IN OUR OPINION
THE NEWSLETTER OF
THE LEGAL OPINIONS COMMITTEE
ABA BUSINESS LAW SECTION
Volume 15 — Number 4
Summer 2016
James F. Fotenos and Susan Cooper Philpot, Editors
CONTENTS
FROM THE CHAIR......................................................................................... 1
FUTURE MEETINGS ...................................................................................... 3
CLOSING OPINIONS FOR COMMON LAW TRUSTS ....................................... 5
RECENT DEVELOPMENTS .......................................................................... 10
The Williams Companies, Inc. v. Energy Transfer Equity, L.P. ...............10
LEGAL OPINION REPORTS ......................................................................... 15
Chart of Published and Pending Reports ..............................................16
MEMBERSHIP ............................................................................................. 19
NEXT NEWSLETTER ................................................................................... 19
ADDENDUM, WGLO 2016 SPRING SEMINAR .......................................... A-1
 2016 American Bar Association
ALL RIGHTS RESERVED
In Our Opinion
Summer 2016
Vol. 15 ~ No. 4
FROM THE CHAIR
appropriate comfort at the time of signing that
the opinions can be given when required or, if
not, what factors would result in the inability to
give the opinions. In the end, of course, the
function of the opinions (and, more importantly,
the merger agreement conditions calling for
them) is to identify, address and allocate risk
relating to the opinion topics between the
parties. And as all M&A lawyers know (with or
without reading the Williams decision), those
risks can be very real, and therefore the
conditions addressing them require a great deal
of attention. The question “what do we want to
happen if the opinion is not forthcoming” is one
that has to be considered when the condition is
crafted.
I am pleased to share with you the Summer
2016 issue of “In Our Opinion.” Yet again our
editors, Jim Fotenos and Susan Cooper Philpot,
have worked hard to bring us an interesting issue
for summer reading. And of course this issue
comes with the semi-annual Appendix
containing the summaries of the programs this
past May of the Working Group on Legal
Opinions Foundation. These summaries have
been edited by Gail Merel, with the assistance
and input of our Newsletter editorial team.
Thank you to all for this great work.
Common Law Trusts. The initial article in
this Newsletter is a piece by Jim Gadsden on
Closing Opinions for Common Law Trusts.
Opinions about trusts is an area that has received
little attention in bar reports to date. Jim focuses
on the status and power opinions that one might
give when opining with respect to a common
law trust used as an investment vehicle (as
opposed to a statutory or business trust). His
article addresses both what these opinions
should be understood to mean, and how they
might be supported. I believe that Jim’s
contribution will start a broader conversation,
both in future issues of this Newsletter and
perhaps elsewhere, about opinions on trusts,
both of the type Jim considers as well as
statutory and business trusts.
Statement of Opinion Practices. As many of
you recall we approved circulation of an
exposure draft of a proposed Statement of
Opinion Practices at our April Committee
meeting in Montreal.
I wrote about this
Statement in our last issue and I will not repeat
myself here. Suffice it to say that the Board of
Directors of the Working Group on Legal
Opinions Foundation did approve (as I ventured
to predict in my last column) circulation of the
exposure draft of the Statement on the same
terms as did our Committee in April. As a
result, the Statement will be sent to bar groups
around the country for review and comment. It
remains the goal of the joint committee
(comprised of members of our Committee as
well as of the WGLO) to publish a final version
of the Statement that has the endorsement of as
wide a group of bar associations as is possible.
To that end, I would urge those of you who are
active in your state and local bar business law
sections (and opinions committees) to consider
the proposed Statement carefully, and hopefully
indicate your willingness to support its adoption.
As I noted, comments are welcome (that is, after
all, the function of an exposure draft) but with
due regard to the years of work invested in the
few short pages of which the Statement is
comprised by the committee charged with
developing it.
Opinions as Closing Conditions.
Our
second article takes a look at the recent
Delaware decision in the case of The Williams
Companies, Inc. v. Energy Transfer Equity, L.P.
This case, which has been the subject of much
attention in the business press, examined a
closing condition to the merger that made
delivery of a tax opinion by one party’s counsel
a condition to close for both parties. When
counsel determined it could not render the
opinion, the counterparty wished to waive the
condition but counsel’s client did not. Quite
apart from the merits of the positions taken (not
a subject on which I will opine), the case will, I
suspect, lead M&A practitioners to focus more
closely on the use of opinions as closing
conditions, and the diligence necessary to obtain
In Our Opinion
The End and a Beginning. It is hard for me
to believe that my tenure as Chair of our
1
Summer 2016
Vol. 15 ~ No. 4
Committee is coming to a close. This will be
my last column.
September’s Committee
meeting will be the last I will Chair. It has been
a privilege to serve for three years as your Chair,
and for two before that as a Vice Chair of the
Committee.
committee members working years on our
reports, the panelists who put together our
programming, the lawyers spending hours
planning the next legal opinions survey, or
responding to list serve inquiries, our Committee
would be nothing. We make the mark we make
because of the involvement of all of you as
members. So, my sincere thanks to all who have
carried the Committee’s load during my tenure.
While I confess to some bias, I believe our
Committee is one of the more important of our
Section. It is an active producer of “content”
(the latest buzz word for thoughtful writing),
whether it be this Newsletter, our contributions
to The Business Lawyer (which have recently
included the highly regarded Report on Cross
Border Opinions of U.S. Counsel as well as our
most recent Survey of Opinion Practices), and
our educational programs. I am proud to say
that our Committee has never failed to offer
interesting (and often popular) programming at
every Section meeting in which we participate.
For all of us, participation in professional
activities requires the support and understanding
of our colleagues and our families. Our work
takes time, and that time is something precious.
In my case, I have to thank my family for
accepting the repeated trips around the country,
and I have to thank my partners and colleagues
at Jones Day for their understanding and support
over the years I have been privileged to serve as
Chair.
More importantly, our Committee offers a
platform for lawyers at every stage of their
careers to come together to talk about the law.
Yes, the law. It is perhaps the Committee most
focused on understanding law in its purest form.
Where else does one discuss how to give
opinions as borrower’s counsel in the face of
new “bail-in” provisions most of us had not
heard of before, or how to enforce a contract
among parties scattered around the world? Our
Committee focuses on a practice which, properly
understood, represents the highest aspirations of
our profession: to bring thoughtful professional
judgment to important questions posed by our
clients and other parties with whom they
transact. The legal opinion practice, while but
an aspect of what we all do for our clients,
demands a great deal of us, both in terms of
learning, teamwork, care and, perhaps most
importantly, awareness and understanding of
what we are asked to do and the circumstances
in which we are asked to do it.
As many of you know, I will leave the
Committee is excellent hands. Ettore Santucci, a
partner at Goodwin Procter LLP, a Vice Chair of
the Committee and the Reporter for our Report
on Cross Border Opinions of U.S. Counsel, will
begin his three-year term as our Chair after our
September meeting in Boston. I know all of you
will join me in wishing him well. But more than
that, I know you will join me in continuing to
stay actively involved in the Committee and to
support its important work as Ettore takes up the
mantle of leadership.
Thank you all for your support over the past
years. I look forward to many more years of
work together.
-
Timothy Hoxie, Chair
Jones Day
tghoxie@jonesday.com
I would be remiss in not noting that, while I
would like to believe I have made some
contributions as Chair to our work as a
Committee, the real work of the Committee is
carried on by the many lawyers who volunteer to
work on its many projects. Without the editors
of this Newsletter, the reporters and drafting
In Our Opinion
2
Summer 2016
Vol. 15 ~ No. 4
Legal Opinions Committee
FUTURE MEETINGS
Saturday, September 10, 2016
(Westin Copley)
Committee Meeting:
9:30 a.m. – 11:00 a.m.
America Ballroom North, 4th Floor
ABA Business Law Section
Annual Meeting
Boston
Boston Marriott Copley Place
The Westin Copley Place
September 8-10, 2016
Professional Responsibility Committee
(Marriott Copley)
Thursday, September 8, 2016
Committee Meeting:
10:00 a.m. – 11:30 a.m.
New Hampshire, 5th Floor
What follows are the presently scheduled times
of meetings and programs of the Annual
Meeting that may be of interest to members of
the Legal Opinions Committee. For updated
information on meeting times and places,
check here.1
Friday, September 9, 2016
Program: “Ethical Issues in Banking Law
Practice”
2:30 p.m. – 4:30 p.m.
Grand Ballroom AB, 4th Floor
Legal Opinions Committee
Friday, September 9, 2016
(Westin Copley)
Saturday, September 10, 2016
Program: “Ethics Regulation of Law Firms and
Other Entities”
2:30 p.m. – 4:30 p.m.
Grand Ballroom CD, 4th Floor
Program: “Customary Practice Revisited and
Renewed: The Statement on Opinion Practices
(Exposure Draft)”
2:30 p.m. – 4:30 p.m.
Essex North, 3rd Floor
Securities Law Opinions Subcommittee,
Federal
Regulation
of
Securities
Committee
Subcommittee Meeting
(Survey of Opinion Practices)
4:30 p.m. – 5:30 p.m.
Courier, 7th Floor
(Marriott Copley)
Friday, September 9, 2016
Reception: 5:30 p.m. – 6:30 p.m.
Gloucester/Newburg, 2nd Floor
1
Subcommittee Meeting:
4:30 p.m. – 5:30 p.m.
Berkeley, 3rd Floor
The URL is
http://www.americanbar.org/content/dam/aba/events/busine
ss_law/2016/09/annual/alpha_schedule.authcheckdam.pdf.
In Our Opinion
3
Summer 2016
Vol. 15 ~ No. 4
Law and Accounting Committee
(Westin Copley)
Saturday, September 10, 2016
Committee Meeting:
8:00 a.m. – 9:30 a.m.
America Ballroom North, 4th Floor
Audit Responses Committee
(Westin Copley)
Saturday, September 10, 2016
Committee Meeting:
11:00 a.m. – 12:00 p.m.
America Ballroom North, 4th Floor
Working Group on Legal Opinions
New York, New York
November 1, 2016
ABA Business Law Section
Fall Meeting
Washington, D.C.
The Ritz-Carlton Hotel
November 18-19, 2016
In Our Opinion
4
Summer 2016
Vol. 15 ~ No. 4
although
less
extensively.3 With
few
exceptions, the literature does not address
closing opinions for trusts.4
This article
discusses the status and power opinions for
common law trusts used as investment vehicles5
and opinion practices followed by lawyers who
give opinions on these trusts. For federal
income tax purposes, these trusts are generally
CLOSING OPINIONS FOR
COMMON LAW TRUSTS
[Editors’ Note: The following article by
Jim Gadsden discusses the status and power
opinions for non-statutory trusts used as
investment vehicles. These trusts often are
formed under New York law. As Jim points out,
non-statutory or common law trusts are to be
distinguished from statutory trusts formed under
the statutes of states like Delaware and
Maryland that provide for the organization of
business trusts as separate legal entities. Nonstatutory trusts also are formed for other
purposes, including as mutual funds, REITS and
holding companies. These non-statutory trusts
are typically referred to as “business trusts.”
Opinion practice for them can differ from the
practice described by Jim for the trusts he
addresses. Opinion practice for business trusts
will be discussed in a future issue of the
Newsletter.]
3
See, e.g., TriBar Opinion Committee, Third Party
Closing Opinions: Limited Liability Companies, 61
Bus. Law. 679 (2006) (“TriBar LLC Report”), and
various state reports. The TriBar Opinion Committee
is currently preparing a report on closing opinions for
limited partnerships.
4
The Florida State Bar’s report on closing opinions
discusses opinions on trusts. See Legal Opinions
Standards Committee, Business Law Section, Florida
State Bar, and Legal Opinions Committee, Real
Property, Probate and Trust Law Section, Florida
State Bar, Report on Third-Party Legal Opinion
Customary Practice in Florida 52-54, 72-75, and 8587 (2011) (the “Florida Report”).
Status and Power Opinions
for Common Law Trusts
Used as Investment Vehicles
Closing opinions delivered in connection
with transactions by corporations have been
extensively addressed in the opinion literature,
including in many state reports.2 Closing
opinions for limited liability companies and
limited partnerships also have been addressed,
The Maryland State Bar report on closing
opinions discusses closing opinions on statutory
trusts. See Special Joint Committee, Section of
Business Law and Section of Real Property, Planning
and Zoning, Maryland State Bar Association, Report
on Lawyers’ Opinions in Business Transactions 107110 (2007, revised 2009) (the “Maryland Report”).
2
See, e.g., TriBar Opinion Committee, Third-Party
“Closing” Opinions § 6.1, 53 Bus. Law. 592, 641
(1998) (“TriBar Report”); D. Glazer, S. FitzGibbon
and S. Weise, Glazer and FitzGibbon on Legal
Opinions § 6.1 (3d ed. 2008) (hereinafter “Glazer and
FitzGibbon”); 1 A. Field and J. Smith, Legal
Opinions in Business Transactions §§ 9.2.2 – 9.2.4
(3d ed. 2014) (hereinafter “Field and Smith”). The
section references in each of these works is to the
report’s or treatise’s discussion of the corporate
status opinion.
In Our Opinion
For a Legal Opinions Committee listserve
dialogue on the status opinion for trusts, see “Notes
from the Listserve ― The Due Formation and
Validly Existing Opinion for Trusts,” In Our Opinion
(Fall 2015, vol. 15, no. 1) at 21-22.
5
In the corporate context, these opinions are
referred to as the “corporate status” and “corporate
power” opinions. See TriBar Report §§ 6.1, 6.3, 53
Bus. Law. at 641-647.
5
Summer 2016
Vol. 15 ~ No. 4
a separate legal entity, . . .”),7 and § 3810(a)(1)
(requirements for contents and filing of a
certificate of trust).
treated as either partnerships or corporations
rather than as ordinary trusts. 6
Common Law Trusts v. Statutory Trusts
The status and power opinions for statutory
trusts are similar to their counterparts for
corporations, limited liability companies and
limited partnerships. The opinion preparers
satisfy themselves as to the due formation of the
entity, its status (certificates of status can be
obtained for statutory trusts), and the power of
the entity under its organizational documents
and the governing statute to enter into the
transaction that is the subject of the closing
opinion.
Trusts used as investment vehicles may be
organized as either common law trusts or
statutory trusts, depending on the laws of the
state in which the trust is formed.
Statutory trusts are created under a state
statute that requires for their formation the filing
of a declaration or certificate of trust with the
state’s secretary of state or other appropriate
official. These statutes have typically specified
that the trust is a separate entity. For example,
Maryland’s REIT Law, MD Code § 8-101 et
seq., provides for formation of a real estate
investment trust as “a separate legal entity,” § 8102(2), and requires the filing of a declaration of
trust with Maryland’s Department of
Assessments and Taxation to form a REIT. § 8201(1). See also Maryland’s Statutory Trust
Act, § 12-101 et seq. (including § 12-103 (a
Maryland statutory trust “is a separate legal
entity”)), § 12-204 (requirements for certificate
of trust to form the trust). Delaware also has a
statute providing for the formation of statutory
trusts. See Delaware’s Statutory Trust Act, DE
Code § 12-3801 et seq., and § 3810(a)(2) (“A
statutory trust formed under this chapter shall be
The focus of this article is not on statutory
trusts but on common law trusts used as
investment vehicles created under state nonstatutory trust law.
7
Delaware recently amended its Statutory Trust
Act to permit a trust to be formed under the Act that
is not a separate legal entity if so specified in the
trust’s certificate of trust and governing instrument.
A Richards Layton & Finger, P.A. client advisory
provides the following explanation for the change:
Notwithstanding the many advantages of a
statutory trust under the DSTA . . . some
sectors of the structured finance industry
have continued to utilize common law
trusts. These sectors have expressed
concerns that a trust which is a separate
legal entity might be treated differently
than a common law trust under various
provisions of federal and state law. There
is also a growing trend in some
transactions to use a federally chartered
financial institution, such as a national
bank, as the trustee to hold title to the trust
assets rather than holding title in the name
of the trust. The trend reflects a concern
that the trust might be a target for
regulators and others who would not
otherwise have authority over a federally
chartered financial institution engaged in a
similar transaction.
6
See William P. Streng et al., Tax Management
(3rd): Choice of Entity § II.M.7.5, II.M.7.7 (2008);
William S. McKee et al., 1 Fed. Taxation of
Partnerships and Partners § 3.02[4] (4th ed. 2015)
(“The 1980s saw the development of a new type of
multi-party investment vehicle in which multiple
investors would acquire a fixed pool of assets (e.g.,
mortgages or credit card receivables) and use state
law trust vehicles to carve up the economics in the
asset pool . . . . [T]he Treasury acted to force all
multiple-class investments in a single business or
asset pool into the income tax regimes (the corporate
or partnership rules) that are designed to tax complex
interests in common asset pools.”).
In Our Opinion
The 2016 Amendments to the Delaware
Statutory Trust
Act
(Jul.
13,
2016),
http://www.rlf.com/Publications/6520 (last visited
July 13, 2016).
6
Summer 2016
Vol. 15 ~ No. 4
The Status and Power Opinions for
Corporations and Alternative Entities
The Nature of a New York Common Law
Trust
The foundation for many of the opinions
given on corporations, limited liability
companies and limited partnerships is the entity
status opinion. A typical status opinion for a
corporation may state that the corporation is
validly existing8 and is in good standing in the
state of its incorporation, and, if relevant, is in
good standing and qualified to do business in a
state other than the state of incorporation that
has a nexus with the transaction.9 The building
blocks of the opinion are a certified copy of the
certificate or articles of incorporation filed with
the proper state official, typically the secretary
of state, and a certificate of recent date from the
secretary of state that the corporation exists and
is in good standing or that its certificate or
articles of incorporation has not been
cancelled.10 This construct cannot be applied to
common law trusts for two principal reasons,
which are discussed further below.
First,
common law trusts do not require a filing to be
formed. Second, the traditional understanding
of a trust, at least in New York, is that a trust,
even one formed for a business or investment
purpose, is viewed as a “fiduciary relationship”
rather than as a separate legal entity.
Under New York law, there are four
essential elements of a valid common law trust:
(1) a designated beneficiary, (2) a designated
trustee who is not the beneficiary, (3) a fund or
other identifiable property, and (4) the delivery
of the fund or other property to the trustee with
the intention of passing legal title to the property
to the trustee to hold in trust for the
beneficiary.11 As expressed in the Restatement
(Third) of Trusts § 2, a trust is a “relationship”
involving a trustee who undertakes duties with
respect to the trust property for the beneficiary
of the trust.12 A trust is a “fiduciary relationship
in which one person holds a property interest,
subject to an equitable obligation to keep or use
that interest for the benefit of another.”13 The
11
In re Doman, 68 A.D.3d 862, 863, 890 N.Y.S.2d
632 (N.Y. App. Div. 2009); In re Manarra,
5 Misc.3d 556, 558, 785 N.Y.S.2d 274, 275 (N.Y.
Sur. Ct. 2004); In re Fontanella’s Estate, 33 A.D.2d
29, 30, 304 N.Y.S.2d 829, 831 (N.Y. App. Div.
1969).
12
The commentary to the Restatement (Third) of
Trusts notes the development of the concept that a
trust is an entity—Reporter’s Notes to comments a
and i; A. Scott, W. Fratchner and M. Ascher, Scott
and Ascher on Trusts §§ 2.1.4., 2.3 (5th ed. 2006)
[hereinafter “Scott on Trusts”].
13
Bogert et al., The Law of Trusts and Trustees § 1
(3rd ed. 2012) (hereinafter “Bogert”) (internal
citations omitted) (citing In re Estate of Luccio, 982
N.E.2d 927 (Ill. App. Ct. 2012)).
8
Historically, the status opinion for a corporation
also included an opinion that it was “duly
incorporated.” For corporations that have been in
existence for a long time, increasingly opinion
recipients accept a status opinion that simply states
that the company is “validly existing as a corporation
under the law of” the jurisdiction in which it is
incorporated, without also referring to the
“incorporation.”
See TriBar Report § 6.1.3(b),
53 Bus. Law. at 644–645.
9
Just this year, the Supreme Court of the United
States referred to the “tradition” that “a trust was not
considered a distinct legal entity, but a ‘fiduciary
relationship’ between
multiple
people”
in
determining that, for purposes of diversity
jurisdiction, a Maryland real estate investment trust
was considered to be a citizen of the states of all of
its members. Americold Realty Trust v. Conagra
Foods, Inc., 136 S. Ct. 1012, 1016 (2016). The
diversity statute, 28 U.S.C. § 1332, specifies in
subsection (c)(1) that a corporation is treated as a
citizen of the state where it is incorporated and where
it has its principal place of business. Consistent with
its treatment of limited partnerships and other
unincorporated associations, the Supreme Court has
declined to extend that rule to a trust.
See Field & Smith § 9.2.4.
10
In some states the certificate has prima facie or
conclusive effect establishing that the corporation has
been formed and is validly existing in good standing.
See Delaware General Corporation Law § 105;
Florida Report at 39; Joint Opinion Committee,
Sections of Real Estate Law and Business Law,
Tennessee Bar Association, Report on Third Party
Closing Opinions 9 (2011).
In Our Opinion
7
Summer 2016
Vol. 15 ~ No. 4
opinion literature,17 and where, for example, no
filing of a public record is necessary to create
the partnership.18 The written trust agreement
should be reviewed to determine that it
establishes all the necessary elements for a valid
trust—that it identifies the beneficiary, the
trustee and the trust property, and that the
property has been delivered to the trustee.
traditional common law rule is that a trustee is
personally liable on contracts entered into as
trustee, but is entitled to indemnification from
the trust property.14 To negate the application of
this rule, trustees typically insist on the inclusion
in contracts to which they are a party as trustee
of an explicit statement that the only recourse of
the counterparty under the contract is to the trust
property and not to the assets of the trustee, and
they sign the agreements under signature blocks
making clear that they are signing the document
as a trustee and not in their individual or entity
capacity.
Since no public filing is necessary to form a
common law trust, a valid existence certificate
from the secretary of state typically is not
available.
Similarly, a certificate of good
standing ordinarily is not available.19 Instead the
opinion preparers have to satisfy themselves as
to the trust’s continued existence in other ways.
The Status Opinion
Although, as with a partnership, a written
agreement is not necessary to create a common
law trust,15 as is the common practice with
partnerships, opinion givers typically require
that a common law trust have a written trust
agreement before they will deliver a closing
opinion. No public filing is required for creation
of the trust.16 In this respect a trust is analogous
to a general partnership, another form of doing
business that is not extensively treated in the
17
For an example of a report addressing opinions on
general partnerships, see Business Law Section, State
Bar of California, Report on Legal Opinions
Concerning California Partnerships, (1998). The
presently circulating exposure draft of the California
Business Law Section’s revised report on Third Party
Closing Opinions: Limited Liability Companies
and Partnerships
(currently
available
at
The Legal Opinion
Resource
Center
at
http://apps.americanbar.org/buslaw/tribar/) contains a
discussion of opinions on general partnerships at
pages 54–57.
14
Bogert § 247 K; 4 Scott on Trusts § 26.1;
Restatement (Second) of Trusts § 261.
15
Restatement (Third) of Trusts § 4, subject to an
applicable statue of frauds (generally applicable to a
trust involving real property). Bogert § 63.
18
See, e.g., Uniform Partnership Act § 202. The
members of a limited liability partnership obtain their
shield from personal liability from the registration of
the partnership as a limited liability partnership, but
the partnership exists independent of that filing.
Uniform Partnership Law § 901; New York
Partnership Law § 121-1500.
16
In the terms of Article 9 of the Uniform
Commercial Code, a common law trust is not a
“registered organization” formed by the filing of a
“public organic record.” UCC § 9-102(a)(71), (68).
For a comprehensive treatment of trusts and trustees
under Article 9, see N. Powell, Filings Against Trusts
and Trustees Under the Proposed 2010 Revisions to
Current Article 9—Thirteen Variations, 4 UCC L.J.
Art. 2 (2010).
In Our Opinion
19
Some opinion literature takes the position that
“good standing” is a concept that has no meaning
outside the certificates delivered by a secretary of
state.
8
Summer 2016
Vol. 15 ~ No. 4
The relevant consideration is whether the trust
continues to exist and has not been terminated.20
work and give an opinion regarding the trustee.
In that case, counsel for the trust may rely on the
opinion of trustee’s counsel or assume the
matters relating to the trustee.
Another
alternative that may be acceptable to a recipient,
especially when a major institution is the trustee,
is for the trust’s counsel to assume the status,
power and authority of the trustee without a
separate opinion as to those matters and to
address just the trust itself.
The Power Opinion
To give a power opinion, the opinion
preparers need to satisfy themselves that the
trustee has the power to act as trustee on behalf
of the trust and that the trustee has the power
under the trust agreement to engage in the
activities covered by the opinions.21
The inquiry as to the status of a trustee of a
common law trust for purposes of the status
opinion is arguably more important than an
inquiry for opinion purposes as to the status,
when an entity, of a member, manager or
general partner of a limited liability company or
a limited partnership. Customary practice for
such opinions does not require, in the case of
entity members, managers, or general partners,
that the opinion preparers confirm those entities’
status, power, or authority to act for and on
behalf of the limited liability company or limited
partnership.22 For a common law trust, however,
the trustee is the only “actor,” and accordingly
an examination of the trustee’s capacity to act as
trustee is typically undertaken or assumed.
Because the trustee exercises the powers of
the trust, the power of the trustee is relevant to
the power opinion. There are several ways of
handling the trustee’s power in order to give the
opinion.
If a trustee is an entity, the opinion preparers
must either determine or assume that the trustee
is a validly existing entity and has taken the
steps required by its organizational documents to
execute the agreement (in this case as trustee).
The opinion preparers may obtain certificates of
good
standing
and
other
necessary
documentation
from
the
appropriate
governmental official to establish that the entity
is validly existing. If the trustee is not the
trustee named in the original trust agreement,
then the opinion preparers should
obtain
satisfactory evidence (or assume) that the
succession was accomplished in the manner
authorized by the trust agreement or otherwise
applicable law.
Whether the trustee is an individual or an
entity, and whether the trustee is the original
trustee or a successor, the opinion preparers
satisfy themselves (or assume) that the trustee is
authorized under applicable law to act as trustee
and that the trustee has taken the necessary
steps, if any, to qualify as trustee. For example,
state and federal banks and trust companies are
typically authorized to exercise trust powers
under the laws of their chartering jurisdictions.23
As a result, the state or federal official of the
Sometimes counsel for the trust takes these
steps to satisfy itself regarding a trustee. In
other situations, the trustee’s counsel, which
may be inside or outside counsel, may do the
20
One issue that must be considered in connection
with a trust is the Rule Against Perpetuities. There is
a statutory exception in New York to the application
of the Rule to a “business trust,” defined as having
transferable certificates of interest offered for sale to
the public. N.Y. Estates Powers and Trusts Law § 91.5. Note that business trusts or investment trusts are
not otherwise excluded from New York’s Estates
Powers and Trusts Law, which addresses trusts for
family or charitable purposes and decedents’ estates.
21
22
See TriBar LLC Report § 2.0 n. 32 and § 4.0 n.
52, 61 Bus. Law. at 685 n. 32 and 689 n. 52.
23
For state chartered institutions, see, for example,
New York Banking Law § 100. States also regulate
the right of institutions charted under federal law or
the laws of other states to exercise trust powers in the
state. E.g., New York Banking Law §§ 131(3), (4),
200, 201-b (out-of-state banks); §§ 226-227
(interstate branches). For federally chartered national
associations, see 12 U.S.C. § 92a.
See Florida Report at 52, 72.
In Our Opinion
9
Summer 2016
Vol. 15 ~ No. 4
chartering jurisdiction can supply a certificate
that a bank has trust powers and is in good
standing with the chartering authority. For an
individual trustee, the opinion preparers confirm
that the trustee is not subject to any limitations
on his or her ability to act as trustee in the
transaction.24
For the reasons discussed above, no opinion
is given that the Trust is validity existing.
-
The second step in the analysis is a review
of the trust agreement to determine the scope of
the powers of the trustee, the trust’s permissible
activities, and the consents required of the
beneficiaries or others, which is similar to the
review of the certificate or articles of
incorporation, bylaws and resolutions of a
corporation in connection with a closing opinion
for a corporation. The investigation will also
confirm that the trust does not have a stated term
that has expired and that no events have
occurred causing the termination of the trust.
RECENT DEVELOPMENTS
The Williams Companies, Inc.
v. Energy Transfer Equity, L.P.:
Delaware Chancery Court Allows
Termination of Merger Agreement
Because Tax Counsel Declines
to Deliver Closing Opinion26
Forms of Status and Power Opinions
The following are forms of the status and
power opinions for a New York common law
trust used as an investment vehicle 25:
The betrothal of The Williams Companies,
Inc. (“Williams”) and Energy Transfer Equity,
L.P. (“ETE”) was tempestuous from the start.
The proposed merger was approved by the board
of Williams by a vote of 8-5 (which reversed a 6
to 7 earlier vote). Shortly after the merger
agreement was signed (in September 2015), the
energy market tanked and the value of both
Williams and ETE (both engaged primarily in
the transport of natural gas) declined
precipitously. By January 2016, ETE wanted out
of the deal.
[The Client] is the trustee of [the
Trust] pursuant to the provisions of
the
Trust
Agreement
dated
____________ ____, 20___.
[The Client], as trustee of the
Trust, has the trust power to execute
and
deliver
the
[transaction
documents] and to perform [the
Client’s] obligations thereunder.
ETE is a Delaware limited partnership whose
limited partnership units (“LP units”) are traded
on the NYSE.
Williams is a Delaware
corporation whose stock is also traded on the
NYSE. Williams wanted its shareholders to
receive traded common stock, not traded LP
units, and wanted its shareholders to receive both
common stock of the surviving entity and some
cash. These objectives resulted in a complex
24
For example, if an aircraft is to be titled in an
owner trust in a leveraged lease transaction, each
trustee must be a U.S. citizen or a resident alien.
14 C.F.R. § 47.7(c)(2). Opinion preparers may
assume, without so stating, that an individual trustee
has the requisite capacity to contract and is not
subject to a disability, unless they have knowledge to
the contrary. See TriBar Report § 2.3(a), 53 Bus.
Law. at 615.
25
26
2016 WL 3576682 (Del. Ch. June 24, 2016).
Williams has appealed the Vice Chancellor’s
decision to the Delaware Supreme Court.
Adapted from the Florida Report at 52, 72.
In Our Opinion
James Gadsden
Carter Ledyard & Milburn LLP
gadsden@clm.com
10
Summer 2016
Vol. 15 ~ No. 4
merger structure.
ETE established a new
Delaware limited partnership, Energy Transfer
Corp. L.P. (“ETC”), which elected to be taxed as
a corporation for U.S. federal income tax
purposes. Pursuant to the terms of the merger
agreement, Williams would merge into ETC in
exchange for “common shares” (representing LP
units) of ETC plus $6 billion in cash. ETC
would then transfer the Williams assets (the
“Williams Asset Contribution”) to ETE (its
parent) in exchange for LP units of ETE. In
addition, and as part of the merger transactions,
ETE would pay $6 billion in cash to ETC for
common shares of ETC representing 19% of
ETC’s common shares (leaving the former
Williams stockholders with 81% of the
outstanding ETC common shares). And yes,
ETE would, at the conclusion of the merger, be
both a subsidiary and a “stockholder” of ETC.
After the merger, ETC would own 57% of the
outstanding LP units of ETE, with the existing
limited partners of ETE owning the remainder.
The number of LP units issued by ETE to ETC in
exchange for the Williams Asset Contribution
would precisely equal the number of common
shares issued by ETC to the Williams
shareholders for the Williams assets and to ETE
in exchange for the $6 billion cash. Complicated
enough?
exchange to which Section 721(a) of the Code
applies.”
The Chancery Court found that, at the time
the merger agreement was entered into –
September 2015, Latham regarded delivery of
the 721 Opinion as “fairly straightforward.”
Cravath likewise had no concern over the
delivery of the 721 Opinion. 2016 WL 3576682
at *6.
The $6 billion to be paid by ETE to ETC for
common shares of ETC was for a fixed
percentage (19%) of the common shares of ETC
to be outstanding after the merger.
That
percentage would not change as a result of an
increase or decline in the value of the ETE LP
units traded on the NYSE even though a change
in the value of those units would directly affect
the value of the common shares of ETC. While
this feature of the merger was clear to anyone
who understood the structure of the merger, it
apparently was not clear to ETE’s Executive
Vice President and Head of Tax who, in March
2016, realized, in an “epiphany” (the Court’s
characterization, 2016 WL 3576682 at **12, 19)
that, with the precipitous drop in the value of the
ETE LP units, the ETC shares to be received by
ETE in the merger would be worth
approximately $2 billion, $4 billion less than the
$6 billion cash to be paid by ETE to ETC.
Concerned that this disparity might be deemed
payment for the Williams assets to be contributed
by ETC to ETE and trigger taxable gain, the EVP
raised his concerns with Latham. This is how
Vice Chancellor Glasscock characterized
Latham’s response to the inquiry:
The Latham Closing Tax Opinion
The merger of Williams into ETC was
intended by the parties to qualify as a tax-free
reorganization under Section 368(a) of the
Internal Revenue Code (“Code”). Each party’s
obligation to consummate the merger was
conditional on, among other things, receipt of an
opinion of its counsel that the merger of
Williams into ETC would qualify for tax-free
treatment under the Code (Cravath, Swaine &
Moore LLP (“Cravath”) for Williams, and
Latham & Watkins LLP (“Latham”) for ETC).
In addition, Latham, as counsel to ETE and ETC,
was to render at closing a “contribution opinion”
(“721 Opinion”) for the benefit of both ETC and
Williams “. . . to the effect that the [Williams
Asset Contribution and the issuance of LP units
by ETE to ETC] should qualify as an [tax-free]
In Our Opinion
Before its conversation with [the ETE
officer], Latham was preparing to
issue the 721 Opinion and had never
considered that it would be unable to
issue it.
Indeed, Latham had
previously never considered how any
movement in [ETE’s] unit price might
affect Latham’s ability to give the 721
Opinion.
2016 WL 3576682 at *7 (footnotes omitted).
11
Summer 2016
Vol. 15 ~ No. 4
After extensive research and deliberation,
consuming over 1000 hours of attorney time,
Latham concluded it could not provide the 721
Opinion. In contrast to the factual situation at
the outset, the decline in the value of the ETE
units and the resulting decline in the value of the
ETC shares (some $4 billion according to ETE)
could, in Latham’s view, cause the transaction to
be treated as a disguised sale under Code
§ 707(a)(2)(B), thereby precluding it from
delivering the 721 Opinion. On April 12, 2016,
Latham informed Cravath that it would be unable
to provide the 721 Opinion (assuming the merger
closed that day). 2016 WL 3576682 at *7.
The Litigation
Chancery Court
Before
the
have considered that issue based on his
interpretation of the terms of the merger
agreement, namely the provision cited above
(§ 6.01(h)) conditioning consummation of the
merger on delivery of the 721 Opinion. As the
Vice Chancellor noted:
The parties could have contracted to a
different level of certainty [i.e.,
conditioning consummation of the
merger on the opinion of Latham] for
the condition-precedent 721 Opinion.
They could have picked an
independent third party to make such
a determination, such as an academic.
They could have opted for an
objective standard, to be provided by a
court or by an arbitrator. Instead, they
assigned responsibility to Latham,
[ETC’s] tax counsel, and determined
that a condition precedent to
consummation of the [merger] would
be Latham’s opinion that the transfer
“should” withstand a challenge to taxfree status under Section 721(a).
Therefore, it is Latham’s subjective
good-faith determination that is the
condition precedent.
Delaware
On April 19, 2016, Williams amended a
previously-filed complaint against ETE, this time
alleging breach by ETE of the merger agreement
for failing to use commercially reasonable efforts
to obtain the 721 Opinion and breach of its
representations concerning the anticipated taxfree treatment of the Williams Asset
Contribution. ETE and the other defendants
responded with various affirmative defenses and
counterclaims. The case was tried before Vice
Chancellor Glasscock on June 20 and 21, 2016,
and he rendered his opinion just a few days later,
on June 24, 2016.
2016 WL 3576682 at *11 (emphasis to last
sentence added).27
Standard for Measuring Latham’s Decision
Not to Deliver the 721 Opinion: Good Faith
The Vice Chancellor evaluated Latham’s
decision through a lens colored by ETE’s strong
desire not to proceed with the merger, or, as he
phrased it, “I must look at this [Latham’s]
decision with a somewhat jaundiced eye.” Id.
In its complaint Williams did not name
Latham as a defendant.
Therefore, ViceChancellor Glasscock had no occasion to address
in his decision the question whether Latham
might have any exposure to Williams for its
belated decision not to give its 721 Opinion.
In his analysis, the Vice Chancellor noted
that his task was not to determine objectively
whether the Williams Asset Contribution
Williams alleged that ETE and ETC
breached their obligation under the merger
agreement to use commercially reasonable
efforts to obtain Latham’s 721 Opinion. Merger
Agreement § 5.07(b). Before ruling on that
issue, the Vice Chancellor considered whether,
on the evidence before him, Latham had acted in
good faith in deciding that it could not issue the
721 Opinion. The Vice Chancellor appears to
In Our Opinion
27
The parties could also have conditioned
consummation of the merger upon securing a private
letter ruling from the IRS confirming the tax-free
status of the Williams Asset Contribution, but such a
ruling is rarely sought given the time it takes to
obtain private letter rulings. See generally Rev. Proc.
2016-3, 2016-1 I.R.B. 126 (Jan. 4, 2016) (identifying
matters on which the IRS will not issue letter rulings
or determination letters).
12
Summer 2016
Vol. 15 ~ No. 4
 The testimony at trial of two Latham
partners, who “forcefully” rejected the notion
that Latham’s conclusion was influenced by the
interests of its client to break the deal. (2016
WL 3576682 at *15.)
qualified for tax avoidance under Code § 721
but to determine, by a preponderance of the
evidence, whether Latham’s decision was made
in good faith. In concluding that Latham acted
in good faith, the Vice Chancellor was
influenced by the following factors:
 The absence in the record “of any
explicit or implicit direction by [ETE] to Latham
to reach a particular outcome.” (2016 WL
3576682 at *15.)
 Latham took seriously the responsibility
of evaluating the EVP’s concerns about the
discrepancy between the $6 billion cash paid by
ETE to ETC and the diminished value of the
ETC units to be issued in exchange, devoting
over 1000 hours of attorney time in the process.
(2016 WL 3576682 at *13.)
In reaching his conclusion, the Vice
Chancellor took into account Cravath’s position
that it could render the § 721 Opinion and the
testimony of Williams’ expert at trial, Professor
Howard Abrams of the School of Law,
University of San Diego, who testified that “no
reasonable tax attorney” would opine that the
Williams Asset Contribution was not tax free.
2016 WL 3576682 at *14. Based on the
evidence before him, the Vice Chancellor found
“that Latham has reached its conclusion [not to
deliver the 721 Opinion] based upon its
independent judgement.” 2016 WL 3576682 at
*15. Given the conflicting testimony by tax
counsel and the tax experts, the Vice Chancellor
concluded: “This range of opinion indicates to
me the closeness of the issue and the unusual
nature of the transaction here.” 2016 WL
3576682 at *14.
 As a result of its analysis, Latham
became concerned that the large “over-payment”
for the ETC units by ETE “would be regarded
by tax authorities as a cash component of the
[Williams Asset Contribution], triggering tax.”
(Id.)
 ETE retained William McKee of
Morgan, Lewis & Bockius LLP for a second
opinion on its EVP’s concerns regarding the
availability of Code § 721 for the Williams
Asset Contribution.28
McKee agreed with
Latham that a “should” opinion could not be
given, but on a different ground, namely, that the
IRS would view the Williams Asset
Contribution by ETC to ETE and the $6 billion
cash payment by ETE to ETC as a single
transaction. (2016 WL 3576682 at *14.)
Cravath, on behalf of ETE, presented two
restructuring proposals to Latham to alleviate its
concerns over delivery of the 721 Opinion.
Latham rejected them both, on the authority of
Commissioner v. Court Holding Co., 324 U.S.
331 (1945), concluding that the tax authorities
would disregard any late modifications to the
transaction structure. The Vice Chancellor
concluded that Latham’s rejection of the
restructuring proposals was also made in good
faith. (2016 WL 3576682 at *16.)
 ETE’s tax expert at trial, Professor
Ethan Yale of the University of Virginia Law
School, reached a similar conclusion to
McKee’s, concluding that the transaction was
flawed from a tax standpoint from its inception.
Id.
 The position of Gibson, Dunn &
Crutcher LLP, Williams’ co-deal counsel, that it
could issue a “weak-should” opinion on the
Williams Asset Contribution. Id.
ETE’s Obligation to Use Commercially
Reasonable Efforts to Obtain the 721
Opinion
28
William McKee is the lead author of a preeminent
partnership tax treatise: McKee, Nelson & Whitmire,
Federal Taxation of Partnerships and Partners (4th
ed. 2007).
In Our Opinion
Having concluded that Latham decided in
good faith it could not deliver the 721 Opinion,
the Vice Chancellor had no trouble concluding
13
Summer 2016
Vol. 15 ~ No. 4
that ETE was not in material breach of its
contractual covenant to use commercially
reasonable efforts to obtain the 721 Opinion
from Latham. The Vice Chancellor interpreted
ETE’s obligation to use “commercially
reasonable efforts” as meaning that ETE
“necessarily submitted itself to an objective
standard ― that is, it bound itself to do those
things objectively reasonable to produce the
desired 721 Opinion, in the context of the
agreement reached by the parties.” 2016 WL
3576682 at *16.
Contribution had been known or developed by
ETE or its tax counsel at the time of signing the
merger agreement. 2016 WL 3576682 at *18*19.
Lessons to Be Drawn From the Decision
The facts in the Williams case are complex,
and the holding will inevitably prompt M&A
counsel to consider the advisability of making
receipt of a tax opinion from one side’s named
counsel a condition of the obligation of both
sides to close a merger.29 For lawyers giving a
traditional closing opinion on corporate law
matters (a “corporate closing opinion”),
however, the lessons of Williams are
considerably less complex and do not require
much rethinking. That is because, unlike the tax
opinion in Williams, a corporate closing opinion
typically is a condition to the obligation to close
of only the side not represented by the opinion
giver and therefore that side can always waive
the condition and proceed with the closing
should it choose to do so.
Having found that Latham exercised
independent judgment in concluding that it
could not render the 721 Opinion, the Vice
Chancellor concluded that nothing ETE could
have done could have caused Latham to change
its position and give the opinion. In doing so, he
concluded that the ETE officer’s bringing to
Latham’s attention the potential tax issue raised
by the discrepancy in the $6 billion cash
payment by ETE to ETC and the value of the
ETC common shares to be issued was not a
violation of ETE’s “commercially reasonable
efforts” covenant.
Similarly, the Vice
Chancellor found that ETE did not violate its
covenant by rejecting ETE’s restructuring
proposals because Latham had determined in
good faith that their adoption would not allow it
to issue the 721 Opinion. Id.
The first lesson of Williams, therefore,
insofar as corporate closing opinions are
concerned, is that Williams should not be an
occasion for any major concerns. The typicallydrafted closing condition (calling for an opinion
letter addressed only to the counterparty) will
continue to work just fine without even minor
surgery. If a law firm discovers at the last
minute a matter ― be it fact or law ― that it
concludes prevents it from giving one of the
opinions it is supposed to give, the closing
condition will have done its job of unearthing
for the recipient an issue for it to consider in
deciding whether or not to close. The inability
of the law firm to give the opinion will not,
unlike in Williams, provide its client the option
not to close but instead will provide that option
Williams’ Misrepresentation Claim
ETE and ETC represented in the merger
agreement that, among other things, neither
knew of the existence of any fact that would
reasonably be expected to prevent the Williams
Asset Contribution and the issuance of ETE LP
units to ETC in exchange from qualifying as an
exchange to which Code § 721(a) applies.
Merger Agreement § 3.02(n)(i).
Williams
claimed that ETE’s failure to deliver the Latham
721 Opinion breached this representation. The
Vice Chancellor rejected that claim, concluding
that Latham’s change of position was not a
“fact” requiring disclosure under the merger
agreement and, even if Latham’s change of
position were deemed a fact, nothing in the
record indicated that Latham’s belated analysis
of the taxation of the Williams Asset
In Our Opinion
29
In Williams, as noted above, delivery of the
Latham tax opinion was a condition to both Latham’s
client’s (ETE’s) obligation to close and Williams’
obligation to close, undoubtedly because both ETE
and the Williams stockholders would become
“stockholders” of the surviving entity – ETC, and the
tax-free nature of the Williams Asset Contribution
was material to ETC.
14
Summer 2016
Vol. 15 ~ No. 4
only to the other party, which is the purpose for
making receipt of the opinion a condition for the
closing.
Between the signing of an agreement and a
closing, lawyers are expected to exercise
customary diligence, and if the work they do
post-signing to support the opinions the
agreement calls on them to give unearths a
problem that prevents them in good faith from
giving an opinion, the opinion process will, as
noted above, have done its job by alerting the
recipient to an issue for it, in consultation with
its own counsel, to consider in deciding whether
or not to waive the condition and close anyway.
(We should note that if counsel is named in the
closing condition and has acted in good faith in
deciding that it cannot give a particular opinion
then, in Vice-Chancellor Glasscock’s view,
counsel’s client will have satisfied its obligation
to exercise commercially reasonable efforts to
satisfy this condition to close because any efforts
it could make to change its lawyers’ mind are
destined to be futile.)
The second lesson of Williams is that as a
matter of contract law the parties to an
agreement cannot take action that impedes the
ability of their counsel to provide the opinions
that have been made a closing condition. Thus,
the party represented by the law firm that is to
give the opinions cannot refuse to execute the
certificates on which opinions ordinarily are
based and may not refuse to take actions its
counsel deems necessary to give an opinion, for
example, by declining to take all of the steps
required to create a class of preferred stock to be
issued in the transaction. (Refusing to take the
steps needed to give the required opinions not
only will affect its counsel’s ability to close but
also may prevent the closing altogether by
precluding waiver of the closing condition as a
practical matter.)
We are not litigators, and the purpose of this
article is not to address the professional liability
of corporate lawyers when declining to give a
closing opinion. Nevertheless, we do feel
comfortable making a few observations. First,
lawyers are not parties to agreements making
delivery of their opinions a condition of closing.
Thus, whatever an agreement might say, as long
as counsel is not a party to the agreement,
counsel for one party has no contractual
obligation to deliver a corporate closing opinion
to the other party. (By way of contrast, by virtue
of an express provision in the agreement or an
implied provision read into the agreement by a
court, the parties themselves have an obligation
to make at least a good faith effort (and maybe a
greater effort depending on the further assurance
language of the agreement) to satisfy all
conditions to closing.) Second, if a law firm in
good faith decides even belatedly that it is
unable to give an opinion, then under the
teaching of Williams, its client should have no
liability to the counterparty for failure of that
condition (unless, by the terms of the agreement,
the client assumes liability for failure to meet the
condition in any event).
In Our Opinion
-
James F. Fotenos
Greene Radovsky Maloney Share
& Hennigh LLP
jfotenos@greeneradovsky.com
-
Donald W. Glazer
dwglazer@goodwinprocter.com
LEGAL OPINION REPORTS
(See Chart of Published and Pending
Reports on following page.)
15
Summer 2016
Vol. 15 ~ No. 4
Chart of Published and Pending Reports
[Editors’ Note: The chart of published and pending legal opinion reports below has been prepared by
John Power, O’ Melveny & Myers LLP, Los Angeles, and is current through June 30, 2016.]
A. Recently Published Reports30
ABA Business Law Section
2009
2010
2011
2013
2014
2015
Effect of FIN 48 – Audit Responses Committee
Negative Assurance – Securities Law Opinions Subcommittee
Sample Stock Purchase Agreement Opinion – Mergers and
Acquisitions Committee
Diligence Memoranda – Task Force on Diligence Memoranda
Survey of Office Practices – Legal Opinions Committee
Legal Opinions in SEC Filings (Update) – Securities Law Opinions
Subcommittee
Revised Handbook – Audit Responses Committee
Updates to Audit Response Letters – Audit Responses Committee
No Registration Opinions (Update) – Securities Law Opinions
Subcommittee
Cross-Border Closing Opinions of U.S. Counsel – Legal Opinions
Committee
ABA Real Property
Section (and others)31
2012
Real Estate Finance Opinion Report of 2012
Arizona
2004
Comprehensive Report
California
2007
2009
2014
2015
Remedies Opinion Report Update
Comprehensive Report Update
Venture Capital Opinions
Sample Venture Capital Financing Opinion
Revised Sample Opinion
Florida
2011
Comprehensive Report Update
Georgia
2009
Real Estate Secured Transactions Opinions Report
30
These reports are available (or soon will be available) in the Legal Opinion Resource Center on the web site of
the ABA Legal Opinions Committee, http://apps.americanbar.org/buslaw/tribar/. Reports marked with an asterisk
have been added to this Chart since the publication of the Chart in the last quarterly issue of this Newsletter.
31
This Report is the product of the Committee on Legal Opinions in Real Estate Transactions of the Section of
Real Property, Trust and Estate Law, Attorneys’ Opinions Committee of the American College of Real Estate
Lawyers, and the Opinions Committee of the American College of Mortgage Attorneys (collectively, the
“Real Estate Opinions Committees”).
In Our Opinion
16
Summer 2016
Vol. 15 ~ No. 4
Recently Published Reports (continued)
City of London
2011
Guide
Maryland
2009
Update to Comprehensive Report
Michigan
2009
2010
Statement
Report
National Association of
Bond Lawyers
2011
2013
2014
Function and Professional Responsibilities of Bond Counsel
Model Bond Opinion
501(c)(3) Opinions
National Venture Capital
Association
2013
Model Legal Opinion
New York
2009
2012
Substantive Consolidation – Bar of the City of New York
Tax Opinions in Registered Offerings – New York State Bar
Association Tax Section
North Carolina
2009
Supplement to Comprehensive Report
Pennsylvania
2007
Update
South Carolina
2014
Comprehensive Report
Tennessee
2011
Report
Texas
2006
2009
2012
2013
Supplement Regarding Opinions on Indemnification Provisions
Supplement Regarding ABA Principles and Guidelines
Supplement Regarding Entity Status, Power and Authority Opinions
Supplement Regarding Changes to Good Standing Procedures
TriBar
2008
2011
2011
2013
Preferred Stock
Secondary Sales of Securities
LLC Membership Interests
Choice of Law
Multiple Bar Associations
2008
Customary Practice Statement
Multiple Law Firms
2016
White Paper – Trust Indenture Act §316(b)
In Our Opinion
17
Summer 2016
Vol. 15 ~ No. 4
B.
Pending Reports
ABA Business Law Section
Sample Asset Purchase Agreement Opinion – Merger and Acquisitions
Committee
Updated Survey – Legal Opinions Committee
Debt Tender Offers – Securities Law Opinions Subcommittee
Resale Opinions – Securities Law Opinions Subcommittee
Third-Party Closing Opinions of Local Counsel 32
Opinions on Risk Retention Rules White Paper – Securitization and Structured
Finance Committee & Legal Opinions Committee
California
Opinions on LLCs & Partnerships
Sample Personal Property Security Interest Opinion
Exceptions and Other Qualifications to the Remedies Opinion
National Ass’n of Bond Lawyers
Model Bond Opinion (Update)
Real Estate Opinions
Committees (Among Others)33
Local Counsel Opinions
Texas
Comprehensive Report Update
TriBar
Limited Partnership Opinions
Opinions on Clauses Shifting Risk
Bring Down Opinions
Washington
Comprehensive Report
Multiple Bar Associations
Statement of Opinion Practices
32
A joint project with WGLO and other groups.
33
See note 31.
In Our Opinion
18
Summer 2016
Vol. 15 ~ No. 4
MEMBERSHIP
If you are not a member of our Committee
and would like to join, or you know someone
who would like to join the Committee and
receive our newsletter, please direct him or her
here.34 If you have not visited the website lately,
we recommend you do so.
Our mission
statement, prior newsletters, and opinion
resource materials are posted there. For answers
to any questions about membership, you should
contact our membership chair Anna Mills at
amills@vwlawfirm.com.
NEXT NEWSLETTER
We expect the next newsletter to be
circulated in October 2016. Please forward
cases, news and items of interest to Tim Hoxie
(tghoxie@jonesday.com),
Jim
Fotenos
(jfotenos@greeneradovsky.com),
or
Susan
Cooper Philpot (philpotsc@cooley.com)
34
The URL is http://apps.americanbar.org/dch/committee.cfm?com=CL510000.
In Our Opinion
492614.4
19
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Addendum
Working Group on Legal Opinions Foundation
Spring 2016 Legal Opinion Seminar Summaries
In Our Opinion
Summer 2016
Vol. 15 ~ No. 4
Addendum
Working Group on Legal Opinions Foundation
Spring 2016 Legal Opinion Seminar Summaries
Table of Contents
Page
Dinner Sessions.................................................................................................................................. A-1
Electronic Signatures - Opinion Traps for the Unwary? .......................................................... A-1
“The Opinion Shop”: Farming Out Real Property and Other Opinions by Law Firms:
Current Practice? .................................................................................................................. A-3
Opinions to Clients................................................................................................................... A-4
Panel Sessions I.................................................................................................................................. A-5
10b-5 Letters – Negative Assurance in Securities Offerings ................................................... A-5
Current Issues and Practices Related to Opinions on the Issuance of Equity Interests ............ A-7
Concurrent Breakout Sessions I ......................................................................................................... A-8
Current Opinion Practices in Connection with Section 316(b) of the Trust Indenture
Act – the Marblegate and Caesars Decisions ...................................................................... A-8
Dealing with Unasserted Claims, Investigations and “Threats” in No-Litigation Opinions
and Audit Response Letters; Other Current Issues in Audit Response Letters .................. A-10
Discussion of Selected Issues in the Proposed Local Counsel Report ................................... A-13
Panel Sessions II .............................................................................................................................. A-15
Recent Opinion Developments............................................................................................... A-15
Opinion Implications of Article 55 of the EU Bank Recovery and Resolution Directive
(the “EU Bail-in Rule”) ...................................................................................................... A-18
Concurrent Breakout Sessions II...................................................................................................... A-19
Back to Bring-down Opinions................................................................................................ A-19
Opinions Covering Performance of Agreements: Covering Each Provision?
Limited to “Core Items” of the Agreement? Other Solutions ............................................ A-21
Opinion Letter Significance of Equityholder Agreements and Side Letters .......................... A-22
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Table of Contents
(Continued)
Page
Panel Session III .............................................................................................................................. A-25
Current Ethics Issues Relating to Opinions............................................................................ A-25
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WORKING GROUP ON LEGAL OPINIONS FOUNDATION
SPRING 2016 OPINION SEMINAR SUMMARIES
The following summaries have been prepared to provide an overview of the subjects covered at the
panel sessions and concurrent discussion sessions held in New York on May 9-10, 2016. Editorial
oversight and input was provided by Gail Merel of Andrews Kurth LLP, WGLO’s Editor-in-Chief,
with, for purposes of inclusion in this Addendum, input from the editors of the ABA Legal
Opinions Committee’s Newsletter (Jim Fotenos and Susan Cooper Philpot). The next WGLO
seminar is scheduled to be held on November 1, 2016 in New York.
The summaries do not necessarily reflect the views of the chairs, co-chairs, panelists or reporters of
any particular session, nor do they constitute statements of the views of any of their respective law
firms, or of WGLO or any other organization.
DINNER SESSIONS:
1.
Electronic Signatures - Opinion Traps for the Unwary?
James A. Smith, Foley Hoag LLP, Boston, Co-Chair
Steven O. Weise, Proskauer Rose LLP, Los Angeles, Co-Chair
Kenneth P. (“Pete”) Ezell, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC,
Nashville, Reporter
This session considered federal and state legislation that validate electronic signatures in business
transactions and that permit electronic signatures in entity governance. Co-Chair Steve Weise began the
session by providing an overview of the relevant statutes.
The federal E-Sign Act (15 USC §§ 7001 et seq.) validates electronic signatures in “transactions.”
E-Sign, however, defers to state laws if a state has adopted the substance of the Uniform Electronic
Transactions Act (“UETA”) or its equivalent. Forty-seven states have adopted UETA. Three states (New
York, Illinois and Washington) have adopted their own electronic signature statutes. New York's statute
is the Electronic Signatures and Records Act (“ESRA”).
E-Sign and UETA do not apply to the Uniform Commercial Code, except for Article 2 (sale of
goods) and Article 2A (leasing of goods). In Article 1, the definition of “signing” (§ 1-201) anticipates
use of electronic signatures, as does the Article 9 definition of “authenticate” (§ 9-102). Article 3, on the
other hand, requires a writing (see definition of “promise” in § 3-103), so no electronic signatures are
possible, except for “transferable records” subject to UETA or E-SIGN.
Since E-SIGN and UETA apply only to “transactions” and matters “relating” to a transaction,
they do not apply to all of entity governance. Thus, one must refer to the applicable entity statute to
determine if electronic signatures are authorized for governance matters for a particular entity. For
instance, see Delaware General Corporation Law § 141 (written consent of directors), § 228 (written
consent of shareholders), and § 232 (notice to shareholders and definition of electronic transmission).
An electronic signature on an agreement may include a person typing his or her name on an email or on the screen; clicking/tapping on a computer/device screen button that says “I agree,”
“Submitted,” or equivalent language as long as the language or actions of the person demonstrates an
intent to enter into an agreement; or manually signing a piece of paper and then sending an image of that
piece of paper by electronic means (e.g., fax or PDF).
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A person must agree to use an electronic signature to make that process effective, but that
agreement can be inferred from the use of an onscreen form or a fax or PDF. If the parties close the
transaction, doesn't that prove an agreement to recognize electronic signatures? In a loan transaction, for
example, the funding of the loan by the lender is evidence of consent to accept electronic signatures, as a
lender that has funded a loan on the basis of electronic signatures would not likely maintain that it did not
agree to accept electronic signatures. It is prudent to have an express statement of agreement, however.
Proving the electronic signature can be problematic, as with blue ink signatures. How does one
show that the “signature” was the act of the person who purportedly signed the document or clicked the
radio button in an online form? Section 9 of UETA provides that an electronic record or electronic
signature is attributable to a person if it was the act of the person. The act of the person may be shown in
any manner, including a showing of the efficacy of any security procedure applied to determine the
person to which the electronic record or electronic signature was attributable.
The group discussed the types of records that can be electronic signatures. Since the laws depend
on intent, almost any record or transmission that can be retained, retrieved and reproduced can work.
Almost anything can be an electronic signature, if all persons agree to the use of electronic signatures.
Thus a stored voice mail message and a screen shot of a text message can be electronic signatures. Use of
commercial electronic signature platforms such as DocuSign will provide greater security, however.
Participants also discussed delivery requirements for director and equity holder consents. In
Delaware, for example, a consent from a stockholder is not valid unless delivered to the corporation. One
participant observed, however, that not many practitioners wait until a consent is filed with the
corporation before deeming the consent effective.
The group then discussed the implications of electronic signatures for opinion givers. For
example, when there is not explicit consent to use electronic signatures, how does the opinion giver
determine that the signatures are effective? Can the opinion giver assume such consent for purposes of
giving an execution and delivery opinion? Further, how does an opinion giver know who signed and
whether they intended to create a contract? If a document is actually signed in blue ink, but is delivered
by fax or email (with a PDF attachment), how does one prove execution and delivery? Perhaps a followup email that confirms the signature and delivery will suffice, but how would an opinion giver know who
actually sent the email? The general consensus of the group was that the same level of comfort and
diligence that an opinion giver uses to give an opinion on execution and delivery of a blue ink signature
(when the signature does not occur in the presence of the opinion giver) should also apply to an electronic
signature.
One participant asked about governing law. What if a document is signed in Massachusetts (a
UETA state) and faxed to New York (which has adopted ESRA)? There did not appear to be a consensus
on this issue although no one in the group identified any reason to believe that ordinary contract choiceof-law rules should not apply.
As is often the case, there were more questions than answers, but the session proved to be very
informative.
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2.
“The Opinion Shop”: Farming Out Real Property and Other Opinions by Law Firms:
Current Practice?
Charles L. Menges, McGuireWoods LLP, Richmond, Co-Chair
David L. Miller, Pillsbury Winthrop Shaw Pittman LLP, McLean, Co-Chair
David R. Keyes, Kelly Hart & Hallman LLP, Austin, Reporter
The Co-Chairs began this discussion session by sharing a recent experience from a large (approx.
$80mm) real estate loan transaction involving real estate located in Virginia. The borrower’s transaction
counsel was a large law firm with multiple offices, including in New York and Los Angeles. That law
firm announced that it no longer issued third-party closing legal opinions on these types of transactions.
It recommended a California boutique law firm—which in the meeting we called an “opinion shop”—that
offers to provide opinion letters to others, even though the lead counsel was entirely qualified to issue the
opinion letters.
This was a surprising situation because the lead counsel refused even though the opinion letter
was routine and would have covered the typical matters such as corporate power and authority and
enforceability. The opinion shop law firm covered all the corporate and enforceability opinion points, as
well as local counsel matters pertaining to the Virginia real estate.
The Co-Chairs distinguished the opinion shop from the long established practices whereby law
firms occasionally refer (i) real estate or other local-law matters to counsel in the relevant jurisdiction or
(ii) matters requiring specialized expertise, such as a regulatory opinion. In contrast, the opinion shop,
although it is not involved in the transaction, offers to render all the opinions that the lead transaction
counsel would ordinarily render.
One of the Co-Chairs had previously raised this subject in a ListServ, asking if others had run into
this opinion shop practice. The responses did not indicate awareness of this, and so the purpose of this
WGLO discussion was to ask the participants if they had encountered an opinion shop situation.
Although there were one or two anecdotes, essentially none of the 15 or so attendees had experienced a
transaction where the lead counsel farmed the entire opinion letter out to an “opinion shop.”
The group discussed the pros and cons of an opinion shop practice, were it to develop. Although
no one recommended the practice, one observation was that using an opinion shop might affect the
assumptions that could be made in an opinion letter. Where lead counsel might know of some issue that
would prevent it from making an assumption necessary to support an opinion, an opinion shop would not
be familiar with the client or the documents and might more likely be able to rely on customary
certificates of officers or public officials or on representations in the documents to support the opinion.
The group thought that risk management considerations might prompt some lead counsel to farm
out the opinion letter. Typically, a relatively small amount of the final legal bill is allocated to work on a
legal opinion, but if a transaction fails and litigation ensues, a legal opinion letter is increasingly likely to
become a litigation focus.
The group also touched on the advisability of counsel for the opinion recipient agreeing to accept
an opinion letter from an opinion shop. Should counsel for the opinion recipient refuse to accept an
opinion letter from an opinion shop and instead insist that the borrower’s lead counsel provide the
customary opinions? What due diligence, if any, should the recipient’s counsel do regarding the opinion
shop? No one in the discussion session expressed the view that bringing in an opinion shop would always
be inappropriate. There was general agreement that counsel for an opinion recipient would want to
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inquire and learn why lead counsel is declining to render an opinion and is recommending an opinion
shop.
In summary, none of the attendees were of the view that opinion shops are a coming development
in opinion practice, although there was general acknowledgment that we might see more of opinion shops
going forward, and there was speculation—but no conclusions—as to the reasons for using opinion shops
to provide the opinion letter in lieu of the customary lead counsel opinion letter.
3.
Opinions to Clients
Linda Hayman, Skadden Arps, Slate, Meagher & Flom LLP, New York, Co-Chair
Dina Moskowitz, Standard & Poor’s Rating Services, New York, Co-Chair
A. Mark Adcock, Moore & Van Allen PLLC, Charlotte, North Carolina, Reporter
This discussion focused on giving an opinion to the opinion giver’s own client.
Several participants noted that lawyers routinely give opinions to their own clients in a variety of
contexts. The focus of this discussion, however, was at the request of the client, the giving of a formal
opinion letter to the opinion giver’s own client, with the same sort of formality as typically used in a
third-party opinion letter.
During a broad and wide-ranging discussion, a range of views and observations was shared:

With respect to tax and patent issues, as well as in European practice, it is quite common
to give a formal legal opinion letter to one’s own client.

If a client requests a formal opinion letter, some opinion givers ask the client the purpose
of the formal opinion letter. If the purpose is to share the opinion letter with a third party,
then the attorney-client privilege may be waived and the opinion giver may want to
caution the client about such waiver. In addition, the third party to whom the opinion is
shown might rely on the opinion and bring a claim against the opinion giver for negligent
misrepresentation.

The opinion giver cannot assume that third-party opinion literature is applicable. If, as is
often the case, the client is not represented by separate counsel, then, for example, thirdparty opinion “customary practice” may not apply because the client may not be familiar
with customary practice. Even if the client is represented by internal counsel familiar
with third-party customary practice, it may not apply unless the opinion letter expressly
invokes customary practice (since an opinion to a client is not a third-party opinion).

Opinion givers owe a greater duty to a client than to the recipient of a third-party opinion.
For that reason, the opinion giver may be required to give additional advice and
disclosures beyond what the client requested. For example, areas of law excluded by
customary practice from the coverage of a third-party opinion (such as tax and antitrust)
would not necessarily be excluded from the scope of the opinion giver’s responsibilities
to its own client.

The opinion giver should consider whether the scope of the engagement is broader than
the scope of the opinion letter. For example, if the scope of the engagement letter is
broader (and the opinion does not expressly refer to the engagement letter for purposes of
narrowing the scope of the opinion), then the client might later rely on the scope of the
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engagement letter for purposes of bringing a malpractice claim on the basis of the
opinion. The broader scope of the engagement letter may prevent the opinion giver from
obtaining summary judgment on any claim brought under the opinion letter.

One participant noted that his firm had a “treaty” with a long-standing client. The treaty
specified what particular phrases in an opinion letter mean, and the assumptions and
exceptions applicable to the opinion.

One participant noted that in one case an opinion giver rendered the opinion that the
documents prepared in the closing conform to the requirements of the credit agreement.
It turned out that the “true sale” opinion delivered by another law firm was wrong. The
client sued its counsel on its opinion, and the malpractice insurer paid to settle the claim.

It was recommended by the ALAS representative participating in the session that counsel
keep careful records as a jury might think “I don’t recall” is code for “My answer would
be bad for me.” It was also noted that despite a statement of assumed facts, some judges
sometimes expect the opinion giver to have conducted some diligence to verify the
assumed facts.

Despite the additional risks in giving a formal opinion letter to a client, none of the
participants had ever been sued by a client on an opinion letter and only one had been
fearful of being sued.
PANEL SESSIONS I:
1.
10b-5 Letters – Negative Assurance in Securities Offerings
Rob Evans, Shearman & Sterling LLP New York, Chair
Julie M. Allen, Proskauer Rose LLP, New York
Adam T. Greene, Vice President and Assistant General Counsel, Goldman, Sachs & Co.,
New York
Michael Kaplan, Davis Polk & Wardwell LLP, New York
Robert S. Risoleo, Sullivan & Cromwell LLP, Washington, D.C.
Thomas W. Yang, Managing Director and Associate General Counsel, Bank of America
Merrill Lynch, New York
E. Carolan Berkley, Stradley Ronon Stevens & Young, LLP, Philadelphia, Reporter
Negative assurance letters differ in many respects from typical third-party opinion letters in both
format and purpose. The letters are delivered to the underwriters by counsel to the issuer as well as
counsel to the underwriters at the closing of a securities transaction and state that the law firm conducted
an investigation related to the offering document, and that nothing came to the firm’s attention to cause it
to believe that the disclosure contained any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the circumstances under which they
were made, not misleading. A negative assurance letter is not, however, a representation or warranty of
the law firm as to the accuracy of the disclosure.
The panel laid the framework for the discussion with an overview of liability under the Securities
Act of 1933, the source of the language for the negative assurance. The 1933 Act establishes a disclosure
regime, and participants in a public offering of securities, other than the issuer, have a due diligence
defense.
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The key is that the law firm giving the negative assurance is expected to conduct a reasonable
investigation and, in giving the negative assurance, helps establish that the underwriters also undertook a
reasonable investigation. The panel noted that liability under the letter attaches at the pricing of the
transaction and the closing is the last opportunity for the underwriters to avoid potential liability.
The written materials provided a discussion of typical carveouts that law firms take and the
theory behind those carveouts. Because certain carveouts, for example broad carveouts for all statistical
information, are becoming less common,1 it is good practice to discuss the scope of the negative
assurance letter in detail at the outset of the transaction. In this respect, the negative assurance letter
tracks good third-party opinion practice.
In order to illustrate the issues that arise in giving negative assurance, the panel worked through a
number of the hypotheticals included in the materials.
The first hypothetical addressed the incompleteness of information with respect to government
contracts because of required redaction of information in board minutes. Discussion of practical ways to
obtain comfort included a discussion of whether issuer’s counsel was permitted to review unredacted
versions of the minutes. It was noted that if the redacted information was material, a court likely would
not excuse the failure to include the material in the total mix of information that needed to be addressed in
the negative assurance. Consensus was that there would need to be at least an oral discussion with an
appropriate person to determine whether the redacted material included any information that could
negatively impact the issuer.
Other hypotheticals addressed the omission from consideration in the negative assurance letter of
documents incorporated by reference in the offering document and exhibits to those documents. Panelists
suggested that such documents should be reviewed and considered whether or not the firm giving the
negative assurance drafted the documents. The panel also discussed a hypothetical where the lawyer
found a mistake in the financials, which are normally carved out from the lawyer’s negative assurance.
As would be expected and consistent with third-party opinion practice, panelists stated that the firm
should have a discussion to determine the materiality of the mistake and not expect to hide behind the
carveout.
Other topics discussed, based on hypotheticals, included whether there is a need for one counsel
to cover the entire disclosure package, with acknowledgement of certain carveouts for tax or specific
regulatory matters, where the issuer is in a regulated industry. It was noted that, absent such an approach,
a concern arises as to whether there is a gap in the coverage of the negative assurance. In certain cases,
issuer’s counsel will cover negative assurance on the disclosure as a whole while other counsel may
prepare the summary of documents included within the disclosure.
Finally the panel stressed a strong bias for having two negative assurance letters issued by United
States counsel (by both issuer’s counsel and counsel for the underwriters) and, except in the case of a
well-seasoned issuer issuing debt, for the negative assurance from issuer’s counsel to be given by
outside counsel.
1
Carveouts for statistical information derived from the financial statement numbers continue to be common in
negative assurance letters. The accountants rather than the lawyers typically give comfort on the issuer’s financial
statements, and the notes and schedules thereto, which comfort often covers financial and statistical data derived
from the financial statements.
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2.
Current Issues and Practices Related to Opinions on the Issuance of Equity Interests
Stanley Keller, Locke Lord LLP, Boston, Chair
C. Stephen Bigler, Richards, Layton & Finger, P.A., Wilmington
Mark H. Burnett, Goodwin Procter LLP, Boston
Richard R. Howe, Sullivan & Cromwell LLP, New York
Anna S. Mills, Womble Carlyle Sandridge & Rice, LLP, Charlotte, Reporter
This panel discussed current practices and considerations in a number of areas involving opinions
on the issuance of corporate shares and other equity interests.
As an introduction, the panel reviewed the typical opinions on the issuance of corporate shares
(“The shares have been duly authorized and validly issued and are fully paid and non-assessable”) and
noted comparable opinions on the issuance of limited liability company interests and limited
partnership interests.
The panel discussed the issue of problems with the valid issuance of corporate shares under
Delaware law. Defective stock issues may be discovered when counsel is reviewing capitalization in
order to give an opinion in connection with later public or private offerings. Depending upon the type of
defect, problems might be cured by common law ratification, “do-overs,” curative mergers or even
bankruptcy. In some instances, Delaware courts have taken a strict view that the defectively issued stock
is void. In response, the Delaware General Corporation Law has been amended to add statutory
ratification alternatives in Sections 204 and 205. Section 204 provides a self-help process for ratification
that results in a conclusive presumption that the stock is valid and has been used for a variety of defects
because of its certainty. Section 205 provides a judicial track for ratification but has thus far not produced
significant results because Delaware courts have shown a reluctance to be involved. The panel also noted
that the Model Business Corporation Act is being updated to include similar ratification procedures.
The panel then considered how Section 204 ratifications affect opinion practice. Panelists felt
that it was not necessary to note expressly that an opinion relied upon a Section 204 ratification, though
references to documents reviewed may indicate that the process was used. Panelists also noted that a duly
authorized opinion can be given when the ratification is effective without waiting for the 120-day appeal
period to expire; however, if there is controversy regarding the ratification process, an opinion giver
might want to consider whether to disclose the possibility of a challenge or wait until the appeal period
has expired to give the opinion. It was noted that some non-Delaware lawyers have gotten comfortable in
some circumstances using the Section 204 procedure without relying on Delaware firms.
The panel then discussed how Section 630 of the New York Business Corporation Law might
affect nonassessable opinions. Historically, Section 630 has made the ten largest shareholders of a New
York corporation personally liable for compensation due to employees. Opinion practices have varied,
with some New York lawyers choosing to include in their opinions that stock is “fully paid and
nonassessable” an express reference to possible liability under NYBCL Section 630, but with other New
York lawyers not taking an exception for Section 630, in part on the basis that liability under Section 630,
since it is not pro rata, is not an assessment. Section 630 was amended in 2016 to extend this liability to
nonpublic foreign corporations when the unpaid services were performed in New York. 2 Although the
Governor’s signing message said that there were constitutional issues with the amendment, the Governor
has not proposed any curative legislation, and there is no controlling authority in New York addressing
2
See Dick Howe’s article on the 2016 amendments to Section 630 in the Winter 2015-2016 issue of the
newsletter (vol. 15, no. 2) at 11-12.
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any of the constitutional issues. Therefore, in the absence of controlling authority on constitutional
issues, New York lawyers have to consider how to deal with Section 630 when giving opinions on
Delaware and other non-New York corporation stock issuances. The panel noted that non-New York
lawyers giving opinions on non-New York corporations typically will not be covering New York law and
therefore will not address amended Section 630. However, if non-New York lawyers are covering
New York law, for example, because they are giving an opinion on the enforceability of an agreement
governed by New York law, they may need to consider Section 630. One way to exclude Section 630
would be to narrow the coverage limitation so that the reference to New York law does not apply to the
opinion on the stock of the non-New York corporation.
Finally the panel dealt with opinions that no registration is required under the Securities Act of
1933 for the issuance or resale of shares or other equity interests. The panel noted that exemptions for
resales have been less clear than the exemptions for share issuances, with opinions on resales often
relying on the so-called 4(1 ½) exemption. In December 2015, the Fixing America’s Surface
Transportation (FAST) Act added Section 4(a)(7) as a resale safe harbor. It provides an exemption for
resales to accredited investors if they receive certain information and there is no general solicitation. The
panel indicated that experience to date is that the availability of the Section 4(a)(7) safe harbor has not
affected practice in giving 4 (1 ½) opinions.
CONCURRENT BREAKOUT SESSIONS I:
1.
Current Opinion Practices in Connection with Section 316(b) of the Trust Indenture Act –
the Marblegate and Caesars Decisions
Senet S. Bischoff, Latham & Watkins LLP, New York, Co-Chair
David A. Brittenham, Debevoise & Plimpton LLP, New York, Co-Chair
Cynthia A. Baker, Chapman and Cutler LLP, Chicago, Reporter
This breakout session discussed current practices and considerations in giving opinions to
indenture trustees in connection with indenture amendments, as well as closing opinions to other
transaction participants, in light of Section 316(b) of the Trust Indenture Act, as amended (the “TIA”), as
interpreted by the Marblegate and Caesars Entertainment federal district court decisions. The discussion
focused in particular on the recently released Opinion White Paper relating to legal opinions implicating
TIA Section 316(b) (the “White Paper”).3
Decisions of the United States District Court for the Southern District of New York in the
Marblegate4 and Caesars Entertainment5 cases interpreted TIA Section 316(b) in a manner that
significantly departed from the widely understood meaning of that provision among practitioners, and
suggested that, in the context of a debt restructuring, Section 316(b) of the TIA protects more than the
legal right to receive payment of principal and interest. As a consequence, these cases introduced new
interpretive issues and disrupted established opinion practice. The White Paper indicates that, under these
cases, TIA Section 316(b) is implicated if (i) there is an indenture amendment that affects the “core”
payment terms, or (ii) there is a collective action on the part of the issuer and some or all of its creditors
3
The Opinion White Paper on Section 316(b) of the Trust Indenture Act was issued on April 25, 2016 by 28
leading U.S. law firms, and is attached as an Addendum to the Spring 2016 issue of the newsletter (vol. 15, no. 3).
4
Marblegate Asset Management v. Education Management Corp., 75 F. Supp. 3d 592 (S.D.N.Y. 2014); and
Marblegate Asset Management v. Education Management Corp., 111 F. Supp. 3d 542 (S.D.N.Y. 2015)
5
Meehancombs Global Credit Opportunity Funds, LP v. Caesars Entertainment Corp., 80 F. Supp. 3d 507
(S.D.N.Y. 2015); BOKF, N.A. v. Caesars Entertainment Corp., 2015 WL 5076785 (S.D.N.Y. 2015)
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that constitutes a “debt restructuring”6 that has the effect of impairing the ability of the issuer to make all
future payments of principal and interest to non-consenting noteholders when due. The White Paper
concludes that, absent unusual circumstances, a law firm should be able to render an unqualified opinion
to a trustee in connection with proposed amendments to an indenture of one or more non-core terms
(which could include amendments to material covenants) either (a) outside of the context of a “debt
restructuring” or (b) in the context of a debt restructuring where the opinion givers receive evidence
satisfactory to them that the issuer will likely be able to make all future payments of principal and interest
to the non-consenting noteholders when due after giving effect to the amendment and the related
transactions facilitated by the amendment. The White Paper further concludes that, absent unusual
circumstances, a law firm similarly should be able to render an unqualified legal opinion to other
transaction participants in these same circumstances (including in a transaction not involving an indenture
amendment).
The discussion in the breakout session focused on the White Paper, the issues in opinion practice
that led to its development, and some of the practical challenges of applying the analytical framework of
the White Paper in determining when (and which type of) legal opinion is appropriate in the context of an
amendment of, or other transaction involving, an indenture that is subject to the TIA or an indenture that
is not subject to the TIA but includes wording substantially similar to the text of TIA Section 316(b).
Participants noted that the White Paper helps clarify that if a transaction does not involve a debt
restructuring, then Marblegate and Caesars Entertainment do not apply and the law is what everyone
thought it was before the decisions. Since the Southern District decisions, opinion practice has been
complicated by the fact that some trustees, even for simple, non-restructuring amendments, have wanted
the issues raised by the cases specifically addressed in opinions delivered to them. Additionally, some
trustees have objected to reasoned opinions, expressing the view that reasoned opinions push the risk of
proceeding with an amendment onto the trustee. It was noted that because 28 leading firms were able to
agree (in writing) on the approach reflected in the White Paper, that consensus should help firms that
might be hesitating to provide opinions with respect to fairly straightforward amendments.
At the time of the breakout session, the White Paper had only been out a few weeks. Participants
shared that they had heard through law firms that represent trustees that the trustees were not offended by
the approach. It was noted, however, that it is not clear how trustees will respond to opinions that follow
the White Paper approach.
A substantial portion of the breakout session discussion focused on two of the more difficult
issues raised by the cases and discussed in the White Paper: (1) the factors to be considered in
determining whether a transaction or series of related transactions amounts to a “debt restructuring;” and
(2) the types of evidence that law firms will require to establish that the issuer will likely be able to make
all future payments of principal and interest to non-consenting noteholders when due.
Factors Indicating a Debt Restructuring. Participants in the breakout session noted that the
White Paper does not provide a great deal of guidance on what factors an opinion giver should take into
consideration to determine whether a transaction or a series of related transactions constitutes a “debt
restructuring.” The White Paper notes that the cases provide little in the way of guidance, but do suggest
that a debt restructuring is only implicated if the issuer is experiencing sufficient financial distress that,
absent debt modifications, it will likely be unable to pay its debts when due or will be likely to file for
bankruptcy. The White Paper goes on to suggest that particular attention should be given to transactions
involving releases of material guarantees, release of substantially all collateral, or transfer of substantially
6
Also referred to as a “debt readjustment plan” or an “out-of-court debt reorganization.”
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all assets. It was noted that Marblegate and Caesars Entertainment mention that the challenged
transactions resulted in a “complete impairment” leaving no hope or extremely little hope of repayment to
non-consenting bondholders.
The discussion raised other factors that might possibly be considered in evaluating whether a
“debt restructuring” is occurring, but reached no conclusion on whether those factors would or should be
determinative of the issue. The factors discussed included: (i) whether the debt is trading below par,
(ii) ratings actions, (iii) an exchange of debt below par, (iv) the participation of bankruptcy lawyers on
deal teams, (v) whether the transaction is isolated or involves a large portion of the capital structure, and
(vi) releases of guarantees (and whether those releases are expressly provided for in the indenture).
Several participants suggested that, when the relevant facts make it unclear as to whether a transaction
might involve a “debt restructuring,” the prudent approach would be for a law firm to require evidence of
the ability to pay in the future before providing an opinion.
Evidence of Ability to Pay in the Future. The White Paper makes it clear that, even in the context
of a debt restructuring, opinion givers can render unqualified opinions based on evidence satisfactory to
them that the issuer will likely be able to make all payments of principal and interest to non-consenting
bondholders when due. Breakout session participants raised a number of questions concerning the
practical difficulties that lawyers might encounter in reviewing evidence of future ability to pay. The
questions raised related not only to customary opinion practice but also to risk management and
assessment, and included the following: How much diligence will a lawyer or firm be able to do? Is it
the job of a lawyer to evaluate the ability to pay in the future? In what circumstances might a solvency
opinion or report be required before an opinion is given? What should the opinion giver do if it is not
satisfied with the evidence of solvency it has received? What approach should be taken if bankers or
financial advisors disagree? These questions were discussed but not resolved. It was noted, however,
that under customary practice, as reflected in the White Paper, opinion givers may rely on information
provided by an appropriate source unless reliance is unreasonable under the circumstances or the
information is known to the opinion preparers to be false. The White Paper goes on to state that opinion
givers are not responsible for independently assessing the accuracy of or analysis underlying the
conclusions set forth in a solvency certificate or third-party solvency opinion.
Participants were reminded to watch for additional developments in this area of the law, as
arguments in the Marblegate case were scheduled before the Second Circuit in May,7 and several class
actions are also pending that raise TIA Section 316(b) arguments relating to exchange offers made only to
qualified institutional buyers outside the context of an indenture amendment.
2.
Dealing with Unasserted Claims, Investigations and “Threats” in No-Litigation Opinions
and Audit Response Letters; Other Current Issues in Audit Response Letters
W. Eugene Magee, Butler Snow LLP, Jackson, Co-Chair
Thomas W. White, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., Co-Chair
Sharon A. Kroupa, Venable LLP, Baltimore, Reporter
Participants in this concurrent session discussed two primary topics: (1) dealing with government
investigations in audit response letters and (2) the emergence of a new electronic platform intended to
streamline the audit letter process. The group noted at the outset that auditors still request oral
confirmations or bring-downs despite all of the developed protocols with respect to audit letter responses.
7
Oral argument took place on May 12, 2016.
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A.
Government Investigations in Audit Response Letters
Reference was made to both (i) the Accounting Standards Codification 450-20 (“ASC 450”)
(formerly Statement of Financial Accounting Standards No. 5), which governs the accounting treatment
for contingencies, including requirements for accruing for and/or disclosing loss contingencies arising
from “litigation, claims, and assessments” and (ii) the ABA’s Statement of Policy Regarding Lawyers’
Response to Auditors’ Requests for Information, which addresses information to be furnished by lawyers
to auditors with respect to, among other matters, “overtly threatened or pending litigation” and unasserted
possible claims or assessments identified by the client and upon which the client has specifically
requested comment to the auditor. The participants noted that government investigations have become
more common, particularly in regulated industries, but also including antitrust and FCPA investigations,
and discussed whether a government investigation should be treated as an asserted or unasserted claim.
Tom White, the Chair of the ABA Business Law Section Audit Responses Committee, led the discussion
on this topic and suggested that receipt of a subpoena regarding a pending investigation does not in and of
itself give rise to disclosure. However, as the investigation develops, the attorney should take account of
all relevant facts and circumstances, including whether the client has commenced an internal
investigation, which could affect the likelihood of possible enforcement action. The consensus of the
group was that until an agency manifests an intention to bring a claim, no action has been “threatened”
and thus the investigation does not have to be reported to the auditors. Participants further noted that,
before that point, the investigation involves an “unasserted” claim, and attorneys are not permitted to
describe “unasserted claims” in audit letters, unless the client has requested that the attorney do so. The
group also generally agreed that the issue of whether any securities law disclosure is warranted in
connection with a pending investigation is a separate matter from the content of the audit response.
Participants discussed various scenarios that could arise in connection with a government
investigation. For instance, if the client launched an internal investigation and learned of significant
potential legal violations, it might be appropriate for the attorney to discuss with the client not only any
securities law disclosure obligations, but also whether the client should consider informing the auditors
about the investigation. Once a decision is made to disclose an ongoing investigation, the content of the
disclosure is generally minimal. The group discussed whether the decision to disclose an investigation in
an audit letter is ultimately that of the attorney or the client. That decision turns on whether the
investigation is an asserted or unasserted claim. The group generally agreed that there is definitely a
tension from a business perspective as to when auditors should be informed, but there was also consensus
that lawyers should try to address the question of disclosure of an investigation to the auditors early on in
the process.
The participants agreed that receipt of a Wells notice (or equivalent) by a client is generally
viewed as a trigger for audit letter disclosure, serving as evidence of a present intent by the government to
assert a claim or an overt threat to do so (even though some judicial decisions (including the Lions Gate
case discussed below) note that Wells notices by their terms only state the staff’s intention to recommend
enforcement action). Mr. White noted that sometimes the SEC staff has “pre-Wells” communications
which could warrant the same treatment, depending on how serious the government appears to be about
bringing a claim. He further noted that on occasion the SEC immediately moves to “settlement”
discussions and in this instance those discussions probably constitute an implicit and obvious “threat” that
should be considered when preparing audit responses. It was observed that clients can disclose to their
auditors that there is an investigation underway without getting into the merits of the investigation,
particularly when an internal investigation may have resulted in findings prior to any formal investigation
by the SEC. It was also noted that attorneys can discuss investigations known to the auditors if asked to
do so by their clients.
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The participants then discussed two recent court decisions which purported to interpret
ASC 450-20 in the context of investigations:

In re Lions Gate Entertainment Corp. Securities Litigation, 2016 WL 297722 (S.D.N.Y.
Jan. 22, 2016). The court in the Lions Gate case went to great lengths to hold that the company
had no affirmative obligation to disclose an SEC investigation in its public SEC filings until a
settlement agreement with the SEC had been reached. The court also concluded that receipt of a
Wells notice did not amount to a pending proceeding under Item 103 of Regulation S-K nor did
the SEC investigation constitute “pending or threatened litigation” for purposes of required
disclosure under ASC 450.

Indiana Public Retirement System v. SAIC, Inc., 818 F.3d 85 (2nd Cir. 2016). In this case
the Second Circuit reversed a district court dismissal of a claim based on SAIC’s failure to
disclose an investigation into a kickback scheme involving a contract with the City of New York.
The Second Circuit rejected the district court’s holding under ASC 450 that the claim was not
“probable of assertion” and instead held that if a plaintiff has manifested awareness of a claim, it
becomes “probable of assertion.” Mr. White noted that this case may be distinguished from a
typical government investigation because the claim was made by a third party (the City of New
York) as opposed to a government agency. Participants reiterated that attorneys still would not be
permitted to discuss unasserted claims in audit responses unless those claims had been identified
by the client to the auditors.
B.
Confirmation.com
In the second portion of the break-out session, Gene Magee discussed his firm’s recent
experience with an electronic platform for audit requests and response letters. Confirmation.com bills
itself as the “leading provider of secure online audit confirmations” and Mr. Magee’s firm was requested
to be a beta-test firm along with nine other law firms and several CPA firms to test and evaluate the
online audit confirmation platform. Mr. Magee summarized his firm’s experience for the session
participants. In order to use the platform and receive audit letter requests electronically, attorneys must
set up an account on the Confirmation.com website. There is no charge to law firms to respond using the
platform and firms are now able to use their individual firm response (particularly since it became evident
that standardized responses are not workable). Several changes to the electronic response platform were
recommended as a result of the trial experience, including with respect to the effective and response dates,
the identification of covered subsidiaries and disclaimers of the privilege waiver.
The ABA Business Law Section’s Audit Responses Committee has also engaged in conversations
with Confirmation.com and has established a working group to identify some of the more widespread
concerns with the platform in order to constructively assist Confirmation.com in addressing participants’
concerns. Identified issues include, among other items, the use and verification of client e-signatures, the
ability to access data on the Confirmation.com website, the website user agreement, and the impact on the
attorney/client privilege. The ABA working group will work with Confirmation.com as the process
evolves but does not intend to take any position regarding the advisability of using the electronic
platform. The Co-Chairs of this session confirmed that the platform is intended primarily to facilitate
dissemination of the audit request letter and not to systematize how the responses must come back from
attorneys (i.e., hard copy responses sent directly to the auditor remain acceptable).
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3.
Discussion of Selected Issues in the Proposed Local Counsel Report
Frank T. Garcia, Norton Rose Fulbright US LLP, Houston, Co-Chair
Philip B. Schwartz, Akerman LLP, Miami, Co-Chair
William A. Yemc, Richards, Layton & Finger, P.A., Wilmington, Co-Chair
Kenneth M. Jacobson, Katten Muchin Rosenman LLP, Chicago, Reporter
This breakout session began with an introductory description of the principles-based report (the
“Local Counsel Report”) that is currently being drafted by a joint WGLO-ABA working group to provide
guidance to local counsel in addressing issues that often arise in local counsel opinion practice.
The LOCO Report
Following the introduction, William B. Dunn, Clark Hill PLC, Grand Rapids, Michigan, provided
an overview of the soon-to-be published report, “Local Counsel Opinion Letters in Real Estate Finance
Transactions-A Supplement to the Real Estate Finance Opinion Report of 2012” (the “LOCO Report”).
The LOCO Report was jointly promulgated by the Committee on Legal Opinions in Real Estate
Transactions of the Section of Real Property, Trust and Estate Law of the American Bar Association, the
Opinions Committee of the American College of Mortgage Attorneys, and the Opinions Committee of the
American College of Real Estate Lawyers.
The LOCO Report was drafted as a practice guide for local counsel who deliver opinions in real
estate finance transactions. It observes that neither the role of local counsel nor the scope of their
opinions can be categorically defined, and that assembling an opinion letter is a process of selecting from
a variety of choices to create a meaningful and appropriate response relative to the role of the opinion
giver. It includes an illustrative opinion form for use in real estate financing local counsel opinions, with
suggested language for assumptions, opinions, and limitations that relate to varying roles and topics. In
addition, the LOCO Report provides more specifics and details compared to the contemplated principlesbased Local Counsel Report, including the LOCO Report’s discussions on such topics as choice of law;
“as if” opinions (related to choice of law issues); potential implicit opinions in connection with
enforceability opinions; distinctions between documents provided for review and opinion versus other
transaction documents; recording documents and the effect of recording; the need for governmental
approvals; the effect of the exercise of remedies; and whether the real estate documentation includes all
“essential” remedies. The LOCO Report is intended to be observant and descriptive, rather than
normative, although it reflects the thinking on these topics of the organized real estate legal opinions bar,
while recognizing the influence of local law and practice.
Selected Issues in the Local Counsel Report
Following the presentation on the LOCO Report, a discussion began on the following selected
issues that have arisen in the course of drafting the Local Counsel Report: (i) client consent to issue the
opinion letter; (ii) conflict of interest resolution; (iii) engagement letters; and (iv) identifying the “client”
of local counsel.
Client consent. Initially, it was noted that the Rules of Professional Conduct do not always align
with local counsel opinion practice and are not uniform in all jurisdictions. One participant noted that it is
unlikely that the professional conduct rules can or will be modified to facilitate issues of the local
counsel-related opinion practice and a discussion ensued about whether that is the case.
ABA Model Rule 2.3 addresses, in part, when client consent is required before counsel can
deliver an evaluation of a matter affecting the client (e.g., a legal opinion) to a third party. That rule, in
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varying forms, has been adopted in substantially all states. The participants noted that formulations of
Rule 2.3 address client consent in two ways: (i) requiring counsel to receive informed consent from the
client before providing the opinion in all cases vs. (ii) requiring counsel to receive informed consent from
the client before providing the opinion only if the opinion is likely to affect the client’s interest materially
and adversely. There was an observation that it may not always be clear as to what is material and
adverse to a client’s interest. It was further observed that the client’s interest may be materially and
adversely affected if counsel cannot deliver its legal opinion on behalf of the client without
communicating to the opinion recipient a flaw in the transaction document which, if uncorrected, would
be beneficial to the client. In this context, it was observed that disclosure of such an issue to, and
approval of such disclosure by, lead counsel should be sufficient, since the lead counsel is presumably the
agent of the client. This discussion of Rule 2.3 emphasizes the need for counsel to consult the rules of
professional conduct that have been adopted in its state.
Assuming consent is required to deliver the opinion letter, the participants discussed the nature of
the requisite consent when the client does not expressly authorize its consent in an engagement letter or
otherwise. A healthy discussion ensued. Some participants believed that such consent may be inferred
from a provision in a transaction document conditioning the closing on delivery of the opinion, and
further noted that various bar reports and legal opinion commentators have previously expressed that
same position. Other participants disagreed with that position and noted, among other things, that issues
could arise because the client signatory may not be aware of that condition-to-closing provision or may
not be aware of the contents of the opinion, or both, and that the concepts of “informed consent” and
“inferences” may not be compatible. However, there was a general consensus that one means of
obtaining formal consent from the client should be obtaining the consent of the client’s lead counsel. One
participant suggested, which point was supported by many participants, that the Local Counsel Report
should develop clear support for the authority of lead counsel to act as agent for the client to, among other
things, provide informed consent, when necessary, upon which local counsel may rely.
Conflicts of interest. ABA Model Rule 1.7 provides, in part, that a lawyer cannot represent a
client if representation would be “directly adverse” to another client, without, among other things,
obtaining written informed client consent. While this rule has been adopted in different forms in many
states under the Model Rule (and practitioners should review the governing rules in their state), a conflict
may arise if local counsel is engaged to provide an opinion as borrower’s local counsel, but represents one
or more of the opinion recipients in other, unrelated matters. In the context of local counsel opinions,
local counsel’s representation of the borrower may arguably be adverse to those recipients under the
Model Rules of Professional Conduct. A participant questioned whether this situation might be avoided
if local counsel were to agree to act as local counsel to the lender or, perhaps, to the transaction; however,
responsive observations were made that any such position would be inconsistent with the general practice
of local counsel being engaged by, and acting at the direction of, the client or client’s lead counsel, and
not the opinion recipient. One participant questioned whether local counsel is truly adverse to a thirdparty opinion recipient in the circumstances where local counsel, in its customary, limited participation
and role in delivering a local counsel opinion, is neither advising the client on the transaction nor
advocating or otherwise negotiating the client‘s position against any recipient.8 A number of participants
suggested that, because there is no clear answer, it is important that the Local Counsel Report present the
view of the organized legal opinion bar on this topic.
8
The same question might be raised more generally as to borrower’s lead counsel in syndicated loan transactions,
since borrower’s counsel rarely advocates or negotiates against opinion recipients other than the agent bank through
its counsel.
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A discussion then ensued on situations where local counsel is able to provide an enforceability
opinion on behalf of its client because the documents “work,” but the documents are not the “best.” The
consensus was that local counsel is not required to make the documents better if the documents otherwise
“work” under the law of their state. There was an observation, however, that this might be an issue if
local counsel agrees to provide an opinion that all “essential” remedies are included in the documents.
Engagement letters. The need for and use of engagement letters were briefly discussed.
Professional conduct rules in some jurisdictions require practitioners to receive engagement letters in
connection with undertaking their engagements, and many lawyers require engagement letters even if
there are no such rules. Receiving engagement letters prior to the delivery of a local counsel opinion
letter is often difficult because of the fast-track nature of many transactions with limited time to review
related documents and prepare the opinion letter. Some participants observed that opinion givers
sometimes meet with resistance to requests for engagement letters. While no consensus emerged on
whether a practitioner should receive an engagement letter prior to the delivery of its opinion letter, some
participants expressed the view that where the opinion giver believes it needs an engagement letter, an
opinion can be delivered if the opinion giver has reasonable comfort that the engagement letter will be
forthcoming. It was observed that local counsel and lead counsel are generally reluctant to have an
engagement letter signed by lead counsel, as agent for the client, since, among other things, financial
responsibility for payment of local counsel’s fees is solely the obligation of the client (absent unusual
circumstances). It was further observed that while an engagement letter would address many preliminary
concerns in an engagement, obtaining such a letter prior to delivery of the local counsel opinion letter is
often not possible.
Who is the client? Due to limited remaining session time, this topic was not fully discussed.
However, the preliminary consensus was that local counsel’s client is, at a minimum, the party requesting
it to deliver the opinion. Among other things, however, it remained unclear whether that party might be a
parent company vs. its subsidiary, or both, where the opinion covers only the subsidiary. It was suggested
that how the subsidiary is referred to, or how the client is identified, in the introductory paragraph of the
local counsel opinion letter will affect the answer to this question.
PANEL SESSIONS II:
1.
Recent Opinion Developments
(Summarized by John B. Power)
John B. Power, O’Melveny & Myers, LLP, Los Angeles, Moderator
William B. Dunn, Clark Hill PLC, Grand Rapids
Donald W. Glazer, Newton, Massachusetts
Timothy G. Hoxie, Jones Day, San Francisco
Stanley Keller, Locke Lord LLP, Boston
Steven O. Weise, Proskauer Rose LLP, Los Angeles
A. Bar Reports
Chart of Recent Published and Pending Reports. John Power referred to the Chart of Recent and
Pending Bar Association Reports in the program materials, noting the addition of a pending white paper
on opinions on risk retention in securitization transactions jointly sponsored by the ABA Business Law
Section’s Securitization and Structured Finance Committee and Legal Opinions Committee, and the white
paper by twenty-eight law firms on opinions on Trust Indenture Act Section 316(b) (see below).
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Statement of Opinion Practices. Stan Keller and Steve Weise reported on the Statement of
Opinion Practices sponsored jointly by WGLO and the ABA Business Law Section’s Legal Opinions
Committee. Stan is a co-chair of the joint committee responsible for the Statement, and Steve is the
reporter for the Statement. The other co-chair is Ken Jacobson, and Steve Tarry and Pete Ezell are coreporters. Stan and Steve reported that the March 31, 2016 exposure draft of the Statement has been
approved by each of the Board of Directors of WGLO and the Legal Opinions Committee for distribution
to bar association and other opinion groups around the country. The hope is that many of these groups
will approve the Statement in its eventual final form.
The Statement is an effort to state concisely selected customary and other opinion practices so
that it may be used by opinion givers and recipients and others as a basis for understanding opinion
practice. It is based on the ABA Principles and some provisions of the ABA Guidelines. Stan and Steve
said that consideration is being given to also preparing a short statement of core principles drawn from the
Statement, which could more easily be incorporated into or attached to opinion letters. Separately, the
joint committee proposes to continue its work by considering additional provisions that might be included
in an extension of the Statement. Members of the panel indicated that the Statement and the collaborative
work of the joint committee are important developments in the effort to achieve a national consensus on
legal opinions.
Third-Party Closing Opinions: California Limited Liability Companies and Partnerships. Tim
Hoxie summarized a pending joint report by the California Business Law Section’s Opinions and
Partnerships and Unincorporated Associations Committees on third-party closing opinions on California
limited liability companies and general and limited partnerships. According to data supplied by the
California Secretary of State cited in the report, vastly more LLCs are formed in California than limited
partnerships.9
The sponsoring committees have approved an exposure draft of the report which addresses
opinions on California LLCs and partnerships and also provides an overview of other opinions not unique
to those entities.10 This will permit opinion preparers to use the report and a related sample opinion to
draft a complete closing opinion without reading other California reports unless a specific opinion raises
issues requiring special attention.
Tim mentioned issues that received particular attention in the report, focusing particularly on the
valid issuance opinion. TriBar and California reports state that opinions on the due authorization of
corporate preferred stock cover not only compliance with procedural requirements of the corporate statute
and charter, but also confirm that the “terms” of the stock do not violate the statute and the charter.
TriBar carried that principle over to valid issuance opinions on LLC membership interests in its recent
report on opinions on LLC interests.11 The draft California report generally accepts that view for opinions
on interests in California LLCs and partnerships. In doing so, however, it recognizes that some lawyers
may have difficulty distinguishing those provisions of an operating or partnership agreement that are
integral “terms” of the membership or partnership interests from other provisions setting forth the
contractual rights and duties of the parties. Consequently, reflecting the view of the drafting committee,
the draft report defines “terms” to mean distribution and voting rights, thus clarifying that the validly
9
No data is available on general partnerships.
10
The exposure draft is available from the Legal Opinion Resource Center maintained by the Legal Opinions
Committee at http://apps.americanbar.org/buslaw/tribar/ under “Meetings and Other Materials.”
11
TriBar Opinion Com., Supplemental TriBar LLC Opinion Report: Opinions on LLC Membership Interest,
66 Bus. Law 1065, 1066-1068 (2011).
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issued opinion does not cover statutory restrictions on other provisions of an operating or partnership
agreement.
Real Estate Report on Local Counsel Opinions. Bill Dunn discussed a forthcoming Supplement
to the 2012 Real Estate Finance Opinion Report by the ABA Section of Real Property, Trust and Estate
Law, the American College of Mortgage Attorneys, and the American College of Real Estate Lawyers.
The topic of the Supplement is Local Counsel Opinions in Real Estate Finance Transactions, and a
prepublication review version was included in the panel materials. The Supplement, which has been in
the drafting process since early 2013, has been accepted for publication in the Fall 2016 issue of the ABA
Real Property, Trust and Estate Law Journal. It is intended to serve as guidance to local counsel in
providing responsive but limited local counsel opinions.
The subject of local counsel opinions has been little discussed in national opinion reports. In the
style of the 2012 report, the Supplement examines common opinion subjects and suggests adjustments to
opinion language, assumptions and limitations consistent with local law and practice. Bill noted that
work is also underway on a report on local counsel opinions by a joint committee of WGLO and the ABA
Business Law Section’s Legal Opinions Committee. That report will stress discussion of principles
whereas the Supplement focuses on opinion letter language, consistent with the 2012 report. Although
the two reports follow different paths, they are expected to be compatible companions, and there is an
overlap of membership between the two drafting groups.
B. Lightning Round of Developments
FAS 5: Indiana Public Retirement System vs SAIC, Inc., 818 F.3d 85 (2d Cir. 2016). Stan Keller
briefly described the SAIC decision and its relevance to audit responses. The Second Circuit reversed the
district court’s dismissal of claims based on SAIC’s failure to disclose a federal criminal investigation
into a kickback scheme involving a large contract with the City of New York. The Appeals Court found
that the plaintiffs had made sufficient allegations of a violation of ASC 450-20 (formerly FAS 5). It
rejected the district court’s holding that ASC 450-20 does not require disclosure of an unasserted claim
“unless it is considered probable that a claim will be asserted,” stating that “[t]he ‘probability’ standard
applies in lieu of the ‘reasonable possibility’ standard only if the loss contingency arises from ‘an
unasserted claim or assessment when there has been no manifestation by a potential claimant of an
awareness of a possible claim or assessment.’” The court found that the “reasonable possibility” standard
applied in view of the plaintiff’s allegation that by the time of the financial reports in question, the City of
New York had, through public statements by Mayor Bloomberg, manifested an awareness of a possible,
sizeable claim against SAIC. Stan noted that many lawyers have analyzed similar situations as involving
an unasserted claim, and have then taken into account the claimant’s awareness as a factor in assessing
the probability of assertion and therefore the need for client disclosure. The SAIC court’s approach
changes that analysis but it is unlikely to have a significant effect since a claimant’s awareness has
usually resulted in a conclusion that assertion of the claim is probable and therefore, assuming the claim is
material, has to be disclosed.
Causation in a Malpractice Action: Excelsior Capitol LLC v. K&L Gates LLP, 138 A.D. 3d 492,
29 N.Y.S.3d 320 (A.D. 2016). Although this malpractice case was not about an opinion, Don Glazer
described it as a helpful reminder that, for a plaintiff to win an action against a lawyer, the plaintiff must
prove not only that the lawyer was negligent and the plaintiff incurred actual damages but also that the
lawyer’s negligence was the proximate cause of the plaintiff’s damages. Applying the decision to a claim
for negligent misrepresentation against an opinion giver, Don noted that for an opinion recipient to win it
must establish not only that the opinion was wrong and negligently prepared but also that the error
actually caused the recipient’s damages. Don then pointed out that a recipient would be unable to
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establish the requisite causation if it did not reasonably rely on the opinion letter, which it would not have
done if it knew the opinion was wrong or that the opinion giver was not competent to give it.
White Paper on Opinions Involving § 316(b) of the Trust Indenture Act. Steve Weise discussed
the white paper prepared by twenty-eight law firms providing guidance on opinions covering
Section 316(b) of the Trust Indenture Act in light of the Marblegate and Caesars decisions. An entire
breakout session was devoted to this topic at the WGLO Spring Seminar. See the summary of the
breakout session entitled “Current Opinion Practices in Connection with Section 316(b) of the Trust
Indenture Act – the Marblegate and Caesars Decisions” at pages A-8 – A-10 of this Addendum.
2.
Opinion Implications of Article 55 of the EU Bank Recovery and Resolution Directive (the
“EU Bail-in Rule”)
Ettore A. Santucci, Goodwin Procter LLP, Boston, Chair
Sandra M. Rocks, Cleary Gottlieb Steen & Hamilton LLP, New York
Bridget Marsh, Loan Syndications and Trading Association, New York
Miranda S. Schiller, Weil, Gotshall & Manges LLP, New York
Adam W. True, Deputy General Counsel, Natixis North America LLC, New York
James R. Silkenat, Sullivan & Worcester LLP, New York, Reporter
This panel discussed the newly effective (January 1, 2016) EU Bank Recovery and Resolution
Directive (“BRRD”) that has been adopted by most of the 31 members states of the European Economic
Area (“EEA”). The BRRD creates a structure for regulators in EEA countries to deal with financially
troubled European financial institutions. Such actions by regulators could include the imposition of
losses on creditors of such financial institutions in order to prevent taxpayer funded bail-outs. This means
that the regulators can write-down, reform the terms of, cancel and convert into equity the liabilities of
these financial institutions.12
An equally important aspect of the BRRD is that it requires financial institutions in the EEA to
include, in contracts that are governed by any law other than that of an EEA country, express provisions
(“bail-in provisions”) recognizing the right of European regulators to exercise their powers under the
BRRD. As a result, almost all contracts entered into or amended after January 1, 2016, under which an
EEA financial institution has a “liability,” must include a bail-in provision. This covers an enormously
broad set of agreements, including loan agreements, bond issues, letters of credit, derivatives and custody
agreements. Exceptions to what constitute “liabilities” of EEA financial institutions that are subject to
actions by the regulators under the BRRD are very limited.
The form of the bail-in provision to be included in those contracts and agreements is not
specifically set out in the BRRD, but numerous forms have now been adopted by affected financial
institutions. A particularly relevant consideration is that an EEA financial institution can be required to
furnish to its regulator a legal opinion confirming that the bail-in provision is binding in the jurisdiction
the governing law of which governs the agreement. The panel did not discuss at any length legal opinions
from counsel to EEA financial institutions concerning the BRRD, but focused instead on the EU bail-in
arrangements as they relate to third-party closing opinions. In this context there are at least five
approaches identified by the panelists that can be used by counsel in preparing such opinions:
12
For additional discussion of the EU Bail-in Rule, see “Implications of the European Bail-In Legislation for
Opinions on Credit Facilities in the United States” and related commentary in the Spring 2016 issue of the
newsletter (vol. 15, no. 3) at 11-22.
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
express exclusion of the enforceability of the contractual recognition provisions themselves
from the coverage of the remedies opinion;

reliance on the standard bankruptcy exception;

reliance on the standard equitable principles limitation;

a targeted exception that expressly excludes from the coverage of the remedies opinion the
effects on enforceability of the agreement following bail-in action pursuant to the bail-in
provision; or

refusal to give a remedies opinion on an agreement that includes bail-in recognition
provisions.
Some U.S. lawyers wonder whether a New York (or other U.S.) court might view the contractual
grant of powers to a European regulator to alter a contract as it elects to be so one-sided as to limit the
enforceability of the agreement in general. Other U.S. lawyers, however, view the enforcement of
provisions implementing the bail-in rule as an ordinary application of contract law, subject to
applicability of the bankruptcy or equitable principles limitations.
CONCURRENT BREAKOUT SESSIONS II:
1.
Back to Bring-down Opinions
Sylvia Fung Chin, White & Case LLP, New York, Co-Chair
Sandra M. Rocks, Cleary Gottlieb Steen & Hamilton LLP, New York, Co-Chair
Richard N. Frasch, Opinions Committee, Business Law Section of the State Bar of California,
San Francisco, Reporter
This breakout session considered developments in the field of “bring-down” opinions building on
the work done in a prior breakout session led by Willis R. Buck, Jr. and Stephen C. Tarry. The prior
discussion was framed in terms of three general types of bring-down opinions: opinion reliance letters,
monitoring bring-down opinions and additional event bring-down opinions. This session subdivided the
field further to reassess whether there is sufficient interest in preparing sample bring-down opinion forms
and to determine what overarching principles might be developed to guide practitioners in this area. The
co-chairs noted that TriBar has agreed to take up this subject for a possible report, and the input of this
breakout session was intended to be a key resource in shaping that endeavor.
The session then briefly considered the following attributes that characterize bring-down
opinions:

First, any third-party legal opinion delivered in connection with a transaction that closed
previously, without regard to the scope of the additional advice.

Second, opinions required by virtue of applicable law or regulation – e.g., annual
opinions mandated by the Trust Indenture Act of 1939 (Section 314(b)) – as well as
opinions required/requested by transaction documents or transaction parties.
It was generally acknowledged that a uniform practice does not seem to have developed in this
area and there is little guidance available from published reports or treatises. Based on this limited
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guidance, the co-chairs stated that, when analyzing bring-down opinions, a good approach is to consider
first the following basic questions:

First, what do opinion recipients think they are asking for/think they are getting?

Second, what do opinion givers think they have been asked for/think they are giving?
The co-chairs then suggested that bring-down opinions might be categorized as follows:
1. Reliance letters, i.e., letters requested by parties brought into a transaction after an initial
closing who request a letter authorizing their reliance upon an opinion letter delivered at the original
closing of the transaction (such as later purchasers of bonds or loans).
2. Monitoring opinions such as those: (i) required under the Trust Indenture Act of 1939 or (ii)
required by rating agencies or creditors.
3. Additional event opinions, e.g., where an event occurs subsequent to the delivery of an
opinion and a creditor requests a bring-down opinion seeking comfort that the event does not affect the
conclusions expressed in the prior opinion. Such events can include: (i) post-closing perfection activity,
(ii) post-closing amendment of a credit agreement, (iii) post-closing joinder to a credit agreement, (iv)
post-closing amendment of a credit support agreement (e.g., a guaranty or security agreement), (v) postclosing joinder to a credit support agreement, and (vi) transfers or substitutions.
4. Special situations, e.g., where a new law firm has been brought into a financing transaction
after the closing and is requested to deliver the bring-down opinion.
One participant suggested that developing common formulations for such opinions could lead to
standard forms and could reduce the time and cost of negotiations of bring-down opinions. A variation
on this approach might be to have a “water fall” of standard opinions that would increase or decrease in
complexity with suggested procedures for diligence applicable to each level of complexity.
Another participant observed that sometimes the easier approach to avoiding the vague language
and unclear diligence procedures associated with issuing bring-down opinions is simply to reissue the
opinion in the form originally delivered at closing. A lively discussion ensued as to the problems of
“reissuing opinions” – such as getting current officer certificates, creating assumptions confirming that
the underlying facts have not changed since the issuance of the original opinion, and the need to check for
new case developments and revised statutes since the issuance of the original opinion.
Many agreed that one major practical problem associated with bring-down opinions is the cost
incurred in issuing them. A show of hands indicated that some firms but not many of the firms
represented in the group have developed standard bring-down opinion forms.
The session then considered whether firms commonly take an assumption that the original
agreement was enforceable at the time of the original opinion. A lively discussion ensued as to whether
such an assumption is appropriate, because it can be interpreted as assuming a major portion of the
opinion. One participant suggested that the appropriateness of the assumption often depends on the
nature of the fact pattern underlying the request for the opinion. After further discussion, there was
general consensus that the appropriateness of such an assumption depends upon the underlying fact
pattern and that any report would have to address how such fact patterns affect the appropriateness of
underlying opinion letter assumptions.
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There then ensued similar discussions of other assumptions and diligence procedures that may or
may not be appropriate such as: (i) assuming no intervening defaults since the date of the original
opinion, and (ii) the need to conduct new lien/security interest searches.
2.
Opinions Covering Performance of Agreements: Covering Each Provision? Limited to
“Core Items” of the Agreement? Other Solutions
Donald W. Glazer, Boston, Co-Chair
Timothy G. Hoxie, Jones Day, San Francisco, Co-Chair
Willis R. Buck, Jr., Sidley Austin LLP, Chicago, Reporter
A number of the standard opinions in a third-party closing opinion—the “power” opinion, the
“authorization” opinion, the “no consents and approvals” opinion and the “no violation” opinion—are
often stated as extending to the execution and delivery by the client of the agreements they cover and the
performance by the client of its obligations under those agreements. The performance component of
these opinions reaches beyond the formation of the contract or the closing of the transaction, and requires
the opinion giver to think about future activities that may bear on the opinion. This future aspect is not
unique to these opinions. For example, a remedies opinion covers the enforceability of the provisions of
the agreement over the term of the agreement, based on law, facts and circumstances as of the time of
closing. Increasingly, however, opinion givers have been thinking harder about the performance
component of the “building block” opinions and the extent to which it may cover future contingencies
that the opinion giver is not in a position to evaluate as of the closing date either at all or without
undertaking diligence and analysis that as a cost-benefit matter outweighs the value of the additional
comfort the opinion provides.
This breakout session used as its starting point the approach taken in the Sample California ThirdParty Legal Opinion for Venture Capital Financing Transactions issued recently by the Opinions
Committee of the Business Law Section of the State Bar of California (70 Bus. Law. 177 (Winter 20142015)) and also available online from the Legal Opinion Resource Center, under “State and Other Bar
Reports -- California.”13 The session contrasted the opinions presented in the California sample venture
capital opinion (which adopted a more restrained approach to performance related opinions) with those in
the California Sample Third-Party Legal Opinion for Business Transactions (2014) also issued by
California’s Opinions Committee, which took a more traditional view and included “performance” in the
formulation of the four “building block” opinions.14 Most of the conclusions described below are
consistent with the approach taken in the California sample venture capital opinion.
Given the established practice of addressing performance, at least to some extent, in the “building
block” opinions, as well as the future-looking element of the remedies opinion itself, participants came to
consensus fairly quickly that a wholesale removal of the performance component from the opinions is not
likely to take root. Rather, each of the opinions should be considered separately to determine whether the
inclusion of the performance component is problematic in ways that warrant exclusion or other limitation.
The consensus with respect to the “power” opinion was that coverage of the performance
component (e.g., “The [Borrower] has the [applicable entity] power to enter into and perform its
obligations under the [agreements]”) is not especially troublesome. This opinion means that the entity has
13
See http://www.americanbar.org/content/dam/aba/publications/business_lawyer/2015/70_1/report-legalopinion-201501.authcheckdam.pdf.
14
This sample opinion is also available in the Legal Opinion Resource Center under “State and Other Bar Reports
– California.” See http://apps.americanbar.org/buslaw/tribar/materials/2014_ca_opinion_marked.pdf.
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the power under the applicable entity law and its charter to perform its obligations under the relevant
agreements. Given the broad powers possessed by most entities formed under modern statutes, an
opinion giver should be able to address the performance component without extraordinary diligence, by
examining the applicable statutes, the charter documents and the terms of the agreements being covered.
Discussion turned next to the authorization opinion, which is generally understood to mean that
the entity has obtained the approvals it needs under its charter and by-laws (or other applicable
constitutive documents) and the statute under which it was formed to enter into and, if covered, perform
its obligations under the covered agreement. Here coverage of performance has the potential to cause
concern, especially if the agreement includes an obligation to take action in the future that might require
further approvals to effect. One example offered was a case in which a company agrees to repurchase its
equity interests from a counterparty upon the occurrence of a specified event. If in the future the
specified event occurs, the board of directors would likely need to adopt a resolution at that time
approving the repurchase. Similar issues can arise where the agreement provides for demand registration
rights or contains a mandatory merger provision contingent on future events or circumstances.
Participants noted that some agreements—for example, many commercial loan agreements—do not
contain obligations requiring future approvals. In those cases, expressly covering performance in the
opinion (as was done in the California sample business transactions opinion referenced above, which used
an unsecured loan as its model transaction) should not pose much difficulty. The consensus among the
participants was that the obligations in the covered agreements must be evaluated on a case-by-case basis
before agreeing to extend the “authorization” opinion to performance. The suggestion was made that
form opinions should exclude or at least bracket the performance component in the “authorization”
opinion and add an explanatory footnote to help assure that an appropriate transaction-specific evaluation
takes place.
A poll of the participants indicated that a minority routinely include performance in the “no
consents or approvals” opinion. The primary concern among the participants seemed to be that what
future performance of obligations under agreements might entail (some of which obligations might
themselves be contingent upon the occurrence of future events) would be beyond their knowledge as of
the closing date. To take one example, if as is common a loan agreement includes a covenant that the
company operate in compliance with law, would an opinion on performance mean that the company had
made all regulatory filings required to be made by the company over the life of the transaction? While
some of the matters covered by performance could be managed by assumptions—e.g., that all routine
business filings will be made—doing so would undercut or even negate the value of the opinion. The
consensus that was emerging as the session came to an end was that an opinion limited to consents,
approvals and filings required to enter into the agreement as of the closing date is appropriate for the “no
consents and approvals” opinion.
While time did not permit discussion of performance in the “no violation of law” opinion, the
questions raised in the materials for the session indicate difficulties similar to those outlined above for the
“consents and approvals” opinion would apply when thinking about a “no violation of law” opinion given
the unknown future events the opinion might cover.
3.
Opinion Letter Significance of Equityholder Agreements and Side Letters
Arthur Norman Field, New York, Co-Chair
Louis G. Hering, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Co-Chair
Susan Cooper Philpot, Cooley LLP, San Francisco, Reporter
This concurrent session focused on how opinions given by issuer’s counsel can be impacted by
agreements among the equityholders of an issuer or by side letters between an equityholder and either the
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issuer itself or the manager of an issuer. The session began with a discussion of the current trends in the
use of side letters.
Use of Side Letters
Side letters are often used in the marketing and sale of equity interests in investment funds
formed as limited partnerships or limited liability companies, such as hedge funds, private equity funds,
venture capital funds and real estate funds. These side letters generally secure for the contracting investor
special rights not available to the other equityholders through the fund’s partnership or operating
agreement. These side letters may take the form of an agreement with the fund itself, with the fund
manager or with both. Side letter practices can vary significantly, including as to whether the practice of
entering into side letters is or is not disclosed in the private placement memorandum or other investment
offering materials, whether such side letters are or are not specifically authorized by the main fund
agreement and, once the side letters are entered into, whether such side letters are or are not disclosed to
the non-contracting equityholders. Whatever the fund practices, the existence of these side letters and
their relationship to the main fund agreement has the potential to impact the rights of all parties with
equity interests in the fund and, depending on the facts and circumstances, may need to be taken into
account by fund counsel in giving an opinion regarding the fund.
Opining on Side Letters
As part of the admission of new investors to a fund, fund counsel is often asked to opine on the
enforceability of the main fund agreement against the fund manager. If the fund or the fund manager is
party to one or more side letters, fund counsel may also be asked to opine on the enforceability of the side
letters against the fund and/or the fund manager. Several years ago, it was unusual for fund counsel to
address side letters. Now they are often, but by no means always, addressed, and it can be a point of
discussion and negotiation among the fund manager, fund counsel, and the individual investors whether
fund counsel will or will not address side letters. Depending on the circumstances, fund counsel may
want or need to inquire as to the existence of any side letters, perhaps through a fund manager’s
certificate. In addition, because of the prevalence of side letters, if fund counsel will not be reviewing and
addressing them in the opinion, they will sometimes expressly state that they have not reviewed any side
letters. However, to the extent fund counsel includes a general statement that they have not reviewed any
documents other than those identified, a specific statement on side letters may not add anything, and the
general statement may suffice. Because fund managers may not consider all written arrangements and/or
informal marketing statements (either oral or in emails) as amounting to formal side letter commitments,
there was consensus that the opinion giver should consider casting any inquiry regarding side letters or
other side agreements in the broadest possible terms and in language understandable by a layman if he or
she is trying to capture all side arrangements, amendments, waivers, or course of dealing or course of
performance practices that may modify the formal written terms of the agreement(s) being opined on.
From fund counsel’s point of view, and particularly local Delaware fund counsel who may not be as close
to the negotiations as is main fund counsel, best practice to avoid any misunderstanding may be to list the
side letters that counsel is aware of and has reviewed in the opinion itself and expressly assume in the
opinion that there are no other side letters than those identified in the opinion.
Another important matter is who is the side letter with―the fund, the fund manager or both? The
appropriate contracting party may depend on the substantive provisions of the side letter. If the side letter
purports to share in the manager’s carried interest or promises that the manager will exercise its discretion
under the fund agreement in a certain manner, the side letter may need to be with the manager. If the side
letter purports to relieve the investor of one of its obligations under the main fund agreement, it may be
necessary that the fund itself be one of the counterparties to the side letter. Increasingly investors are
requiring that both the fund manager and the fund be parties to side letters.
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A related inquiry is whether a side letter is an amendment to the main fund agreement or an
independent stand-alone contract that is separate and apart from the main fund agreement. It was noted
that increasingly fund agreements contain enabling language specifically authorizing the fund manager to
enter into side letters that modify the rights and obligations of the individual contracting investor under
the main fund agreement and that under the Delaware Revised Uniform Limited Partnership Act a
partnership agreement may expressly allow the general partner to amend the partnership agreement
without notice to or consent of the limited partners. On the other hand, it was also noted that in a fund
agreement that does not expressly provide for the existence of side letters, there can be an unintended
adverse impact on the enforceability of side letters signed pre-closing when a fund agreement with a
traditional integration clause is later signed and delivered by those same parties at closing.
The greatest challenge in opining on side letters may be the evaluation of the substantive
provisions of the side letter. Side letters that add additional responsibilities for the manager (e.g. monthly
reporting rather than the quarterly provided for in the fund agreement) or that specify how the manager’s
discretion will be exercised (e.g., agreeing in advance to consent to certain transfers of the investor’s
interest in the fund) or that give up some of the manager’s rights (e.g., limit the fees that the general
partner will receive with respect to the investment of that particular investor) generally do not pose a
serious problem for an opinion on the enforceability of the side letter, provided that the correct entity is a
party to the side letter. However, even with a broad, express authorization for the fund manager to enter
into side letters contained in the fund agreement, the contents of a side letter can be problematic if the side
letter includes provisions that alter the terms of the investment for the benefit of the contracting investor
in a manner that has a direct or indirect adverse impact on the other fund investors who are not a party to
the side letter (e.g., granting priority over the other investors in utilizing a dollar limited right to withdraw
its investment from the fund). The fiduciary duties owed by the manager to the other fund investors and
the implied covenant of good faith and fair dealing may impact enforceability of such a side letter. While
opinions on enforceability are generally understood not to cover either compliance with fiduciary duties
by the contracting parties or equitable principles such as the compliance by the contracting parties with
the implied covenant of good faith and fair dealing, some opinion givers expressly assume in an
enforceability opinion on side letters that none of the terms of the side letters will operate to adversely
affect the economic or other rights of the other investors in the fund. Where that assumption cannot be
reasonably made by an opinion giver, additional consideration may need to be given to the
appropriateness of the problematic side letter provision altogether.
Disclosure Practices
From a disclosure standpoint, side letter practices continue to evolve. As a result of concerns by
regulators that investors were not being adequately advised about the contents of certain side letters that
might impact their investment, fund managers have expanded their disclosure about side letter practices in
their offering materials. In addition, the requests for opinions on side letters have pushed fund counsel to
add to the fund agreement more detailed authorization for entering into side letters and a fuller
articulation of the relationship of the side letters to the provisions of the main fund agreement. Finally,
sophisticated fund investors are increasingly demanding “most-favored-nations” provisions in their side
letters, since they allow investors to have notice of the terms of side letters with other fund investors and
may provide them with the opportunity to obtain the same terms or otherwise to take steps to protect their
interests. This trend toward increasing side letter disclosure and transparency may reduce the risk of
unhappy investors and, as a result, may reduce the risk of a claim against fund counsel for a
misleading opinion.
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Delaware Decisions
The session then discussed these current practice trends in the context of a series of hypotheticals
and a handful of court cases, including ESG Capital Partners II, LP v. Passport Special Opportunities
Fund, LP, 2015 WL 9060982 (Del. Ch. Dec. 16, 2015) (in which the court held that claims brought by
limited partners in an investment fund that held Facebook stock under a partnership agreement that
provided for a pro rata distribution of the Facebook stock (or the cash proceeds therefrom) to the limited
partners stated a valid claim against limited partners who received more than their pro rata share pursuant
to the terms of side letters entered into with the general partner that guaranteed the favored limited
partners certain minimum distribution amounts) and Paige Capital Management, LLC v Lerner Master
Fund, LLC, 22 A.3d 710 (Del. Ch. 2011) (in which the court held both (i) that a side letter provision
expressly allowing withdrawal of an investor’s investment after three years overrode a “gate provision” in
the main fund agreement restricting the dollar amount of withdrawals and (ii) that it was a breach of
fiduciary duty by the general partner to invoke the “gate provision” restricting withdrawal where the
outflow of funds would not adversely impact the operation of the partnership business or any investment
of any other limited partners, and where the “gate provision” was being invoked by the general partner
solely because it would preserve the dollar amount of the management fees payable to the general
partner).
PANEL SESSION III:
Current Ethics Issues Relating to Opinions
Craig D. Singer, Williams & Connolly LLP, Washington, D.C.
John K. Villa, Williams & Connolly LLP, Washington, D.C.
Leonard H. Gilbert, Holland & Knight LLP, Tampa
This panel considered the ethical issues raised by the facts of a hypothetical distributed to WGLO
members prior to the program relating to the role of a lawyer in connection with a securities offering. The
hypothetical together with the applicable ABA Model Rules 1.0, 1.2, 1.6, 1.7, 1.16, and 4.1 were included
in the seminar handbook.
The hypothetical concerned a law firm that, in representing a securities issuer, provided an
opinion letter to a placement agent opining that the securities were not required to be registered under
applicable state law. The discussion opened with the question whether it was appropriate under Model
Rule 1.7 for the law firm to undertake the representation given that the firm also represented the
placement agent in other unrelated matters. This discussion included the question whether client consent
to the representation would be necessary under Rule 1.7.
The hypothetical firm’s opinion letter provided that the opinions expressed “are only as of the
date of his letter, and we are under no obligation, and do not undertake, to advise [the placement agent] or
any other person or entity of any change of law or fact that occurs, or of any fact that comes to our
attention, after the date of this opinion letter, even though such change or such fact may affect the legal
analysis or a legal conclusion of this opinion letter.” Yet the securities were expected to be offered for a
60-day period following the issuance of the letter. In the hypothetical scenario, a few days after the
issuance of the letter, the state’s intermediate appellate court announced a new standard governing the
exemption from registration that was the basis for the firm’s opinion. The responsible lawyers at the firm
discussed the issue and concluded that this change in the law would not change the ultimate conclusion of
the opinion that these securities did not need to be registered.
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The panel discussion focused on the question whether the law firm had an ethical duty to inform
anyone of the change in the law, notwithstanding that the lawyers believed the result of the opinion was
still correct. The participants discussed whether the law firm owed a duty (a) to the client, for example
under Rule 1.4, to inform it of developments in the matter, or (b) to the placement agent to correct the
opinion. On the latter point, the participants were asked to assume that the client was instructing the law
firm not to amend its opinion or inform the placement agent about the new court decision. The discussion
considered the impact of the clause in the opinion letter that the opinion was effective only as of the date
of its issuance, given that the law firm also understood that the placement agent had a period following
the effective date of the opinion in which it could and was continuing to market the securities on the basis
of the opinion. The panelists and participants also discussed the interaction of various ethics rules,
including Rule 1.6’s client confidentiality requirements, and the duty under Rules 1.2 and 4.1 not to
knowingly assist a crime or fraud and not to knowingly make a false statement or fail to disclose a
material fact when necessary to avoid assisting a crime or fraud.
The discussion then turned to a new step in the hypothetical when the law firm learned that the
placement agent was actually marketing the securities to individual purchasers who were not
contemplated by the firm’s opinion, where such marketing (a) would not have required registration under
the legal standard assumed in the opinion but (b) would require registration under the new standard
announced by the state intermediate appeals court. The participants discussed whether this new
information required the law firm to take any action that was not required before. It was noted that the
firm’s opinion had expressly assumed that the placement agent would not market the securities to
individual purchasers.
Discussion on all of the above points was lively.
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