A. No Breach or Default; No Violation of Law
Most closing opinions will require that the opinion giver include the multiple-part opinion that the entering into and consummation1 of the transaction by the company will not (i) violate the company’s organizational documents (such as articles, bylaws, operating agreement, etc.); (ii) violate any court orders to which the company is bound; (iii) violate applicable law, rules and regulations; or (iv) result in a breach of or default under certain other listed contracts to which the company is a party.2 These opinions are commonly requested and commonly given. What the lender or seller is looking for in these opinions – which is different from most of the other opinions requested – are the legal consequences of the proposed transaction itself on the company. For example, lenders will want to verify that their loan to the company will not result in any adverse consequences to the company that will in turn have unintended or unforeseen consequences for the lender. If the transaction at hand results in a default by the company under an existing agreement with another lender, depending on the contractual remedies provided in the agreements, that lender may be able to accelerate its loan, which not only could affect the value and availability of the new lender’s collateral but would likely affect the loan-paying ability of its borrower.
The opinion that the execution and delivery of the transaction documents and the consummation of the transactions by the company will not violate its organizational documents arguably does not add anything to the opinion if the opinion giver has already given the standard due execution and delivery opinions and the power and authority opinions. This duplicative opinion requires the same due diligence that the power and authority/due execution and delivery opinions require and one could not be given without the other.3 While little risk is involved in giving this opinion, to avoid opening up the door to a discussion on what type of transactions would “conflict with” the company’s organizational documents, the opinion giver should use the precise term “violate” as opposed to the imprecise and nebulous phrase “conflicts with”.4
The second prong of the “no breach or default” opinion requires that the opinion giver indicate that the consummation of the transaction will not “violate any court orders to which the company is bound.” The focus here is on the obligations of the company that are not a result of their private contractual agreements, but rather the product of governmental action, such as injunctions, restraining orders, judgments, etc. This opinion should be narrowed to the particular transaction at hand and not to the company’s activities in general, and the opinion giver should reference specific court orders in a schedule or in the opinion body itself.5 It is not advisable to
1 The best practice is to limit the opinion to the consummation of the transaction as opposed to opining over the performance of the obligations under the transaction. Consummation will only include actions by the company up to and including the closing, while performance extends to post-closing obligations – obligations of the company under the transaction documents themselves. For a discussion on consummation vs. performance, see GLAZER §§ 13.2.3, 14.4, 15.5, and 16.3.7.
2 See generally GLAZER Chapters 13, 14 and 16. See also 1998 TriBar Report §§ 6.5 and 6.6.
3 Practitioners typically will include this opinion despite the redundancy, but it would be acceptable to omit this opinion (or allow for its omission, as applicable). See the discussion in GLAZER § 16.2.
4 See GLAZER § 16.3.2.
5 See generally GLAZER Chapter 14.
narrow the opinion by limiting it to “orders known to the opinion giver” or similar language. This approach requires a more extensive inquiry into the company’s records and activities and can be avoided by referring in the opinion to a list of court orders.
The “no violation of law” opinion is not as daunting as it may seem because it does not, and is not intended to, cover all laws; it only covers statutory law and published rules and regulations of governmental agencies at the state level (local law is excluded) that a lawyer in the State “exercising customary diligence would reasonably recognize as being applicable”6 in the transaction and that are of the types of law covered by a third party opinion pursuant to customary practice.7
Finally, an opinion giver is typically asked to give an opinion that the entering into/consummation of the transaction “will not result in a breach of or default under any other contracts to which the company is a party.” Similar to the approach suggested above relating to court orders, the opinion giver should limit the opinion to a defined set of contracts either listed in a schedule or within the body of the opinion. The opinion giver should use the phrase “no breach or default” in lieu of “violates” or “conflicts with,” which could be interpreted to include any and all adverse consequences that could result. Precision is key in narrowing these opinions.
B. No Governmental Approvals or Consents
Another common closing opinion requested by lenders is the opinion that “no consent or approval of, or filing with, any governmental authority is required to be obtained or made by the Company in connection with its execution and delivery of the Documents.” Sometimes it will be stated in the affirmative such as “All consents, approvals, authorizations of, and filings and registrations on the part of the Company with, any state or federal authority required for the consummation of the Transaction have been made or obtained.” Regardless of form, the focus here is on the Company’s compliance with all legal and regulatory requirements necessary for it to enter into the transaction documents, and therefore, it is more important when the particular Company is in a regulated industry that requires certain authorizations, permits, etc. in order to consummate the transaction. The scope of this opinion as a matter of customary practice is limited to the state and federal level as well as to published rules and regulations.8
Similar to the no violation of law and no breach or default opinions discussed above, the opinion given should be limited to those approvals and filings necessary to consummate the transaction – to close the deal – and should not include post-closing obligations or future performance by the Company of its obligations under the agreement at hand. An opinion that no consents, approvals, or filings are necessary for the Company’s “performance” under the transaction documents is a broader opinion and should be specifically negotiated and deliberated by the opinion giver. Most state legal opinion reports advise the opinion giver not to give that
6 1998 TriBar Report § 6.6, p. 662.
7 See generally GLAZER Chapter 13. See also 1998 TriBar Report § 6.6.
8 See GLAZER § 15.2 (opinion neither covers approvals and filings at the municipal or local law such as zoning compliance nor does it apply to obscure laws that a lawyer exercising reasonable diligence could not be expected to recognize as applicable to the Company or the transaction).
broader opinion;9 however, the TriBar 1998 Report states that the opinion “often” covers performance and its illustrative opinion includes performance in the scope of this particular opinion.10 In the event that the opinion giver agrees to opine on future performance, it should do so only after determining if the Company’s future obligations are easily discernible and if the cost of undergoing the due diligence required to give the opinion is justified and acceptable to the Company. As you will see in the Illustrative Opinion, it is recommended that you limit the scope of the opinion to the execution and delivery of the documents and the consummation of the transaction and not opine on future performance.
Reviewing corporate or other authority documents and filings at the Secretary of State’s Office and possibly at the Office of the Clerk of Court in the County where the Company owns real estate will be sufficient due diligence for an opinion giver to give the no consents/filings opinion in most standard real estate financed transactions. For example, if the Company has had a name change since it has acquired title to any real property or after it has mortgaged such real property, a name change affidavit should be on file in the County in which the real property is located to ensure the Grantor indices are updated. However, if the Company is part of a heavily regulated industry, the opinion giver should exercise a higher and more detailed level of due diligence and ensure that it understands the industry’s requirements or consult with counsel that does.
9 GLAZER § 15.5 at note 6.
10 Id. at note 7.