Business Law Breakdown: The Role of Attorney Opinion Letters in M&A Transactions

Business owners are very used to working with their attorney, having their questions answered, and having their lawyer give opinions on legal issues. When a seller is selling their business, however, sometimes a buyer will ask for the seller’s lawyer’s opinion on certain issues related to the sale.

It’s About Due Diligence

So, what’s all this about? In this situation, the buyer is actually looking for additional due diligence on the business, and who better to ask than the seller’s attorney, who’s been working with that business for a while. The form that this takes for a seller’s attorney is a third-party opinion letter, which is a carefully written document that says that the lawyer’s opinion is that the seller can enter into this transaction and related issues to that one central issue.

Opinion Letters are Expensive

The problem with opinion letters, from a seller’s perspective, is that they are expensive. They are expensive because the lawyer has to actually spend time looking at all of the corporate documents of the seller, has to spend time looking at all of the written consents of the governing body of the seller, and also all of the meeting minutes. He/she has to look at all of that, look at the law, and then give an opinion that in fact, the seller can sell what the seller says they’re selling.

How Does it Work?

In writing the letter, the seller’s attorney is actually allowed to rely on certain assumptions that they write out in the letter, and there’s also a complete set of customary “conventions” dealing with opinion letters. The question, though, is whether everyone understands what those customary conventions are. The American Bar Association in this last year has helped us with this, by issuing a document called “Statement of Opinion Practices,” which actually says what those assumptions are and what the conventions are for opinion letters for lawyers.

Certain Exemptions

The seller’s lawyer’s opinion letter isn’t always an insurance policy for the buyer, either. In fact, a seller’s lawyer’s opinion letter is governed by customary conditions, practices, and assumptions that are written out in the letter. There’s even another layer which the American Bar Association has described in its statement of opinion practices, that talks about what is customary for opinion letters. For a buyer, oftentimes they might want to look at a seller’s representations and warranties because that actually binds the seller and allows the buyer to look for damages against the seller if those are untrue.

Opinion letters can be expensive for the seller to produce because they wind up having to pay their own attorney to spend time doing the due diligence work required. In the last ten years or so, the use of opinion letters has actually gone down quite a bit in middle-market transactions. Best practice for buyers and sellers who are contemplating using an opinion letter in a transaction is to state that clearly at the beginning. Put it in the letter of intent and have a clear understanding of who pays for it and what the purpose for it is.

For more information on this topic, contact us today.