Drafting Legal Opinions for Article 9 Security Interests: Navigating the Complexities and Avoiding Liability Erik W. Hepler, Kirkland & Ellis James C. Schulwolf, Shipman & Goodwin
Overview Opinions are typical in financing transactions • u Always given at initial closing u Given in connection with some, but not all, amendments Ø Always if “new money” Contrast to M&A transactions • u For many years, opinions were routinely given in M&A deals u Today they are almost never given
Overview • Who gives opinions u Borrower’s counsel u Some lenders/investors require opinions from their own counsel u Local Counsel Ø State-by-state issues u Foreign counsel
Overview • What does an opinion look like? u Introduction Ø Describes where the opinion request comes from u List of documents reviewed and being opined on u Standard assumptions Ø Execution by parties Ø Genuineness of signatures Ø Certificates of governmental officials, etc.
Overview • What does an opinion look like? (cont.) Standard assumptions (cont.) u Ø Officers’ certificates Knowledge definition u Actual opinions u Entity and contract opinions u UCC opinions u Ø Attachment Ø Perfection Ø Priority (?)
Overview • What does an opinion look like? (cont.) u Assumptions u Qualifications u What law is covered? u Concluding paragraphs Ø What time period is covered? Ø Who can rely?
Sources of Opinions • Official sources u ABA Reports Ø ABA Guidelines Ø ABA Principles u TriBar Reports Ø TriBar II Ø TriBar LLC & Partnership Reports Ø TriBar Remedies Report
Sources of Opinions (cont.) Official Sources (cont.) • u TriBar Reports (cont.) Ø TriBar Article 9 Report Ø TriBar Report on Secondary Sales of Securities (UCC Article 8 – may apply to security interest in investment property) u State Bar Reports Ø Corporate, LP and LLC Reports Ø Real Estate Opinions Ø Remedies Reports
Sources of Opinions (cont.) Official Sources (cont.) • Other “Official” Sources u Ø ALI Restatement of law governing lawyers Ø National Customary Practice Statement Good Summary at the ABA Legal Opinion Resource Center – u http://apps.americanbar.org/buslaw/tribar/ Unofficial Sources • Law Firm “model” opinions u Do you use “your form” or the form sent by Lender’s counsel? u
§ “Predicate” opinions § No conflicts/no consents § Specific Status Opinions § Diligence Issues
§ Organization, existence and good standing § Corporate power § Due authorization § Due execution
§ “Credit Party is an [entity] existing and in good standing under the [state entity law].” § Opinion is often limited to information gained from certificates issued by the state in question 12
§ “Credit Party has the [type of entity] power to execute, deliver and perform its obligations under the Opinion Documents to which it is a party” § Requires analysis of organizational documents of the Credit Party, as well as the relevant entity law of the state of organization § some entities may have restrictions on debt actions that they can take in their organizational documents 13
§ “Credit Party has taken the [type of entity] action necessary to authorize its execution, delivery and performance of the Opinion Documents to which it is a party.” § need to diligence that proper board/manager and/or shareholder/member action has been taken to authorize the transaction 14
§ “The Opinion Documents have been duly executed and delivered on behalf of the Credit Party.” § ensure that documents are signed by properly authorized persons 15
“The execution, delivery by the Credit Party of the Opinion Documents [performance by the Credit Party thereunder/the payment by the Credit Party of its obligations thereunder] will not (i) constitute a violation of the organizational documents of the Credit Party, (ii) constitute a violation of any applicable provision of existing [covered state] law or United States federal statutory law or published regulation, or (iii) result in a violation of, or result in the creation of a lien under, any agreement indentified in Exhibit A attached hereto”
§ No conflicts with other agreements should be limited to a specified list – not “all agreements” or “all material agreements” § need to review listed agreements to make sure there is no conflict § no conflicts merely requires that a reasonable future performance will not conflict – not that there is no way in the future (such as a default) there would not be a conflict § should state law be limited to statutory law and regulations as well? § treatment of financial covenants 17
§ “No consent, approval, authorization or order of, or filing with, any United States federal of [covered state] governmental authority or body, is required for Credit Party to obtain the right to execute, deliver, and perform its obligations under, the Opinion Documents, except for (1) those already obtained, (2) those required by Credit Party for the ordinary course of business, and (3) those required under the Securities Laws. 18
§ if Credit Party is a regulated entity (e.g., a public utility or a railroad), may exclude things relating to their regulation § sometimes separate regulatory counsel will cover those matters 19
§ Investment Company Act § Litigation § Regulation U 20
§ “The Credit Party is not an “investment company” required to be registered as such under the Investment Company Act of 1940, as amended, or the rules and regulations thereunder” § requires diligence on the Credit Party to determine its status § even if this opinion is not given, some consider it an element of enforceability 21
§ “To our actual knowledge, (1) there are no actions, suits or proceedings pending or threatened against the Credit Party with respect to the Opinion Documents and (2) there does not exist any judgment, order or injunction prohibiting the consummation of the transactions contemplated by the Opinion Documents” § should not cover litigation in general (even material litigation), if not with respect to the Opinion Documents 22
§ “Assuming application of the loans as contemplated by the credit agreement and that the lender is not subject to Regulation T, the execution and delivery of the credit agreement by the Credit Party and the making of the loans thereunder will not violate Regulation U or X.” § if no margin stock owned by Credit Party, simple opinion to give § where margin stock is present, more analysis is necessary 23
§ Diligence is most important with respect to entity opinions § most likely area to face liability § Diligence important both to law and to organizational documents § never assume the easy answer § where margin stock is present, more analysis is necessary 24
§ Coverage § Limitations 25
“Each of the Opinion Documents is a valid and binding obligation of the Credit Party and is enforceable against the Credit Party in accordance with its terms.”
§ Unless exceptions taken, covers most provisions of agreements § Including usury, choice of law, etc. 27
§ Should not be read to cover creation and perfection of security interests 28
UCC Opinions • Attachment • Perfection • Priority • Remedies
UCC Opinions (cont.) UCC Opinions - Example • The Security Agreement creates in your favor a valid security interest in the items u and types of property of the Borrower described in Section ____ of the Security Agreement to the extent that a security interest may be created in such property under the UCC. Assuming that there is no agreement among the parties to postpone the time of attachment, such security interest has attached and is enforceable against the Borrower with respect to such Collateral. The Financing Statement shall be delivered for filing to the Office of the Secretary u of the State of Delaware. Upon due filing, such Financing Statement will perfect the security interest created by the Security Agreement in the items and types of Collateral described in such Financing Statement in which a security interest may be perfected under the UCC by the filing of a financing statement in such office. We are not admitted to practice in the State of Delaware and the opinion set forth above is based solely upon our review of the compilation of the Delaware Uniform Commercial Code set forth in the CCH Secured Transactions Guide.
UCC Opinions (cont.) • UCC Opinions - Attachment u Based on contract opinions Ø Authority Ø Existence Ø Enforceability u Scope Ø Is the transaction subject to the UCC? Ø Is the collateral covered by the UCC?
UCC Opinions (cont.) • UCC Opinions – Attachment (cont.) u Scope (cont.) Ø Has the security agreement been properly authenticated? Ø Is there appropriate granting language? Ø Is the collateral properly described? v Reminder – “all assets” is OK in the UCC-1 but not in the security agreement
UCC Opinions (cont.) • UCC Opinions – Attachment (cont.) u Scope (cont.) Ø Assumptions v Rights in collateral v Value given
UCC Opinions (cont.) • UCC Opinions – Perfection u By filing u By possession u By control u Due Diligence – Things you need to know Ø Type of entity Ø Jurisdiction of organization Ø Registered organization?
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