April 2, 2024 - On March 26th, the LSTA hosted a webinar, Third Party Legal Opinions for LLCs, which was presented by Andrew Bettwy of Proskauer Rose LLP, Kim Desmarais of Jones Day, and David Miller of Pillsbury Winthrop Shaw Pittman LLP.

Section 1 of the Statement of Opinion Practices published in the Business Law Journal in 2019 defines third-party legal opinion letters (or “closing opinions” as they are often referred to) as letters that are delivered at the closing of a business transaction by counsel for one party (the “opinion giver”) to another party (the “opinion recipient”) to satisfy a condition to the opinion recipient’s obligation to close. A closing opinion includes opinions on specific legal matters (“opinions”) and, in so doing, serves as a part of the diligence of the opinion recipient.

There have been bar and multi bar reports over the years addressing third party legal opinions delivered in transactions.  Contrary to today where much has been published on the topic, fifty years ago there was a dearth of information and no clear standard for legal opinions. Then in 1973, James Fuld published an article in the Business Lawyer, Legal Opinions in Business Transactions—An Attempt to Bring Some Order out of Some Chaos.  His article gained a lot of traction, and eventually, this gave rise to TriBar  (the “tri” referring to New York County, New York City, and New York state) publishing its book on legal opinions in 1979.  Then in 1998, TriBar published its seminal report referred to as TriBar II, and this is viewed as the “gold standard” for third party legal opinion principles.

The panelists then turned to the different opinions which are typically given in transactions involving an LLC.  First is the status opinion which looks at the LLC’s formation, existence, and good standing.  The opinion giver must opine on whether the borrower has been properly formed and exists today and whether it is in good standing under the laws of the state where formed.

The power to execute, deliver and perform is another opinion typically covered in an enforceability opinion.  Under the statute in Delaware, an LLC can do anything that is legal other than be a bank. The operating agreement can cut back on this so make sure that nothing contrary is included in the operating agreement or in the certificate of formation.

Other prominent opinions that opinion recipients will typically request for LLCs include the following:  (i) the no approvals or other actions under applicable LLC statute opinion (and if any were required they were already obtained); (ii) the no violation opinion (here the opinion giver will say that entering into the transaction documents and the performance of the obligations under them do not violate the applicable LLC statute and do not breach any of the governing documents of the LLC); (iii) the security interest opinion is another common opinion in the context of LLCs (in certain lending transactions, the opinion recipient may want to know that the secured parties have a valid and perfected lien on the LLC interest being pledged to them).

Many (but not all) LLCs are formed in Delaware.  Non-Delaware lawyers often provide certain opinions covering Delaware LLCs. Coverage will typically be limited to the Delaware LLC Act, which is understood to cover both the statute and reported Delaware judicial decisions interpreting the Delaware LLC Act.  The panelists noted that third-party opinions do not cover enforceability of the operating agreement unless (in unusual situations) covered explicitly. In any event, non-Delaware lawyers generally do not cover enforceability of the operating agreement.

Tribar also states that in preparing an action opinion, the opinion givers also: (i) determine what approvals, if any, the applicable LLC statute and the operating agreement (and in some states the certificate of formation) require for the LLC to enter into the agreement on which the opinion is being given; (ii) confirm that those approvals do not violate the applicable LLC statute; and (iii) confirm that those approvals were given. Opinion givers can confirm that required approvals were given by obtaining a certificate or representation from an appropriate person detailing the action taken or, if the action requires a meeting or written consent, by examining a copy of the minutes of the meeting or written consent or a copy of the authorizing resolution.

There is a broad spectrum of qualifications taken in opinions.  Some firms take a shorter form opinion approach and rely on bar reports and take exceptions when necessary. Some take the less common approach and rely on the American Bar Association, Section of Business Law, Third-Party Legal Opinion Report including the Legal Opinion Accord, which was published in the 1991 Business Law Journal and is referred to as the “Accord”.  While still others take the kitchen sink approach and prefer disclosure even when it is assumed which may lead to longer opinions.  The panelists warned about this approach because if you take a kitchen sink approach someone may point to your long list of qualifications and say if it’s not in there then you chose to leave it out.

I have only touched on a few issues raised during this excellent webinar and urge those who work on opinions to listen to the replay and view the slides. Click here for the slides and replay.

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