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

I. Purpose of this Report

In the years before and after the publication of the 1989 Report, commentators expressed concern about the substance, form and proliferation of written legal opinions in business transactions.17 Concerns focused on the usefulness of opinions, the increased cost to clients of the preparation and delivery of opinion letters, and the risk of liability of lawyers rendering them.

This Report discusses the general understanding of what is meant by the term "legal opinion" in the business law context and the characteristics that distinguish legal opinions expressed in an opinion letter from informal legal advice. The principal objective of this Report is to assist lawyers in the preparation of opinion letters by examining common formats and by identifying and discussing the meanings generally ascribed to certain customarily used terms and phrases. In those instances where language customarily found in specific legal opinions is reasonably subject to differing interpretations, that fact is noted.

In addition to these general topics, this Report discusses the following issues:

1. The matters to be considered in requesting and providing opinion letters, such as guidelines for determining when and if a specific legal opinion should be requested in a particular business transaction, including cost-benefit considerations, and the appropriate content of such opinions.

2. The standard of care required under California law, with particular attention to the standard of care in rendering opinions in specialized areas of the law, such as securities law. Unresolved issues regarding the standard of care are also noted, and the Committee's view on them is sometimes presented. The Committee emphasizes that this Report is not, however, intended to establish an independent measure of the standard of care or to constitute evidence of the standard of care.18

3. The nature and extent of the "diligence" investigation an opinion giver customarily undertakes before issuing particular types of opinions, such as the way factual information upon which an opinion is based is obtained, determining appropriate factual assumptions to be included in the opinion letter, and analyzing the extent to which additional legal research is appropriate.

The most common context in which an opinion letter is given is to a third party at the request of a client. In that context, the opinion letter is typically referred to as a "third-party legal opinion" or, if given at the closing of a business transaction, a "closing opinion."19 This Report addresses the giving of third-party legal opinions by California lawyers, including opinion letters nominally requested by and addressed to the client, but intended by the opinion giver to be relied on by a third party, such as the legal opinion ("Exhibit 5 opinion") rendered by securities counsel to their client in connection with an offering of securities registered under the Securities Act of 1933 (as amended, the "1933 Act").20

Lawyers may also from time to time be asked to render a legal opinion to their own clients. For example, a financial institution may request not only a closing opinion from borrower's counsel, but also a legal opinion from its counsel. As another example, a client may request a tax opinion from its counsel to provide a basis for the avoidance of penalties if the tax aspects of a transaction are later challenged by the Internal Revenue Service.21

While an opinion giver must exercise due care in rendering an opinion letter, whether addressed to a third party or to the opinion giver's client, other considerations apply when an opinion is rendered to a lawyer's own client.22 As the commentary to Section 95 of the Restatement (addressing opinions to third parties) notes, a third-party recipient of a lawyer's opinion "does not thereby become the client of the lawyer, and the lawyer does not thereby undertake all duties owed to a client, such as confidentiality or avoidance of conflicting interests . . . ." 23 Moreover, in rendering a third-party legal opinion, "a lawyer does not undertake to advise the third person except with respect to the questions actually covered by the evaluation [opinion]."24

Accordingly, except as specifically noted, this Report does not address the separate considerations that may be relevant when an opinion giver is rendering an opinion to its client, and references in this Report to "opinions" are to third-party opinions.

Finally, Appendix B to this Report lists the authorities cited in this Report and Appendix C contains a bibliography of articles and other publications on the subject of legal opinions and related topics.


17 See Appendix C, Bibliography. Back

18 As noted in Part III, Section A.2 of this Report, however, the Restatement looks to Bar reports such as this Report for guidance on the standard of care applicable to lawyers for purposes of establishing the lawyer's discharge of his or her duty of care. For a discussion of standard of care issues in rendering securities law opinions, see Part V, Section E of this Report. Back

19 See generally James Fuld, Legal Opinions in Business Transactions--An Attempt to Bring Some Order Out of Some Chaos, 28 BUS. LAW. 915 (1973) [hereinafter Fuld]. Back

20 Securities Act of 1933, 15 U.S.C. §§ 77a -- 77aa. See Special Report of the Task Force on Securities Law Opinions of the ABA Section of Business Law, Legal Opinions in SEC Filings, 59 BUS. LAW 1505 (2004) [hereinafter SEC Filings Report]. Back

21 See Jasper Cummings, Jr., The Range of Legal Tax Opinions, With Emphasis on the "Should" Opinion, TAX NOTES 1125 (February 17, 2003). Back

22 See RESTATEMENT § 16 and § 95, comment c. Section 16 of the Restatement outlines the duties of a lawyer to his or her client, which duties include the obligation to proceed "in a manner reasonably calculated to advance a client's lawful objectives, as defined by the client after consultation," the obligation to "act with reasonable competence and diligence," the obligation to "comply with obligations concerning the client's confidences and property, avoid impermissible conflicting interests, deal honestly with the client, and not employ advantages from the client-lawyer relationship in a manner adverse to the client," and to "fulfill valid contractual obligations to the client." See also CAL. BUS. & PROF. CODE § 6068(e) (lawyer to "maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client"). Back

23 See RESTATEMENT § 95, comment c. Back

24 Id. Arthur Norman Field observes that "[a]ny opinion letter to the client likely represents only one aspect of the lawyer's duty to the client." Arthur Norman Field, LEGAL OPINIONS IN BUSINESS TRANSACTIONS § 15:1 (2004) [hereinafter FIELD TREATISE]. Field discusses legal opinions to clients in chapter 15 of his treatise. Back

II. Definition and Purpose of a Legal Opinion / Table of Contents