Newsletter – The Role of Legal Opinions

The role of Legal Opinions

In most important international business transactions, particularly where one of the parties has retained EU lawyers – but increasingly also where no European lawyer is involved – opinions of counsel are required as a condition precedent to the consummation or “closing” of the transaction. Legal opinions of the kind discussed here state conclusions of law but do not set forth the reasoning underlying such conclusions.

Parties to a business transaction usually ask for legal opinions in order to evaluate the legal risks that may be involved in the transaction. The recipient of a legal opinion rendered in the context of a business transaction wishes to obtain counsel’s professional judgment that the legal assumptions upon which the recipient is basis his decision on whether or not to go forward with the transaction are correct. An unqualified favorable opinion is a statement to the recipient that counsel has examined specified legal aspects of the transaction and found them in order. To the extent that counsel is unable to give an unqualified favorable opinion, the recipient is put on notice that the transaction involves certain legal risks which the recipient should evaluate. Generally, one can say, a legal opinion serves to confirm that the legal relationships the parties mean to establish are in fact established.

Thus, in the case of each transaction, the parties and their counsel must determine the relevant legal issues which should be covered by opinions. The negotiations about the scope and language of opinions during the course of negotiating a transaction may uncover legal problems and uncertainties in connection with the proposed transaction. In some cases the parties will change the legal structure of the transaction in order to avoid such problems or uncertainties. In other cases the parties must decide whether to accept these problems and uncertainties as a business matter or to abandon the transaction.

The practice of asking counsel – one’s own counsel or the counsel to the other party or both – for legal opinions originated in the United States of America. It is not a common practice in purely domestic transactions in other countries. This difference in practice can be explained by differences of custom and tradition and, in addition, by the fact that civil law countries have developed legal doctrines and methods that make it easier to verify matters such as due incorporation, the power to bind the corporation, etc., than it is in common law countries.

Legal opinions, however, are gaining increasing acceptance in international transactions. The reason is that businessmen and their lawyers when doing business in a foreign country are not familiar with the legal problems they face and frequently conclude that it is prudent to obtain a written evaluation of the transaction and written assurances as to the absence of legal problems. Businessmen often prefer assurances in the form of a written opinion rather than in the form of oral advice because it is a common experience that a lawyer (like anybody else) tends to be more careful if he puts his advice in writing. Carefully thought out exceptions and qualifications to the legal opinion indicate clearly to the recipient of the opinion certain problem areas and issues as to which no legal assurances can be obtained. Properly drafted opinions also determine which issues involved in a transaction are governed by the foreign law and which issues are governed by the law of the home country of the businessman. Such opinions thereby allocate responsibility among the various lawyers.

In difficult transactions lawyers frequently prefer to render written legal opinions because opinions create a record as to the scope of the advice given as well as the exceptions and qualifications noted, and thereby limit the lawyer’s liability.

  1. Interrelation of the Laws of Several Countries

Frequently a party to a transaction primarily relies on the advice or the opinion of a lawyer admitted to practice in such party’s own country (“Principal Counsel”) event though the transaction takes place in an international setting and the laws of a foreign country – foreign, insofar as such party is concerned – apply to all or part of such transaction. Principal Counsel is required to determine under the conflict-of-laws rules of this country which issues are governed by foreign law and, therefore, should be addressed in an opinion rendered by a lawyer admitted to practice in the foreign country (“Foreign Counsel”) and which issues are governed by his own law and should be addressed by his own opinion. In that sense the opinions assign responsibility for certain legal issues to Principal Counsel and for other legal issues to Foreign Counsel. If only foreign law applies to a transaction (for instance, the purchase of all or a portion of the shares of a company located in a foreign country), a party to that transaction may wish to deal directly with Foreign Counsel.

A party to an international transaction is concerned about all legal aspects relating to the transaction, including issues governed by the foreign law. As far as foreign law issues are concerned, the most important element of Principal Counsel’s obligation of diligence (whether Principal Counsel is counsel to the opinion recipient or not) is to obtain opinions of counsel with respect to relevant issues governed by the foreign law. It cannot be emphasized strongly enough that Principal Counsel does not discharge his duties to his client by simply obtaining some opinion from Foreign Counsel. Principal Counsel must make a diligent effort to uncover legal problems that might exist under the relevant foreign law and must ascertain that these problems have been addressed and resolved. Principal counsel must ascertain that Foreign Counsel is familiar with the transaction and with the purpose and meaning of the proposed opinions. This requires close interaction between Principal Counsel and Foreign Counsel.

  1. Third Party Opinions

 Traditionally, a U.S. party and as well as a European party to an agreement requires a legal opinion from counsel to the other party to the agreement. This is the so-called “third-party opinion”. The third party opinion usually covers the same issues as the representations relating to legal matters made in the agreement by the opining counsel’s client. The rationale for requiring an opinion from the other party’s counsel is that such counsel is usually more familiar with the issues covered by the opinion and that his opinion reinforces his client’s representations. For example, if a seller is required by the purchaser to represent in the stock purchase agreement that the agreement has been duly authorized by the seller, the purchaser will require an opinion by the seller’s counsel to the same effect. The purchaser’s counsel could give this opinion only after a time-consuming and expensive investigation.

The reason why businessmen and their lawyers ask for a legal opinion from counsel to the other party to a transaction is that they wish to be assured that the lawyers for all parties to the transaction have spotted the same legal issues, have thought seriously about the issues involved, and have reached the same conclusions about such issues. After all, all parties to a transaction, including their lawyers, share an interest that there remain no unresolved legal issues, or, as it is sometimes said, that “deal works”. It is common knowledge and everyone’s experience that one thinks much more carefully and in a more disciplined way about a subject matter if one has to commit one’s conclusions to paper.

Frequently, it has been stated that an opinion from the other party is useful because it may make it difficult for such party later to raise a defense against the contract which contradicts a legal opinion delivered at the time the contract was entered into. For instance, it is argued, that the seller cannot assert lack of authorization if his own counsel has given a legal opinion that the agreement has been duly authorized. However, this “estopped theory” is not convincing. If an agreement violates a law or if a necessary governmental approval has not been obtained, the legal opinion to the contrary does not prevent the company or anyone else from later raising this issue. If the person who signed the agreement was not authorized to do so, such lack of authority is not remedied by a legal opinion. It may, however, be remedied under a theory of apparent authority.


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