M&A Vocabulary – Experts explain: Legal opinion

published on 20 January 2023 | reading time approx. 2 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

The term Legal Opinion originates in Anglo-American law and describes - in general terms - a special form of legal report by a lawyer.

Legal Opinions are now also required as standard in Germany, inter alia, in the context of international financing transactions and capital market transactions.

In a Legal Opinion, certain legal matters are assessed vis-à-vis the client or a third party, in particular banks (so-called “Third-Party Opinion”). Wording and structure of a Legal Opinion are meanwhile largely standardized.

Meaning and purpose

Legal Opinions regularly determine the existence of a legal relationship, for example the legality, effectiveness and enforceability of a contract.

In financing transactions, the typical content of a Legal Opinion relates, on the one hand, to the transaction and collateral documents and, on the other hand, to the legal status of the borrower, guarantors and security providers. The issuance of one or more Legal Opinions is usually a condition for disbursement of loans under facility agreements.

A distinction is made between Legal Opinions that confirm, among other things, the validity and enforceability of loan and security agreements (so-called “Enforceability Opinion”) and those that confirm the existence and legal capacity of the borrower or guarantor as well as the fact that all necessary committee resolutions have been passed and the signatory of the contracts has the corresponding power of representation (so-called “Capacity Opinion”). In addition, certain expert opinions are often obtained that confirm specific tax assumptions (so-called “Tax Opinion”).

Structure

A Legal Opinion generally follows a three-stage structure: Assumptions, Opinion Statements and Qualifications.

The Assumptions serve to substantiate the facts to be examined. Here, facts are often assumed to be true that are reasonably beyond the knowledge/verifiability of the author of the opinion, e.g. statements on the legal capacity of persons acting. The Opinion Statements form the core of the opinion. Herein, for instance, the validity of a contract is confirmed. The necessary legal restrictions or reservations with regards to the Legal Opinion depend on the individual case and may relate to entire areas of law or specific issues, such as restrictions on the enforceability of collateral in insolvency scenarios.

Addressees

Even if the author of the Legal Opinion is often in a mandate relationship with the borrower, the addressees of the Legal Opinions are usually the financing banks or the institutions that accompany the capital market transaction as arranger. The addressees often also include the institutions that join in the first round of syndication.

Conclusion

The issuance of Legal Opinions in the context of financing transactions or the issuance of securities on the capital market have become standard and should not be underestimated due to their information and risk disclosure function.