ongoing, such as a revolving credit agreement. A typical form of disclaimer reads as follows: "Our opinion is rendered as of the date hereof and we assume no obligation to advise you of changes that may hereafter be brought to our attention." Back

87 See, for example, the discussion of "Reliance on Certificates of Public Officials" in Part IV, Section D.3 of this Report. Back

88 See Part IV, Section D.3 of this Report. Back

89 An opinion giver may also be called upon to deliver a separate opinion letter to its client as part of the closing conditions to a particular business transaction. In that case, the opinion letter would be addressed to the client. Back

90 The TriBar Report notes the evolving practice whereby opinion recipients are increasingly willing to accept separate opinions of counsel rather than one "bundled" opinion from the primary opinion giver. See TriBar Report § 5.2. Back

91 In loan transactions, it is common for the lender to sell participations in the loan to other lenders. In such instances, the lender will normally request the borrower's counsel to permit such participants to rely upon the opinion. In normal circumstances, most lawyers permit such reliance. See Real Property Law Section, State Bar of California & Real Property Section, L.A. County Bar Ass'n, Legal Opinions in California Real Estate Transactions (1987), 42 BUS. LAW. 1139, 1156 (1987). Those participants are permitted to rely on the closing opinion to the same extent as -- but to no greater extent than -- the addressee. ABA Guidelines § 1.7. Back

92 See Part III, Section B of this Report. Back

93 See also Part IV, Section D.5 of this Report regarding reliance on a "special counsel" opinion by the primary opinion giver. Back

94 The term "special counsel" is also frequently used to refer to a lawyer who has been asked to render an opinion as a specialist in a particular field of law. See Part IV, Section D.5 of this Report. Back

95 See Part IV, Section B of this Report. Back

96 CAL. CORP. CODE §§ 100-2319. Back

97 See "Documentary Examination Assumptions" in this Section D.3 below. See also Part V, Section C.6 of this Report as well as Part V, Section E.1 of this Report regarding standards of factual inquiry specifically applicable to opinions with respect to certain securities law matters. Back

98 A common form of statement to this effect is as follows:

We have made such further legal and factual examination and investigation as we deem necessary for purposes of rendering the following opinions. Back

99 These limitations on the scope of a lawyer's examination of factual matters are often expressly stated when the lawyer has played a limited role in the transaction. Such circumstances are commonly set forth clearly in a sentence such as the following:

In rendering the opinions hereinafter expressed, we have relied solely upon our examination of the foregoing documents and certificates, and we have made no independent verification of the factual matters set forth in such documents or certificates.

If the introductory paragraphs of the opinion do not list the documents and certificates examined, this limitation can be expressed by reference to facts and documents disclosed in an officers' certificate. For example:

In giving the opinion expressed in paragraph is Blank line for inserting response above, we have relied solely upon a certificate of is Blank line for inserting response listing [all] [certain] evidences of indebtedness, agreements and instruments to which the [Company] is a party and all judgments, orders and decrees of any court or arbitrator binding upon the [Company].

See "Officers' Certificates" below in this Section IV.D.3 for a general discussion of officers' certificates. Back

100 See TriBar Report § 1.5 (A material departure from any aspect of customary practice (including customary diligence or usage) should be expressly described in the opinion letter. For example, a mere listing in an opinion letter of documents examined is not sufficient to give notice to the recipient that the opinion giver reviewed only the listed documents (rather than the documents customary practice would cover)); Id. § 1.4(c) (Opinion letters often state (immediately before the opinion paragraphs) that the opinions being expressed are based on a review of certain identified documents "and such other investigation as we [the opinion giver] have deemed appropriate." The term "investigation" is generally understood to relate to both law and fact. Thus, the "such other investigation" statement merely emphasizes that the opinion letter is given in accordance with customary practice and its omission is not sufficient, by itself, to indicate that customary practice is not being followed).

The TriBar Report defines "unreliable information" as follows:

The opinion preparers may rely on information provided by an appropriate source ... unless reliance is unreasonable under the circumstances in which the opinion is rendered or the information is known to the opinion preparers to be false ...

TriBar Report § 2.1.4 (footnotes omitted). For an extensive discussion of establishing the factual basis for an opinion, see chapter four of GLAZER & FITZGIBBON.

For a discussion of misleading opinions, see TriBar Report § 1.4(d); ABA Guidelines § 1.5. See also Part III, Section B, and Part IV, Section B.5 of this Report. Back

101 The good standing and authority of foreign corporations to transact intrastate business in California may likewise be confirmed through certificates from the Secretary of State and the Franchise Tax Board. Back

102 As processing delays are sometimes encountered, lawyers wishing to obtain these certificates should contact the office of the Secretary of State or the FTB, as the case may be, sufficiently in advance to ensure that the requested certificates can be obtained prior to the closing of the transaction. They can often be obtained more quickly through various independent document services. Back

103 Under California law, the term "articles" includes the articles of incorporation, amendments thereto, amended articles, restated articles, certificate of incorporation and certificates of determination. CAL. CORP. CODE § 154. As used in this Report, the term "articles" includes reference to the applicable charter in cases where the Company is incorporated under the laws of a jurisdiction other than California. Back

104 See CAL. CORP. CODE § 209. Back

105 A corporation's failure for 24 months or more to file the Annual Statement required under Section 1502 of the California Corporations Code may lead to suspension by the Secretary of State of its ability to transact business. See CAL. CORP. CODE § 2205. The fact and date of the latest filing can be confirmed with the Secretary of State by telephone to assure that the corporation is not susceptible to suspension prior to the anticipated opinion date. Back

106 In routine transactions, many lawyers do not request a Franchise Tax Board good standing letter unless they have a particular concern regarding potential delinquency of franchise taxes or tax filings. Back

107 Alternatively, the opinion giver may include in the opinion letter an assumption that the financial covenants will not be violated by the transaction or may expressly disclaim an opinion with respect to those provisions. See note 161 and the accompanying text. Back

108 The factual certificate should be reviewed and signed by a person with the particular knowledge described in the certificate. See TriBar Report § 2.2.1(c). Back

109 Opinion preparers often may determine that certain facts need to be established to render a legal opinion. Typically, they discuss the facts with an officer or officers and draft an appropriate certificate for officers to sign setting forth the facts. The opinion preparers should be mindful of the dual functions they fill in that context (preparing the certificate and then relying on it). Back

110 See "Description of Factual Examination" above as to the use of officers' certificates in the context of limitation on the scope of an opinion. Back

111 The assumption that the "documents are binding on the other parties" covers the legal capacity of individuals to enter into contracts on their own behalf and the authority of the signatories to bind the entities on whose behalf they have signed the contract. See text and note at note 85. This assumption relates specifically to any opinion as to enforceability of the documents in question and remedies available in the enforcement of them. The Remedies Report addresses such opinions. See text and note at note 13. In the context of a "duly authorized" opinion, the opinion giver may rely on a certificate of the secretary of the corporation with respect to certain matters. See text and note at notes 153 and 154. Back

112 See note 85. Back

113 The TriBar Report takes the position that these assumptions are of "general application" and need not be stated in opinion letters. TriBar Report § 2.3(a). See note 85 for the Committee's position. Back

114 See ABA Principles § II.B; TriBar Report § 6.6; Appendix 8 ("Application of Customary Practice to the Remedies Opinion") to the Remedies Report. Back

115 See ABA Principles §§ II. C and II.D; Appendix 10 ("Report of the Exceptions Subcommittee") to the Remedies Report, at "Further Note." See also Part V, Section C.4 of this Report. The "bankruptcy exception" to the remedies opinion is understood to exclude the effect of insolvency and fraudulent transfer laws from the remedies opinion. See TriBar Report § 3.3.2 ("[t]he bankruptcy exception is more aptly an 'insolvency law exception' in that it covers not only the federal Bankruptcy Code but also any other similar insolvency laws (state or federal) of general application. . . . Fraudulent conveyance (or transfer) laws are included in the laws covered by the exception."); ABA Guidelines § 4.6. Accordingly, a separate specification of laws not covered by the opinion need not specify insolvency and fraudulent transfer laws if the opinion includes the remedies opinion with its bankruptcy exception. In addition, by customary practice, the "no violation of law" opinion is understood not to cover insolvency and fraudulent transfer laws. See Part V, Section C.4 of this Report; TriBar Report § 6.6. Back

116 See "Description of Factual Examination" in this Section D.3 above, including notes 98 and 99. Back

117 See Fuld at 922. See also Part IV, Section B.3 of this Report (particularly including notes 68-74); Negative Assurance Report. Back

118 The TriBar Report states that each qualification of an opinion is an "exception," which may either take the form of a "limitation" or an "exclusion." Exceptions narrow an opinion's scope. See TriBar Report § 1.2(a). This is distinguished from "assumptions," which act as "fact substitutes" to facilitate the rendering of an opinion. Id. § 2.3. Exceptions, limitations, exclusions and assumptions all fall under the general rubric of qualifications. Issues as to the qualifications or assumptions in an opinion often relate to the "remedies" or "enforceability" opinion. Readers should refer to the Remedies Report, and particularly its Appendix 10 ("Report of the Exceptions Subcommittee") for a discussion of the qualifications and assumptions appropriate for these opinions. Back

119 CAL. COM. CODE § 8303. See also Part VII, Section C of this Report. If not bearer shares, the securities also need to be endorsed. See CAL. COM. CODE §§ 8106, 8303. Back

120 See Uniform Commercial Code Committee, Business Law Section, State Bar of California, Report Regarding Legal Opinions in Personal Property Secured Transactions, as reprinted in 44 BUS. LAW. 791 (1989), at 832-34. The purchaser may seek to bolster its position regarding good faith and lack of notice by requesting a representation from the seller that it has no notice of any adverse claims with respect to the securities. Back

121 See Part IV, Section D.5 below, "Special Matters." Back

122 See ABA Guidelines §3.4; ABA Principles § III.B; TriBar Report §2.6.1. See also FIELD TREATISE § 2:14.2. Back

123 See also the discussion of knowledge qualifiers in note 264. Back

124 See Section II.F of the Inside Counsel Report. See also Accord §§ 6-A, 6-B and commentary. Cf. Am. Bar Ass'n, Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information, 31 BUS. LAW. 1709 (1976). Back

125 See ABA Guidelines § 3.4 n.11; see also Part IV, Section B.1 of this Report. Back

126 A common form of limitation reads as follows:

We are opining herein as to the [effect on the subject transaction only of the] laws of California and of federal law, and we express no opinion as to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction.

Where necessary, multi-state law firms are generally able to render opinions on the laws of various states where they have offices, since lawyers in each office may review and approve the opinion insofar as it relates to the laws of their respective states. Back

127 See Part VI, Section A of this Report and Appendix 10 ("Report of the Exceptions Committee") to the Remedies Report, Annex B ¶ 1. Back

128 See also Part VI, Section B.1 of this Report; TriBar Report § 5.3. Back

129 See Part VI, Section A.1 of this Report. Back

130 The TriBar Report states that, by expressing reliance on the opinion of local counsel, the principal opinion giver indicates that "such reliance is in its professional judgment reasonable," which presupposes that the principal opinion giver has assured itself of local counsel's reputation for "competence in matters of the kind involved." See TriBar Report § 5.1. If reputation is a matter of concern for the principal opinion giver, then it may consider "unbundling" the opinion letter from that of local counsel. This approach is discussed in the following paragraph of this Report. Back

131 Accord ¶ 8.1; GLAZER & FITZGIBBON § 5.3.3 at 143. Back

132 The TriBar Report states that an indication in the principal opinion giver's opinion that local counsel's opinion is satisfactory in "form and substance" or that the opinion giver "concurs" in local counsel's opinion imposes a burden on the principal opinion giver to make an independent investigation of the law involved beyond merely satisfying itself that reliance on the opinion is reasonable, based on the reputation of local counsel for competence in matters of the kind involved. See TriBar Report § 5.1 n. 99. The ABA Guidelines state that a "concurrence" opinion should not normally be requested. See ABA Guidelines § 2.2. The TriBar Report maintains that there is no broadening of the principal opinion giver's responsibility if an opinion letter merely states that the local counsel's opinion is "satisfactory in form and scope" (as opposed to "in form and substance") or that the opinion recipient is "justified" in relying on local counsel's opinion. TriBar Report § 5.1 n. 99 and accompanying text. A statement that the opinion recipient is justified in relying on the local lawyer's opinion expresses the principal opinion giver's belief that, based upon the local lawyer's reputation, the local lawyer is qualified to render the opinion. Similarly, a statement that the local counsel's opinion is "satisfactory in form and scope" would be understood not to constitute an opinion as to the substance of the local counsel's opinion. See TriBar Report § 5.1 at 637. Back

133 See TriBar Report § 5.2. Back

134 An example of the latter would be reliance upon local counsel's opinion that the Agreement has been duly authorized by the Company when the principal opinion giver is giving the remedies opinion.

The Committee does not recommend that the principal opinion giver incorporate local counsel's opinion in the opinion letter of the principal lawyer. The Committee does not conclude, however, that doing so would always be inappropriate. In making a determination as to whether to do so, the principal opinion giver may wish to consider the degree to which the substance of the local counsel's opinion letter is comparable in specialization to that of a "special counsel" as referenced below in note 136 (and accompanying text) and the ease with which the conclusions of local counsel (including all assumptions, limitations and exclusions) may be incorporated into the principal opinion letter. Back

135 See Appendix 4 ("Report of the Threshold Subcommittee") to the Remedies Report, Part III, Section C.2. Back

136 97 Cal. App. 3d 404, 158 Cal. Rptr. 714 (1979). Note that Horne v. Peckham has been overruled on other grounds by ITT Small Business Corp. v. Niles, 9 Cal. 4th 245, 36 Cal. Rptr. 2d 552 (1994), which was overruled four years later by Jordache v. Brobeck, Phleger & Harrison, 18 Cal. 4th 739, 76 Cal. Rptr. 2d 749 (1998). While the standard for referring a matter to a legal specialist still stands, it has not been articulated in any more recent cases. See also Musser v. Provencher, 28 Cal. 4th 274, 121 Cal. Rptr. 2d 373 (2002) (allowing one attorney to seek indemnification from another attorney who was a tax specialist for an incorrect opinion from the specialist). Back

137 The Committee is of the view that the opinion giver is not required to disclose these relationships. See ABA Guidelines § 2.3. Back


V. Certain Common Opinions and Special Issues Under California Law and Practice / Table of Contents