Reviewing Legal Opinions in Securities Offerings: Tips for In-House Counsel

In-house legal departments often work closely with outside law firms on transactions. This is especially the case when companies undertake complex transactions such as securities offerings. In connection with the securities offering, an outside law firm will issue a legal opinion. The legal opinion will contain legal analysis and express legal conclusions about the transaction. The delivery of a legal opinion is often a closing condition in securities offering transactions.

Although the outside law firm will take the lead in drafting and negotiating the legal opinions, in-house lawyers will play a role in reviewing the legal opinions and signing any necessary opinion “back-up” certificates on behalf of the company.

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Legal Opinions and 10b-5 Letters

This legal opinion is drafted in the form of a letter addressed to the recipient of the legal opinion. In securities offerings, the opinion recipients are typically underwriters and their counsel. The opinion usually covers New York state law, federal law, and Delaware General Corporation Law (DGCL).

The company is often also asked to deliver a 10b-5 letter as a closing condition in an underwritten offering. A 10b-5 letter is not a legal opinion. Rather it is a negative assurance letter. Named after Rule 10b-5 under the Securities Exchange Act of 1934, a 10b-5 letter is intended to provide assurance that the outside counsel undertook reasonable diligence efforts to make sure the offering document being presented to investors is not misleading. In other words, the external law firm is stating that did not uncover any information during the due diligence process that caused them to believe the offering document has any material misstatements or omissions.

Legal opinions are delivered in both registered and unregistered securities offering. Registered securities offerings refer to those that are subject to the requirements of the Securities and Exchange Commission (SEC). This includes publicly filing a registration statement with the SEC in order to register the securities and filing a prospectus providing details about the securities being offered for sale.


Preliminary Steps to Take When Preparing to Deliver a Legal Opinion

In order to prepare a legal opinion, the outside law firm will have to conduct a thorough due diligence investigation of the company. This will include reviewing the company’s material agreements, financial statements, and other important documents of the company. The company’s in-house lawyers will support these diligence efforts by promptly providing outside counsel will access to requested documents and information.

If an opinion “back-up” certificate is requested by outside counsel, the in-house legal team will be involved in reviewing it. The outside law firm may want an opinion “back-up” certificate signed by an officer of the company attesting to the accuracy of certain factual matters that are difficult to perform diligence on. An opinion “back-up” certificate will be helpful for certifying that certain factual matters that underlie a legal conclusion are true.


Contents of the Legal Opinion

Although each law firm has their own form of legal opinion, there are many common features to legal opinions across different law firms.

The legal opinion typically begins with listing defined terms and the key transactions documents reviewed by outside counsel.

The substantive opinion paragraphs usually follow after these introductory paragraphs. The substantive legal opinion common to most securities offerings, regardless of whether they are registered or unregistered offerings, include:

  • The company is in good standing
  • The company has the power and authority to execute, deliver, and perform its obligations
  • The agreements of the company have been duly authorized and executed
  • The transaction documents and agreements of the company are enforceable
  • Entering into the transaction does not violate the company’s organizational documents, material agreements, or applicable laws
  • The company has complied with regulatory requirements, including necessary filings, approvals, or consents
  • The company is not subject to any material litigation that has not been disclosed

The legal opinion will generally include a section outlining the key assumptions underlying the delivery of the opinion. Some examples of key assumptions include:

  • All signatures are genuine
  • The documents are signed by individuals with legal capacity
  • The parties to the transaction documents are validly existing, in good standing, and have the necessary power and authority to perform their obligations under the agreements
  • Factual statements are accurate and complete

The legal opinion will also include several qualifications, such as

  • A statement stating that the outside law firm has not independently verified the accuracy of the offering document being presented to investors
  • Materiality qualifiers
  • Knowledge qualifiers

Special Circumstances

Under certain circumstances, the underwriters may request additional legal opinions to be delivered by specialized counsel. These special counsel opinions may be required as a condition to closing the securities offering. For example, if a company has an extensive portfolio of intellectual property, the underwriters may request that the company’s intellectual property counsel offer opinions or 10b-5 assurance on the intellectual property-related disclosure.