Legal opinions: why are they important?

A legal opinion will often be sought as part of a banking transaction, but its importance will often be overlooked. In this insight we explore the purpose of a legal opinion and when a lender may need to obtain one.

What is a legal opinion and when are they used? 

Also known as an ‘opinion letter’, a legal opinion is given in the form of a letter issued by a law firm expressing legal conclusions and/ or analysis of a specific transaction. The recipient of the opinion will then rely on its contents as a basis for entering into the transaction.

The delivery of a legal opinion is often a condition in cross-border transactions and this needs to be satisfied before any advance of money is made. A legal opinion will seek to reassure a lender that the transaction documents will:

• bind the parties involved in the transaction; and
• be enforceable against those parties.

Cross-border transactions

Legal opinions are commonly requested on cross-border transactions, specifically for transactions which involve the acquisition of companies, loan and security transactions, and property sale and purchase transactions. For example, where a transaction includes a Luxembourg entity, a legal opinion may be required by the lender from a law firm in Luxembourg to confirm (amongst other things) that the Luxembourg entity is validly constituted and incorporated and that the documents which they are entering into have been validly executed, and are binding and enforceable.

Purpose of a legal opinion

To inform

A legal opinion informs the recipient of the legal effect of entering into the proposed transaction. For example, in a cross-border transaction, lawyers in a foreign jurisdiction may give an opinion on whether a transaction document is valid and enforceable in that jurisdiction and complies with local law (such as local registration or stamp duty requirements).

To identify

A legal opinion identifies legal risks and issues that the recipient should address as part of the transaction. For example, an opinion may identify certain documents that have not been validly executed and which are therefore unenforceable. The recipient can use the issues identified in the opinion to raise further enquiries and, depending on the outcome of those enquiries, decide whether other forms of protection (for example, warranties and indemnities) are required.

Conclusion of law

A legal opinion will confirm a party’s ability to enter into and perform its obligations under the transaction documents.

Content of a legal opinion

A legal opinion will usually contain the following:

1. Background: an explanation of the relevant transaction, together with details of the documents reviewed and the searches conducted in preparing the opinion.
2. Assumptions: a number of assumptions will be made in the opinion, mainly about factual matters which the law firm cannot reasonably check. For example, that all signatures on the documents are authentic. These matters will be excluded from the scope of the letter of opinion.
3. Qualifications: these will limit the opinion when absolute assurance cannot be given. They often relate to points of law such as the approach local courts would take to enforcing the transaction documents.
4. Opinions: this is the key element of the legal opinion. They are statements relating to specific points of law and will generally cover matters such as the incorporation and existence of a foreign entity, that entity’s ability to enter into the transaction documents and the enforceability of those documents.