A legal opinion will often be sought as part of a banking transaction, but its importance may be overlooked. In this insight, we explore the purpose of a legal opinion and when a lender may need or want to obtain one.
What is a legal opinion and when are they used?
Also known as an ‘opinion letter’, a legal opinion is formal advice given in the form of a letter issued by a law firm expressing legal conclusions and/ or analysis of a specific transaction. The recipient of the opinion will then rely on its contents as a basis for entering into the transaction. Legal opinions may be required in many different circumstances but this article deals specifically with legal opinions given on financing or corporate transactions.
The delivery of a legal opinion is often a condition in cross-border transactions and this needs to be satisfied before any advance of money is made. A legal opinion will primarily seek to reassure a lender that the transaction documents will:
- bind the parties involved in the transaction; and
- be enforceable against those parties.
Cross-border transactions
Legal opinions are commonly requested on cross-border transactions, specifically for transactions involving company acquisitions, loan and security transactions, and property sale and purchase transactions. For example, where a transaction includes a Luxembourg entity, a legal opinion may be required by the lender from a Luxembourg law firm confirming (amongst other things) that the Luxembourg entity is validly constituted and incorporated, that it has validly authorised its entry into the documents and the person signing them on its behalf, that the documents it is entering into have been validly executed, are binding and enforceable against it, and that the courts of Luxembourg would recognise and enforce the judgment of an English court against the Luxembourg entity in relation to the transaction.
Typically on a financing transaction this is a one-way street – it would not be usual for a borrower to obtain a legal opinion in respect of an overseas lender.
Domestic transactions
Although lenders will often not require a legal opinion for most bilateral financings where the borrowers/ guarantors are incorporated in England and Wales, many lenders will have a cut-off in terms of facility amount above which they will require a legal opinion even for purely domestic transactions.
Purpose of a legal opinion
To inform
A legal opinion informs the recipient of the legal effect of entering into the proposed transaction. For example, in a cross-border transaction, lawyers in a foreign jurisdiction may give an opinion on whether a transaction document is valid and enforceable in that jurisdiction and complies with local law (such as local registration or stamp duty requirements).
To identify
A legal opinion identifies legal risks and issues that the recipient should address as part of the transaction. For example, an opinion may identify certain documents that have not been validly executed and which are therefore unenforceable. Or it might identify a specific fact pattern which could impact the enforceability of a document if it applies. An opinion may also identify by the assumptions and qualifications included in it factual points which the recipient needs to check. The recipient can use the issues identified in the opinion to raise further enquiries with the borrower and, depending on the outcome of those enquiries, decide whether other forms of protection (for example, warranties and indemnities) are required. Typically, unless the opinion is being given after the fact on a previously executed and dated document, you would expect the issues to be identified in a draft legal opinion and the recipient to then resolve them prior to the documentation being executed and the final legal opinion being issued.
Conclusion of law
A legal opinion can, for example, confirm a party’s ability to enter into and perform its obligations under the transaction documents or the enforceability of certain transaction documents in a particular jurisdiction.
Content of a legal opinion
A legal opinion will usually contain the following:
- Background: an explanation of the relevant transaction, together with details of the documents reviewed and the searches conducted in preparing the opinion. These details are important as typically the opinion will be based only on those documents or searches.
- Assumptions: a number of assumptions will be made in the opinion, mainly about factual matters which the law firm cannot reasonably check. For example, that all signatures on the documents are authentic. These matters will be excluded from the scope of the letter of opinion.
- Qualifications: these will limit the opinion when absolute assurance cannot be given. They often relate to points of law such as the approach local courts would take to enforcing the transaction documents.
- Opinions: this is the key element of the legal opinion. They are statements relating to specific points of law and will generally cover matters such as the incorporation and existence of an entity, that entity’s ability to enter into the transaction documents and the enforceability of those documents.
Most legal opinions will follow a similar overall form and contain the same key opinions according to whether the legal opinion is opining on the capacity of the relevant party to enter into the transaction documents, the enforceability of the transaction documents or both. Most law firms will have a standard form of legal opinion which they will give in each scenario which will then be amended to refer to the specific parties and transaction.