In most large banking and finance transactions, where the bank (or banks) have engaged an external law firm to draft the financing documents, the bank will almost always require a legal opinion from their lawyers before making the first loan to the borrower.
This practice initially developed in the context of cross-border transactions, especially on syndicated loan transactions where banks were lending to foreign borrowers and wanted comfort in relation to potential foreign legal risks (such as knowing that the financing documents would be enforceable under the laws of a foreign jurisdiction).
However, the requirement for legal opinions eventually permeated into nearly all loan facility transaction, even those that are wholly domestic (that is, a loan transaction involving obligors that are Australian companies and that are entering Australian law-governed finance documents). As such, a detailed understanding of the purpose, content and structure of a legal opinion is important for all banking and finance lawyers and for their lender clients.
In this first of two installments on legal opinions used in banking and finance transactions, we look at the purpose and structure of legal opinions. In the second installment, we will observe standard legal opinions that are typically included in an Australia law legal opinion.
What is a legal opinion and what is its purpose?
A legal opinion is a letter issued by a law firm acting for a bank, addressed to its client and any other finance parties in a financing transaction, that expresses specific conclusions of law about the transaction. More specifically, the three main purposes of a legal opinion are:
- To state conclusions of law regarding the ability of a parties or parties to enter and perform their obligations under the finance documents. The subject of a legal opinion are usually the borrowers and any other obligors involved in a financing transaction.
- To inform the addressee of the legal effects of those finance documents.
- To identify legal risks that the addressees may wish to consider in further details prior to entering into the transaction.
A legal opinion is confined to opining on matters of law as at a stated date, usually the date the opinion is issued. Generally speaking, opinions are not:
- given on factual matters (such as whether the borrower has or has not satisfied various conditions precedent to the first drawdown under the facility agreement); or
- intended to provide the addressee with an assurance that the transaction is satisfactory or on “market” terms, or that it is structured in the most advantageous manner for the client.
Accordingly, if the client has concerns about specific legal issues in relation to the transaction, such as the deal structure used and its tax consequence, it will need to obtain separate and tailored legal advice in relation to such issues.
Which law firm provides the opinion?
It is market practice in Australia that where the banks and the borrower are both represented by Australian counsel that the banks rely on their own counsel to provide the legal opinion on the borrower and the finance documents, and will not ask the borrower’s counsel to do so.
However, in some transactions the banks may request a legal opinion from the borrower’s counsel. A legal opinion issued by a law firm to a non-client is known as an “across-the-table” opinion. Providing an across-the-table opinion raises several important issues for the law firm issuing the opinion, particularly in relation to the scope of its duties towards the addressee and conflict of interest issues.
Structure of a legal opinion
Over time, the structure of legal opinions used in financing transactions has become relatively standardised.
While the order can change depending on the preference of the issuing firm and their client, legal opinions typically contain the following sections:
- Scope of opinion. A description of the matters the opinion covers and does not cover (tax law is usually excluded, although opinions are often given in relation to stamp duty payable in relation to finance documents).
- Documents examined. This section will list the documents the law firm has reviewed for the purposes of giving the opinion such as the finance documents and any relevant powers of attorney.
- Searches. This section lists the searches and enquires conducted in relation to the obligors (for example, ASIC searches) and in relation to any collateral provided as security by the obligors (for example, PPSR searches).
- Opinions. This is the main section of the opinion where the law firm expresses conclusions on questions of law in connection with the transaction.
- Assumptions. The law firm will make assumptions in relation to factual matters that it cannot check by independent enquiry (for example, the authenticity of signatures).
- Qualifications. The law firm will outline matters of law that qualify certain of the opinion given (for example, an opinion on the enforceability of the finance documents will usually be subject to a qualification which outlines the circumstances where a court will not enforce contractual obligations).
- Reliance. Under this section the law firm will list the persons that can rely on the opinion. Generally, this is limited to the original addressees of the opinion. However, depending on the transaction, the law firm may sometimes agree to expand reliance to a narrow class of transferees (for example, transferees of a syndicated loan).
- Confidentiality. This section outlines the confidentiality and restrictions on disclosure of the opinion to third parties.
Refer to part two of this installment for an examination of the standard legal opinions that are typically included in Australian law legal opinions.
Practical Law Banking and Finance has recently published a number of new legal opinions resources, including several standard form legal opinions for use in domestic and cross-border financing transactions. To speak with a specialist about gaining access to Practical Law, register your interest today.