In larger transactions, lawyers are often required as a condition to closing to give a legal opinion on behalf of the lawyer’s client. An opinion letter should not be a guarantee but instead a statement based on professional judgment about what the law in the state is on certain topics as of the date of the opinion.
In most transactions, the attorneys on both sides will give opinion letters. To some degree, this is more form than substance so as to give each party a sense of mutuality or equality. Clearly, the letter from the seller’s attorney is more important and deals with more significant issues than the letter of the buyer’s attorney. An exception to this is when the seller is receiving either shares of stock in the buyer or the buyer’s promissory note.
The basic opinion letter usually relates information about the client, such as its corporate status, power and authorization and the legal enforceability of the closing documents. It may also deal with the knowledge of the lawyer(s) as to any pending claims or lawsuits against the client.
Usually the opinion letter is qualified by exceptions. Among the usual exceptions are an exception to enforceability for bankruptcy and equitable issues. Usually, the letter concludes with express statements that it can only be relied on by the recipient.
There are several drawbacks to opinion letters. First, they always drive up the cost of the transaction because the lawyer giving the opinion must do additional legal work to issue the opinion.
Second, the requested opinion letter can be a source of division between the lawyer and the client. For example, the opinion letter may request an opinion that the attorney is unable or unwilling to give. Without the opinion, however, the deal will not close. Therefore, it is always good practice for the attorney to explain the opinion letter process to the client at an early stage in the transaction. It is also a good practice to review and negotiate the terms of the opinion letter at the start of the transaction and not on the eve of closing.
Third, it is arguable how much added value there is from these letters in which the signer is usually very careful to qualify almost everything in the letter.