Appendix 4: Report of the Threshold Subcommittee
- Third-Party Remedies Opinions
- Primary Purpose
- Consideration of Alternatives
- The Cost/Benefit Analysis
- Other Benefits
- Costs and Burdens
- Reliance on Remedies Opinions
- Special Factors
- Multi-Party Transactions
- Opinions to Unrepresented Parties
- Specialized Legal Issues
- Regulated Obligors
- Counsel from Different Jurisdiction
- Regularly Used Documents
- Limited Scope Opinions
- Ancillary vs. Principal Documents
- Complex Documents
A. Third-Party Remedies Opinions
Much has been written in the recent past about third-party closing opinions in business transactions.1 Opinions reports generally deal with the meaning and scope of opinions, and the customary practice followed prior to issuing certain parts of the opinion. While there is some discussion of the appropriateness of requests for various types of opinions, comparatively little attention has been focused on the purposes, risks and costs of remedies opinions. Often, lawyers and their clients request a remedies opinion from counsel for another party in the transaction without engaging in the recommended cost/benefit analysis.2 Lawyers requesting the opinion frequently rely on the overused flippant comment that "it is market" to receive a remedies opinion and believe that this is the only analysis required.3 The Business Law Section is of the view that lawyers should not recommend that a client request a third-party remedies opinion that will result in significant costs unless a clear benefit that justifies the costs is likely to be enjoyed by their client.
Practitioners in California report fewer requests for remedies opinions than historically have been made, especially in public merger and acquisition transactions and in smaller transactions. Even in small financing transactions, such opinions are regularly dispensed with.4 Presumably, clients and their counsel are beginning to recognize that the cost of a remedies opinion is often disproportionate to the value obtained by the opinion recipient.
The principal question addressed in this appendix is: What are the considerations in determining whether to request or give a remedies opinion? Implicit in reaching any conclusions on this question is a series of additional questions:
- What expected benefits are provided to the opinion recipient and under what circumstances are these benefits likely to be actually achieved?
- Do any negative consequences flow to the opinion giver's client or to the opinion recipient from delivery or receipt of a remedies opinion?
- Can the benefits be obtained in ways that are less "costly" than the issuance of a third-party remedies opinion?
B. Primary Purpose
The principal purpose of a closing opinion is to assist the opinion recipient's due diligence in determining whether to enter into a transaction on the business terms discussed by the parties.5
In light of this purpose, lawyers requesting a remedies opinion need to be mindful that a remedies opinion should only be sought when its benefit justifies its cost.6 Often, especially in transactions that are routinely entered into by it, the opinion recipient (and its counsel) are most knowledgeable about enforceability of the relevant contracts. It may well be more economic and efficient for that party to rely on the advice of its own counsel rather than to request the opinion of the counterparty's counsel, even if the counterparty has agreed to pay the fees and costs of the opinion recipient's counsel.7 As summarized by the Restatement: "It would often be wasteful or impractical for the other party to the transaction . . . to assess a legal issue that could be determined more readily by the lawyer for the client."8
Since the primary purpose of a remedies opinion is to assist in due diligence for the transaction, the request for a remedies opinion should have as its principal goal the identification of legal enforceability issues regarding specific contract provisions, or the existence of a potential legal defense to the contract as a whole. Unenforceability issues that pertain to the text of the document, in contrast to problems that arise as a result of circumstances particular to one or more parties to the contract, are usually as easily ascertained by the opinion recipient's counsel as the opinion giver. In the vast majority of transactions, a third-party remedies opinion does not result in the identification of enforceability issues unknown to the opinion recipient or its counsel. On the other hand, a request for a remedies opinion frequently produces lengthy discussions between counsel regarding the extent and nature of the exceptions that will be included in relation to the remedies opinion.
However, as discussed elsewhere9, in many situations the principal purpose of the remedies opinion is to offer legal comfort to a party not separately represented by counsel, for example, a rating agency or another person who is not a party to the contract. Further, in some situations the opinion involves issues that the opinion giver is better suited to address than the opinion recipient's counsel. In those and other cases, the benefit obtained by the opinion recipient is substantial and is likely to justify the cost of the remedies opinion.
Ultimately, the decision whether a third-party remedies opinion will be given in a transaction should be made by the clients (and not just the lawyers). However, since costs and benefits of remedies opinions are much more familiar to lawyers than to most clients, opinion givers and counsel to opinion recipients should assist their clients in making this cost/benefit analysis.
C. Consideration of Alternatives
This appendix focuses mainly on whether to include a third-party remedies opinion as part of the due diligence in a transaction. That is just one point along a decision tree with many branches. The alternatives are as many and varied as the diversity of transactions and creativity of lawyers can make them. Here are some of the possibilities.
- Dispense with a third-party legal opinion altogether. Alternative sources of due diligence may be sufficient and more cost-effective.10
- Obtain a third-party opinion as to matters such as due organization, authorization, execution and delivery, but not obtain a remedies opinion.11
- Obtain a remedies opinion from the lawyer for the opinion recipient, rather than another party's lawyer.12
- Even if a third-party remedies opinion is given, limit its scope:
- It could cover some but not all of the transaction documents.13
- It could cover some but not all provisions of a complex, multifaceted contract.14
- In a multi-state transaction in which the contractually chosen law is not within the competence of the opinion giver, it could opine as if enforceability were determined under laws within the opinion giver's competence, or the opinion could be limited to enforceability in the opinion giver's jurisdiction of the choice of governing law provision.15
A decision among these choices should be made after engaging in the cost/benefit analysis described in this appendix.
II. The Cost/Benefit Analysis
A. Other Benefits
As noted above, the principal benefit of a remedies opinion is to assist the opinion recipient in determining whether to enter into the transaction on specified terms. In doing the cost/benefit analysis, it is also necessary to identify other possible benefits to the opinion recipient.
- Discharge of Opinion Recipient's Responsibilities to Others. For example, parties like the agent in a syndicated loan transaction or the lead investor in a private placement of securities, where other parties are not represented by counsel, may feel there is an expectation that those parties will be provided with a remedies opinion from the borrower's or issuer's counsel.16
- Satisfying Statutory or Regulatory Requirements. For example:
- Banks regulated by the Comptroller of the Currency or Federal Reserve Board, or subject to the jurisdiction of the Federal Deposit Insurance Corporation, are obligated to employ safe and sound banking practices, and this is sometimes cited as the basis for requesting a third-party remedies opinion.17
- Regulations issued by the Department of Defense pursuant to authority granted in Title 41 of the United States Code contain a relevant condition to the effectiveness of a transfer by a government contractor of a procurement contract to a third party. This condition requires delivery to the Government of an opinion of legal counsel to each of the transferor and transferee which concludes that the transfer "was properly effected under applicable law."18
- Federal bank regulatory agencies require that banks obtain an opinion that any bilateral derivatives netting agreement is "enforceable" if the agreement is to be considered in calculating the bank's capital.19
- The U.S. Maritime Administration (part of the Department of Transportation) requires an opinion of counsel for a shipowner seeking MARAD guarantees in Title XI financings that includes the essence of a remedies opinion.20
- Section 314(b) of the Trust Indenture Act of 193921 requires delivery to the Indenture Trustee of an opinion as to the "effectiveness of the lien"22 created by the indenture or other security documents which secure notes or debentures issued pursuant to an indenture registered under the Indenture Act, and delivery annually of an opinion that all action necessary to be taken to maintain such lien has been taken.
In situations like these, counsel to the party that seeks the benefit of the governmental program or is subject to the regulation is usually the logical one to deliver the opinion, as the opinion is primarily for its client's benefit. The parties may shift the burden of giving the opinion, since the requirement to deliver a remedies opinion does not necessarily specify a third-party opinion, and the opinion could be given by counsel to any party in the transaction.
"Benefit" of Estoppel
It has been suggested that one reason for obtaining a third-party remedies opinion is to raise an equitable estoppel against a later assertion by the opinion giver's client that a particular undertaking is unenforceable. For example, a party may not be willing to enter into a financing transaction that has a complex or unusual structure, or a structure that is subject to potential recharacterization, unless there is an acceptable degree of assurance that all parties and their counsel agree about the legal consequences that flow from the structure and the remedies available assuming that the parties' chosen structure is given legal effect.23 In other transactions, one party may insist on a non-customary undertaking or a limitation of available remedies for breach, which are very important to that party's commercial interest in the transaction.
However, it is doubtful that an estoppel could be asserted successfully against the opinion giver's client based on its counsel's third-party remedies opinion. The client usually is not bound by statements made by its counsel.24 Even though a client has implicitly authorized an opinion,25 it is doubtful that the client will be deemed to have authorized an incorrect or misleading opinion. Accordingly, if the remedies opinion is erroneous, while the opinion giver may have responsibility, the giving of the opinion would not preclude the client from asserting that a clause or document is unenforceable.
Moreover, it is doubtful that any practical benefit would accrue to the opinion recipient from an attempt to assert an estoppel against the opinion giver in a later challenge. Even if the opinion giver is unable or unwilling to assert in litigation a position contrary to its remedies opinion, another lawyer for the opinion giver's client is under no such disability. Indeed, another lawyer might be ethically obligated to assert, if meritorious, that a provision is unenforceable, regardless of a contrary remedies opinion by the opinion giver.
Another "estoppel" argument is that the giving of a remedies opinion by an opinion giver is evidence that the subject contract was reviewed by the opinion giver and explained by it to its client. Hence, it is argued, the opinion giver's client is "estopped" from asserting that it did not understand the contract or provisions in question.
This argument too is weak because, as discussed above, the client is not estopped to assert a meritorious position because its counsel gave a remedies opinion. Moreover, this argument treats the opinion process as if it were designed to establish an evidentiary record, rather than a process that assists parties in their due diligence efforts incident to a transaction. To the extent an opinion recipient wants an evidentiary record, a more direct and cost effective way would be to obtain a representation from the opinion giver's client that it was represented by counsel who explained the relevant transaction documents to it.26
Even if a third-party remedies opinion does not give rise to an estoppel, it can have an informal estoppel-like effect. For example, it can be used in subsequent negotiations related to the subject contracts. Thus, in a loan workout, for example, an earlier remedies opinion might be used in negotiations to counter an argument made by the opinion giver's client that a contract has legal infirmities. Accordingly, the estoppel benefit of a third-party remedies opinion should not be completely ignored.
B. Costs and Burdens
The key guiding principle for determining the appropriateness of a third-party remedies opinion is that the benefits derived must warrant the time and expense required to prepare the opinion.27 The most obvious "cost" is additional fees of the opinion giver. This additional cost is difficult to justify if the opinion recipient's counsel separately addresses the same issues in a written opinion or otherwise as part of the representation of its client. Indeed, the opinion recipient's counsel may be in a better position to advise its client regarding the enforceability of contractual provisions if that counsel was the principal drafter of the contract or if the contract is generally in a form regularly used by counsel to the opinion recipient.28
Perhaps of equal or greater importance than the economic cost, the negotiating process often results in significant delays in completing the transaction, and sometimes injects acrimony and distraction into the transaction as well.
Another potential non-economic "cost" is the possible intentional or inadvertent disclosure of a client's negotiating strategy or confidential communications. For example, the opinion giver might identify an enforceability issue with respect to an undertaking proposed to be given by the opinion giver's client in favor of the opinion recipient. After the opinion giver advises its client of the questionable enforceability, the client might decide not to address this undertaking at that point in the negotiation. Later, the client might agree to the questionable provision in exchange for a contractual concession by the opinion recipient. If the opinion giver is then requested to give a remedies opinion, ABA Guidelines contemplate that early disclosure will be made to the opinion recipient that the questionable provision may not be enforceable.29 The result could be reopening of the negotiations.30 In some cases, disclosure could constitute a violation of a lawyer's ethical duties to the client and informed client consent to any such disclosure may well be required.31
Finally, some lawyers believe that the issuance of a third-party remedies opinion might give rise to a conflict of interest with the opinion giver's client because the issuance of the opinion could result in an informal estoppel.32 Also, as discussed above, the opinion giver may be required to identify deficiencies and risks affecting the opinion recipient's legal position that would not be in the opinion giver's client's interest to reveal, which produces a potential conflict between the opinion giver's duties to its client and the responsibility of the opinion giver to the opinion recipient.33
C. Reliance on Remedies Opinions
In many transactions, the opinion recipient may not, in fact, rely on the third-party remedies opinion in deciding to enter into the transaction. Usually, counsel for the opinion recipient has already considered and given advice to its client concerning the enforceability of contractual provisions in the transaction.34 This is far more meaningful legal advice than the opinion recipient receives from a third-party remedies opinion, which is typically couched in legal conclusions without amplification. Where the attorney for the opinion recipient has advised its client of legal concerns about the documents, the opinion recipient will have difficulty successfully claiming reliance to the contrary on an erroneous opinion, since it has notice of the issues. Additionally, to the extent that the third-party remedies opinion has exceptions for particular provisions, the opinion recipient will not be able to claim reliance on the opinion when one or more of these excepted provisions turn out to be unenforceable. Moreover, inclusion of these exceptions may itself increase the risk that the subject provisions will be held unenforceable.
A principal duty of a lawyer representing a client in documenting a business transaction is to optimize the content of the documents for the client's benefit, consistent with the understandings and intentions of the parties. An opinion recipient could be benefited by the inclusion of provisions of questionable enforceability because other parties to the contract may comply with them regardless of enforceability.35 Moreover, judicial receptivity to a questionable undertaking may change over time or from jurisdiction to jurisdiction. It is also not unusual for a client to be willing to enter into a transaction even if particular provisions, which are not deemed material, or even "essential," by the client, are wholly unenforceable. Accordingly, unless the validity or enforceability of the contract as a whole is in question, the opinion recipient's decision to enter into the transaction may not be impacted by the absence of a remedies opinion regarding these provisions, as the opinion recipient may want to retain the suspect provisions, regardless of enforceability. Obviously, where the issue of enforceability goes to the contract as a whole, e.g., because of a lack of consideration, it is doubtful a remedies opinion will be given. In that case, the parties may modify the agreement after consultation with their own lawyers to solve the enforceability problem. In this type of situation, the opinion recipient may rely in part on a third-party remedies opinion as an expression of the opinion giver's concurrence with the conclusion that the entire agreement is enforceable. But the opinion recipient's reliance is primarily on its own counsel's advice that a solution has been found.
It should be noted that even if there is limited reliance on the conclusions reached in a remedies opinion, opinion recipients can benefit from the process of analysis that precedes the issuance of the opinion. A request for the remedies opinion can serve the purpose of surfacing previously unrecognized unenforceable provisions. If no issues are raised by the opinion giver, some comfort is provided to the opinion recipient that no such unrecognized problematic provisions are contained in the document.
III. Special Factors
The "cost/benefit" analysis done in connection with a transaction to determine whether a third-party remedies opinion should be requested may be affected in some transactions by the presence of special factors.
A. Multi-Party Transactions
Sometimes a third-party remedies opinion is primarily for the benefit of a person that is not a party to the contract involved but is directly affected by it. The regulation promulgated by the Department of Defense cited above36 provides an apt example. The regulation deals with the assignment by one party to another of a contract to which the United States Government is a party. The Government is not a party to the assignment transaction but is affected by it and requires a legal opinion that the assignment is valid. In a similar context, a licensor of a patent or trademark may require an opinion from counsel to the assignee that the assumption provisions of the assignment document are enforceable against the assignee, so that the licensor can enforce the license directly against the assignee.
In a project finance transaction, the enforceability of a third party's undertaking to pay money to the issuer of a debt obligation is one of the key elements in evaluating whether the issuer has the ability to pay the debt instrument. Underwriters and ultimate purchasers of highly rated debt securities often rely on undertakings by a liquidity enhancer to pay the debt upon default, or to purchase or remarket short-term debt that is tendered for repurchase. A remedies opinion relating to the undertakings of these liquidity enhancers is typically given.
Many multi-party transactions involve interdependent contractual arrangements. A lender financing the acquisition of another business by its borrower will usually want comfort that the undertaking by the seller to indemnify the buyer (the borrower) is enforceable. The lender may want to have the buyer to enforce the buyer's claims against the seller in case, for example, undisclosed liabilities impair the creditworthiness of the borrower. A purchaser of a business may want an enforceability opinion on an important supply contract between the business and a customer in which the customer agrees to purchase goods from the business. An investor in a business may require comfort that a previously obtained release of claims against the business by a third party or the grant of exclusive rights to exploit key technology is enforceable.
In these and many similar situations, counsel for the opinion recipient is not the most appropriate party to give the remedies opinion, because that counsel typically did not participate in the preparation or negotiation of the underlying contracts covered by the opinion.
B. Opinions to Unrepresented Parties
The foregoing analysis of whether a third-party remedies opinion should be given assumes that all parties to the transaction have the benefit of counsel. The question is which counsel is better able to provide the legal advice requested, or can do so in the most cost effective manner. In many transactions, however, some parties are not represented.
Rating agencies very frequently require remedies opinions concerning material documents that support the credit being rated, for example, the indenture and the key contracts that provide credit or liquidity enhancement. The rating agency assumes in its credit analysis that the parties will perform a contract, and a remedies opinion from counsel to an obligor provides support for the reasonableness of that assumption. Purchasers of securities from an issuer are often not represented by counsel, but might rely on the issuer's counsel's opinion filed with the Securities and Exchange Commission as an exhibit to a registration statement.37 Similarly, legal counsel to the issuer who relies on an exemption from qualification under the California Corporate Securities Law of 1968 is required to provide a written opinion filed with the California Department of Corporations that the transaction described in the filed notice is eligible for the exemption contained in Section 25102(h).38 As mentioned above,39 participants in syndicated loans and investors in private placement transactions often are unrepresented. In these situations the third-party remedies opinion usually does not result in excessive costs; indeed, it tends to minimize the need for opinion recipients to obtain separate counsel.
C. Specialized Legal Issues
1. Regulated Obligors
In some situations, the enforceability of a contract may depend on compliance with a regulatory scheme that applies to a party to the contract. For example, a standby securities purchase commitment undertaken by a corporation may not raise enforceability issues as a matter of contract law. If the commitment relates to shares of another entity and the undertaking is given by a regulated entity (for example, a bank, an insurance company, a public utility, or a governmental authority), additional issues may be raised under applicable regulations. A third-party remedies opinion given by counsel for the obligor is generally understood to include the conclusion that the undertaking is enforceable against the obligor under the applicable regulatory framework,40 and, usually, the obligor's counsel is best suited to give an opinion that considers the effect of the regulatory elements in coming to the conclusions contained in the remedies opinion.41 But the remedies opinion is not customarily interpreted to cover regulatory requirements applicable to the opinion recipient,42 and opinion givers assume (often explicitly, but sometimes implicitly)43 that the opinion recipient has full legal and corporate authority to enter into the transaction.
2. Counsel from Different Jurisdiction
Counsel for the parties are not equally capable of giving a remedies opinion where the opinion covers a contract that is governed by laws on which only one counsel is competent to opine. For example, when a party and its counsel are based in a state different from that of the other party and its counsel, the contract is often governed by the laws of one of those jurisdictions.
Because state laws are often different, it is sensible for the party that is unfamiliar with the chosen law to request a remedies opinion from the counsel that is familiar with it. It is often inefficient and costly to request the party whose counsel is not familiar with the chosen law to retain local counsel solely to give a remedies opinion to a party whose counsel is familiar with the chosen law.44 In situations where neither party's counsel is familiar with the law chosen by the contract and local counsel is retained, it may be wiser for the opinion recipient to seek to have local counsel represent it and provide the opinion recipient with local law advice directly, even where the fees of such local counsel are to be borne by the other party. Local counsel retained by the opinion recipient will be far more likely to provide advice to the opinion recipient on all relevant matters arising under the chosen law, not just uncertainties in the enforceability of contract provisions under the selected law.
Where the parties have agreed not to retain local counsel, counsel that does not regularly opine on the chosen law is sometimes asked to provide a remedies opinion assuming that enforceability of the contract would be determined under the law of the opinion giver's jurisdiction rather than the law chosen by the contract.45 Alternatively, the opinion giver may be requested to limit its enforceability opinion solely to the question of enforceability in the opinion giver's jurisdiction of the choice of law provision.46 Each of these approaches (whether together or as alternatives) seems to be sensible and to promote efficiency in appropriate cases.
D. Regularly Used Documents
Frequently, a third-party remedies opinion is requested on documents that are prepared and regularly used by the requesting party or its counsel, and are basically in the same form from one transaction to the next. Lenders, in particular, frequently insist on standardized agreements, as this makes for more efficient administration of loans. The benefit of this remedies opinion to the opinion recipient is doubtful. It appears to be both more beneficial and cost effective for the opinion recipient to rely on its own counsel for legal advice regarding enforceability. Therefore, a request for a remedies opinion, in this situation, in the absence of special factors in the transaction, seems inappropriate.47
IV. Limited Scope Opinions
A. Ancillary vs. Principal Documents
In analyzing the cost of preparing the remedies opinion against the benefits provided by its receipt, the relative weightings will obviously not be the same in each transaction. In addition, the weights assigned will not even be the same for all documents in the same transaction. For example, some documents in a transaction may be simple and contain few undertakings. Others may merely be shorter forms of more complete agreements, used, for example, solely for filing purposes (e.g. copyright mortgages, patent security agreements, or memoranda of leases). Some (for example, environmental indemnities and an agreement among shareholders restricting stock transfers) may be short and ancillary but nonetheless raise significant issues that could result in additional qualifications in the remedies opinion, or require significant legal analysis because of the need to weigh many different factors. These documents are typically ancillary documents, which, while playing a role in the transaction, do not contain the principal contractual undertakings that have induced the parties to enter into the deal. Where this is the case, a request for a remedies opinion concerning these ancillary documents may provide little benefit, but on the other hand may require significant cost to analyze.48 While it is difficult to draw general and clear lines, counsel and their clients should be particularly mindful of the cost/benefit analysis in requesting remedies opinions on ancillary documents.
B. Complex Documents
Frequently, documentation in a transaction includes numerous and varied contractual undertakings. These undertakings may be in a single principal document, a number of separate documents, or combined from various documents into the text of a single master or omnibus agreement. For example, acquisition agreements not only include an agreement to purchase and sell, but will often also include undertakings about such matters as the parties' pre-closing conduct, post-closing treatment of employees, preparation and filing of tax returns, accounting matters, collection of accounts receivable, post-closing non-competition, non-solicitation and non-disclosure, indemnification obligations, and the consideration to be paid by the buyer. If there are enforceability issues with undertakings in complex documents, they may arise under a wide variety of legal regimes, including, for example, laws relating to general corporation matters, securities regulation, employment, antitrust, tax, intellectual property, environmental and real estate law. While a remedies opinion is generally understood not to cover some of these specialized areas,49 many of these substantive laws are understood to be covered.50 In situations involving complex documentation or wide-ranging subject matter, the cost/benefit analysis might lead the parties to conclude that a limitation on the scope of the opinion to specific undertakings is appropriate.
A request for a third-party remedies opinion should only be made when the benefit to be obtained by the opinion recipient justifies the cost of its preparation, and where there is no alternative that is more cost effective.51 The cost/benefit analysis involves measuring the cost of preparation against the benefit that the opinion recipient obtains through its reliance on the remedies opinion, taking into account the size and complexity of the transaction. It is not an anomaly that remedies opinions are regularly requested and given in many large transactions, regardless of the nature of these transactions.52 The customary practice of providing third-party remedies opinions in these transactions is recognition that even a small incremental benefit can justify significant costs where large sums of money are at stake.
Third-party remedies opinions are also clearly beneficial in many situations, regardless of the size of the transaction, as discussed in Section III above.
In the absence of special factors, the benefit to be obtained by an opinion recipient from a third-party remedies opinion can often be realized in a more cost-efficient and informative manner through advice provided by the opinion recipient's own counsel, especially as it relates to documents regularly prepared by counsel to the opinion recipient for the opinion recipient. In general, it would seem inappropriate for a third-party remedies opinion to be requested or given in that circumstance.
While clients are usually the ultimate decision-makers about whether to request a third-party remedies opinion in a transaction, their lawyers should assist them with an appropriate cost/benefit analysis.
1 For a list of relevant reports, see the 2001 Statement and the additional reports listed in Appendix 1. Back
2 See ABA Guidelines § 2.2 (2002) ("An opinion of other counsel should be sought by the opinion recipient only when the opinion's benefits justify its costs."). This cost/benefit analysis applies to all opinions contained in a third-party opinion letter (including whether to request such a letter at all), not just the remedies opinion. Applying the analysis to third-party opinions other than the remedies opinion is outside the scope of the Umbrella Report. Back
3 See ABA Guidelines § 1.6: ("An assertion that a specific opinion is 'market'--i.e., that lawyers are rendering it in other transactions--does not make it appropriate to request or render such an opinion if it is inconsistent with these Guidelines.") Back
4 The 2001 Survey suggests that third-party remedies opinions are not being delivered in most transactions (other than lending transactions) involving less than $10 million. Opinions almost always are requested by lenders in loan transactions exceeding $100 million. Delivery of third-party remedies opinions is reported in most M&A transactions involving $10 million or more (except in merger transactions between public companies, where the practice seems to differ). Remedies opinions apparently are given in many private securities transactions. The survey did not seek explanations for the results reported. Possibly, the practice of giving third-party remedies opinions in M&A and securities issuance transactions results from the fact that closing opinions on other subjects are customarily required, and giving a remedies opinion may be perceived as involving little additional effort by the opinion giver. Finally, some members of the Subcommittee reported that a few large institutional lenders active in the California market have de-emphasized receipt of a remedies opinion in many of their loan transactions involving lender-prepared documents, and in real estate construction loan transactions. These trends may signal a general change in approach to third-party remedies opinions. Back
5 ABA Guidelines, § 1.1. Back
6 See Id. § 2.2; 2007 Report, §II and § IV.B.1. Back
7 In assessing whether the benefit of a remedies opinion "justifies its cost," the focus should not be simply on measuring cost from the opinion giver's client's perspective--any cost incurred by a party in having its counsel issue a third-party opinion is greater than that person would have otherwise borne. Rather, the inquiry should be whether the aggregate costs to all parties are greater either because of the duplication of effort (as counsel for both parties may be giving opinions or advising on the same subject), or because of the economic cost of the negotiation over the text of the opinion itself. In many business transactions, the clients collectively want the aggregate legal fees to be as low as possible consistent with obtaining effective legal representation. Because the cost of both counsel is frequently borne by one party, it is particularly important to that party that total costs of the transaction be kept as low as possible. Back
8 RESTATEMENT § 95, cmt. b. Back
9 See § III.B below. Back
10 A third-party opinion "should be sought by the opinion recipient only when the opinion's benefits justify its costs." ABA Guidelines § 2.2. Back
11 This possibility is expressly noted in the ABA Guidelines at § 1.2, n.7. Back
12 See RESTATEMENT § 95; infra text accompanying note 27. Back
13 See discussion infra Part IV.A. Back
14 See discussion infra Part IV.B. Back
15 See discussion infra Part III.C.2. Back
16 Counsel for the agent or lead investor could of course give the same comfort without undertaking to represent the participant lenders or purchasers. However, counsel for agents and lead investors customarily do not give these opinions, possibly because of concerns about liability and in general the increased responsibility in the transaction. This appendix does not take the position that counsel for the agent or lead investor should give the opinion. Back
17 See, e.g., 12 U.S.C. § 1818(b)(1) (2004). The banking regulations do not, however, mandate that an opinion should be obtained, and bank examiners are generally more concerned with whether any condition to funding a loan established by a lender's approving body (e.g., a credit committee) that requires delivery of a legal opinion was in fact satisfied by the opinion obtained. Many banks request confirmation from their own counsel (whether in written form or orally) that the transaction documents comply with the conditions for funding the loan, and this confirmation, and the process followed by bank lawyers to provide the confirmation, seems to satisfy any "best practices" concerns that banks or other regulated institutions charged with operating in a "safe" manner may have. Back
18 48 CFR § 42.1204(f)(5) (2004). The opinion required would not technically be a "remedies opinion" as it appears to focus more on process (e.g. "duly authorized, executed and delivered" opinion) than on validity or enforceability. Back
19 12 CFR Part 3, App. A, Sec. 3(b)(5)(ii)(B)(4). Back
20 See DEP'T OF TRANSP.MAR. ADMIN., APPENDIX I TO GUARANTEE COMMITMENT, available at http://www.MARAD.dot.gov/Title XI/US_flag/C_bondpu.pdf (last visited July 15, 2004). Back
21 15 USC § 77nnn(b). Back
22 While this statutory provision does not mandate an enforceability opinion, it is an example of an opinion "required" by statute, and the term "effectiveness" implies that the opinion giver at least concludes that the lien has been validly created. Back
23 For example, a party may want assurance that a transaction structured as a lease will be given effect as such, and not as a secured financing, so that the lessor will have the benefit of lessor remedies. Ordinarily, absent an express opinion to such effect, a remedies opinion will not be interpreted to include a legal conclusion as to whether the transaction will be enforced as a "true lease," or a "true sale." Cf. 1998 TriBar Report § 3.4.1 n.80 . Back
24 See RESTATEMENT § 28(3). While, under certain circumstances, a lawyer's statement might be deemed an "admission," the client would nonetheless be entitled to assert and prove that the statement is untrue. Id. §28(3) cmt. d. Back
25 See Id. § 21 cmt. e ("A lawyer has authority to take any lawful measure within the scope of representation that is reasonably calculated to advance a client's objectives. . ."); see also ABA Guidelines § 2.4. Back
26 An example of such a provision is the following: "Each party to this Agreement represents and warrants to the other that it was represented by counsel who reviewed and explained this Agreement and related documents and the intended consequences in a manner satisfactory to such party." Back
27 See ABA Guidelines § 1.2; discussion supra Part I. Back
28 See supra text accompanying note 8; infra Parts II.C, III.D. Back
29 "Should a problem be identified that might prevent delivery of an opinion in the form discussed, the opinion giver should promptly alert counsel for the opinion recipient." ABA Guidelines § 2.1. Back
30 Conversely, often an opinion recipient will not want the opinion giver to identify enforceability issues with questionable provisions (for example, if the opinion recipient's practice is to have all of its documents read uniformly and the questionable provision is enforceable in other jurisdictions) and will prefer that the scope of the opinion be narrowed or that the troublesome issue be excluded from the conclusions reached. See 1998 TriBar Report § 1.3, n.19; discussion infra Part II.C para. 2. Back
31 See MODEL RULES OF PROF'L CONDUCT, R. 2.3. Back
32 See discussion supra Part II.A.3. Back
33 The opinion giver's client could of course, on an informed basis, provide an effective waiver to any such conflict. Back
34 RESTATEMENT § 20 cmt. e. Back
35 See supra note 30. Back
36 See supra note 18. Back
37 The so-called "Exhibit 5 Opinion" is addressed by counsel to the issuer, and concludes, with respect to debt securities, that they will be "legally issued and binding obligations" of the issuer. With respect to equity securities, it states that the shares have been legally issued and will be fully paid and non-assessable. Back
38 The opinion issued in conjunction with an issuer's reliance on the exemption from qualification set forth in Calif. Corp. Code § 25102(h), to the effect that the securities issuance described is exempt from qualification under Calif. Corp. Code § 25110, could be relied upon by acquirors of such securities and potentially other third parties (e.g. lenders). Back
39 See discussion supra Part II.A.1. Back
40 See 1998 TriBar Report § 3.5.2(a)(i). Back
41 It is of course possible to bifurcate the enforceability opinion in this situation and to deal separately with enforceability of the contract under laws having specific application to the obligor. This is often covered by an opinion that the performance of the agreement will not violate any statute, rule or regulation having applicability to the obligor. Back
42 See 1998 TriBar Report § 3.5.2(a)(ii). Back
43 "Similarly, in giving a remedies opinion, the opinion preparers will usually assume that the agreement is binding on the other parties to it." 1998 TriBar Report § 2.3(a). Back
44 See ABA Guidelines § 2.2. It may be prudent, however, for counsel not familiar with the chosen law to recommend engaging counsel to advise its client regarding that law, even if no remedies opinion is given, in order to obtain advice on potential legal pitfalls. Back
45 This approach sometimes is implemented by inclusion of an assumption that the law of the jurisdiction selected by the contract is the same as that of the opinion giver's jurisdiction. While this assumption is probably incorrect (and therefore the approach discussed in the text is preferred), this approach is common, and if utilized, would not be misleading. Back
46 See 1998 TriBar Report § 4.6. Back
47 A large number of members of the Opinions Committee are of the view that a request for a remedies opinion in this situation would be inappropriate. Back
48 See 1989 Report § IV.B.1 ("[t]he lawyer . . . should resist acquiescing to provisions [in the Opinion] which, while having some importance to the recipient, are peripheral to the transaction covered by the agreement at hand."). See also 2007 Report ("Generally, an opinion should not be requested or rendered on non-material matters...") Back
49 See 1998 TriBar Report § 3.5.2(c); infra App. 10, Part IV.B.2. Back
50 For example, usury issues and certain securities matters are considered part of a remedies opinion. See 1998 TriBar Report § 3.5.2(c). In addition, corporation, employment and intellectual property laws are generally understood to be included in a remedies opinion. "Customary practice requires the opinion preparers to take account of law that lawyers who render legal opinions of the type involved would reasonably recognize as being applicable (i) to transactions of the type covered by the agreement and (ii) to the role of the [opinion giver's client]. . . in the transaction." Id. 3.5.1.. Back
51 ABA Guidelines § 1.2. Back
52 See supra note 4. Back
Appendix 5 / Report on Third-Party Remedies Opinions