Third-Party Legal Opinion Report including the Legal Opinion Accord of the Section of Business Law American Bar Association (Business Law Opinion Report)

Real Property, Probate and Trust Journal, Fall 1994

Business enterprises frequently need financing. They purchase or dispose of property. They merge, acquire or are acquired. While there is no requirement that lawyers be involved, the participants in such transactions are customarily represented by legal counsel during the course of the negotiations and the preparation of the relevant documentation. Custom and practice have developed over the years pursuant to which a legal opinion is delivered at the closing to parties to the transaction (e.g., an acquiror, lenders or investors) other than the opinion giver's own client. The particular content of that opinion is usually negotiated by the opinion recipient's counsel with the opinion giver. Since the opinion so delivered is not rendered to the opinion giver's client, it is a "third-party legal opinion."

Following publication of the seminal article of James J. Fuld of the New York Bar,* many have written on third-party legal opinions, and there have been a number of bar association studies of the subject. However, there remain differing understandings among practicing lawyers concerning the coverage and interpretation of opinion language. Thus, even when dealing with the same time-honored opinion language, the opinion giver and the opinion recipient (or its counsel) may not have a common understanding of either what is intended by the opinion expressed as to particular legal issues or what further legal or factual issues, if any, might be implicitly addressed by the language used.

The Silverado Conference

Background: To build on the valuable work of various bar associations, and to bring a national perspective to the topic, the American Bar Association's business Law Section sponsored a Conference on Third-Party Legal Opinions that was held on May 31-June 3, 1989 in Silverado, California. The Section invited a representative group of knowledgeable practitioners to attend. Seventy-one lawyers participated, drawn from different regions, large and small legal organizations, borrowers and lenders, and academe.

Purpose: The Conference was designed to be the first step toward the establishment of a national consensus as to the purpose, format and coverage of a third-party legal opinion, the precise meaning of its language and the recognition of certain guidelines for its negotiation.

Scope: The Conference agenda was limited to the use of third-party legal opinions in private financings (including private placement and loan transactions), underwriting transactions, mergers and acquisitions and other business transactions. The use of legal opinions in tax shelters, or in a regulatory context (e.g., requests for SEC "no action" letters), was not considered. Also generally excluded were the technical aspects of legal opinions dealing specifically with secured financings (e.g., the perfection and priority of security interests in personal property).

Origin of Report: The Report builds on papers prepared and distributed prior to the Conference and the discussions during the Conference sessions. It embodies the substantial work of drafting subcommittees established following the Conference to develop further the issues and to propose solutions. The Conference participants are now organized as the Committee on Legal Opinions of the Business Law Section. The Report represents a consensus of the members of the Committee (who are listed in a schedule at the end of the Report).

Organization of Report

The Report starts with the Accord, which is composed of 22 boldface statements of position (e.g., assumptions, opinion issue analyses, qualifications, interpretations and limitations), preceded by an introduction and a glossary. Each such statement is accompanied by a Commentary which (although not part of the Accord) provides guidance as to interpretation of the Accord. Also accompanying each numbered section is a Technical Note (again, not part of the Accord) which should provide guidance in understanding the Accord. The Accord, which is the heart of the Report, sets forth the consensus positions reached by the Committee in a form that permits its adoption as part of an opinion letter. Following the Accord is the text of an illustrative third-party opinion letter, which demonstrates how the Accord might be adopted. The Report concludes with certain guidelines for the negotiation and preparation of third-party legal opinions.

The Concept of the Accord

The various bar association reports, referred to above, have not been as useful as the bar might have wished, because of uncertainty as to whether lawyers could rely on their conclusions as universally authoritative. Apparently for that reason, some lawyers have taken more conservative positions (e.g., setting forth in their opinion letters elaborations on themes that some reports state and some lawyers believe are inherent or included by implication in the opinion) than those set forth in the report issued in their respective jurisdictions. The organizing theme of the Accord is that, when it is adopted in the opinion letter, it governs the opinion and the opinion recipient's acceptance of the opinion letter in this form operates as conclusive evidence of acceptance by the opinion recipient of that role for the Accord. Thus, the Accord will govern those opinions that expressly adopt it. The Accord does not purport, in all respects, to reflect current opinion practice, nor does it purport to govern opinion practice with respect to opinions that do not expressly adopt it.