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GanzRecht > Studium & Lehre > Ausland > International Finance Law




von Holger Langer, LL.M.

Legal Opinions

A. Background

  • one of the first and most important roles of the agent bank in an international syndicated loan agreement will be to certify compliance with conditions precedent by the borrower
  • these conditions precedent relate to issues like status and capacity of the borrower, compliance with export restrictions and the like to make sure that the agreement entered into will be a legally valid and enforceable contract
  • since some of these issues in an international facility will almost invariably have to be determined according to foreign law, the bank may rely on legal opinions, presentation of which will also be made a condition precedent
  • the borrower will therefore ask his lawyers, who will most likely have also taken part in the planning and structuring of the transaction and the drafting and negotiation of the loan documents, to prepare the demanded legal opinions on the respective issues
  • the legal opinions will usually take the form of short standardised letter which have to be distinguished from
    • Letters of legal adviceor reasoned legal opinions on certain points of law or interpretation (e.g. ranking of debts in insolvency, liability of the lenders etc.)
    • Legal reports as to the scope and suitability of the terms of a document (more like a commentary on a certain type of project)
    • Title reports (e.g. as to the title to land which is to be mortgaged as security)

B. Jurisdictions to be covered

  • International syndicated loan agreements / Bond issues will frequently relate to a large number of jurisdictions which can influence the parties’ respective positions
    • borrower’s domicile
    • lender’s domicile
    • place of contracting
    • place of performance (place where payments have to be made)
    • lex situs of assets given as security
    • lex fori
  • however, in practice many of these jurisdictions coincide
  • In international loan and bond issues there is usually
    • one opinion as to the jurisdiction of the borrower’s domicile (important since matters like status, capacity etc. are under conflict of laws rules usually not determined by the governing law)
    • and another opinion as to the jurisdiction of the governing law

C. Limits to the scope of opinions

  • formal legal opinions are not general assurances that the whole transaction is satisfactory from a creditor’s point of view, but speak only as to certain narrow and basic legal matters
  • standard of the advice / commitment of the lawyer: legal opinion is an opinion, not a guarantee; the lawyer is not an insurer that everything will go smooth
    • courts do not impose particularly high standards
    • lawyer must use such skill, prudence and diligence as lawyers of ordinary skill and capacity commonly possess and exercise (Lucas v Hamm)
  • Legal opinion speaks only as to domestic law not foreign law (from the lawyer’s point of view; from the lenders’ point of view it might well be on foreign law) ’ legal comfort is local not universal
  • Legal opinions only advise as to existing law, changes are rapidly and unpredictable and, thus, cannot be covered
  • Major limitations
    • Exclusion of opinion (Qualification, see infra) on certain key questions, such as validity on bankruptcy
    • Assumptions (and as such excluded from the scope of the legal opinion)
      • genuineness of all signatures
      • authenticity and completeness of original documents
      • accuracy of copies
      • all relevant meetings duly held and duly qualified quorums obtained
      • each agreement referred to in the opinion duly executed and constitutes a valid and legally binding obligation
      • no additional matters would have been disclosed by a repeated search at the relevant companies or commercial registries
      • each obligor is not insolvent within the meaning of the relevant insolvency legislation and no action has been taken for the dissolution or winding-up of such a company ’ assumption recognises that actual insolvency may attract preference doctrines and commitments entered into after the commencement of insolvency proceedings may be void
      • no contractual or similar restrictions binding on an obligor
      • each of the banks is an authorised banking institution under the relevant banking legislation (duly licensed)
    • No assumption of facts which are known or suspected to be incorrect!!!
    • commonly, opinions exclude matters of fact
      • no opinion is given as to matters of fact
      • it is assumed that there are no facts which would affect the conclusions in this opinion
      • undercuts the value of the opinion, since many matters are a mixture of matters of law and fact
      • but exclusion is in most cases reasonable, since it is often not practicable for a lawyer to check these matters
      • mainstream view: lawyers should decline to express a view as to matters
        • which are not primarily legal
        • which are not within the professional expertise of a lawyer
        • where the factual review required is impractible

D. Foreign law

  • customary to state that the legal opinion is given only as to local law
  • sometimes assumption that no foreign law will affect the opinion, i.e. exclusion of private international law rules
  • reason
    • it is not practicable in such a short opinion to set out the rules of private international law (beyond the scope of such a short letter)
    • lawyers are strictly not competent to opine on the laws of another jurisdiction and are even frequently prevented by their professional codes from giving such an opinion
  • however, advice should be given
    • as to which foreign jurisdictions should be covered by separate foreign legal opinions
    • as to the choice of an appropriate foreign lawyer
      • in the selection of a foreign lawyer the selecting lawyer has to exercise a basic duty of care in accordance with agency principles as to the appointment of sub-agents
      • however, the principal lawyer should not be held responsible beyond this mere duty of care in the selection, e.g. for defects in the foreign advice (Wildermann v Wachtell; Tormo v Yormark)
      • probably duty to give appropriate instructions, where it is apparent that the foreign lawyer is inexperienced in such kind of transactions

E. Liability of the opining lawyer

  • Contractual liability
    • usually only the persons to whom the opinion is addressed (usually lenders (in syndicated loans) or managers (in bond issues)) are entitled to rely upon it
    • no contractual liability towards third persons, such as assignees or sub-participants
    • express clauses limiting liability
    • however, not to be treated as a disclaimer, which would be subject to vitiating rules restricting the effect of such disclaimers
  • Liability in tort of negligence
    • may be owed to third parties to whom a duty of care is owed
    • according to Sykes v Midland Bank, the third party must show
      • that a duty of care was owed to the third party
      • that the lawyer broke this duty
      • that the third party relied on the opinion
      • that this negligence caused the loss
    • generally very difficult to satisfy these tests in the context of international loans or bonds ’ party must show that it would not have entered into the transaction but for the defective opinion
    • liability unusual except in the case of fraud
    • Leading case in England on misrepresentation and tort of negligence Hedley Byrne & Co. v Heller & Partners Ltd holding that a subsequent purchaser is not bound by an exclusion clause in a supply contract between the manufacturer and the retailer
    • But liability in tort is excluded for pure economic loss, Murphy v Brentwood District Council

F. Contents of the legal opinion

I. Status

  • Status refers to the legal identity and existence of the borrower and would state that the borrower is a duly incorporated and validly existing corporation
  • generally determined by the law of the borrower’s place of incorporation
  • Due incorporation
    • may involve a review of the corporation laws in effect at the time of incorporation and of the incorporating documents
    • certificate of registration is in English-based countries usually conclusive proof of due incorporation
    • EC First Company Law Directive 1973 does not allow for retroactive fictitiousness of companies and limits the grounds on which the nullity of a company can be declared
  • Duly organised
    • may mean that
      • company’s minimum share capital has been duly paid in
      • management, secretary and statutory auditors have been duly appointed
      • company is entitled to start business
      • company has adopted complying internal regulations
    • However, not recommended
      • satisfaction of some of the criteria is in some countries a condition precedent to registration anyway
      • if it is not, investigation of these factual matters would exceed the benefit
      • due organisation may extend to issues that involve factual investigation of things that are usually irrelevant to third parties
  • Valid existence
    • corporation is not a nullity
    • corporation is not in liquidation
    • corporation has not been dissolved (limited duration, merger etc.)
      • absence of liquidation proceedings may be inconclusively ascertainable from the local companies registrar, since the commencement of insolvency proceedings will usually be filed with such registry
      • likeliest incidence of dissolution might arise in the case of prohibited one-man companies
  • Good standing
    • term of art only in the United States
    • expresses that the borrower has filed its annual reports, has paid corporate franchise taxes etc.
    • should be avoided in all other jurisdictions
  • Qualification to do business
    • especially in the fields of insurance, banking, leasing and financial services local laws often require a certain qualification
    • failure to comply may result in unenforceability of the companies contracts
    • however, would require investigation of all places where the borrower does business (e.g. branches)
      • cost would be prohibitive compared to the benefit
      • results may be inconclusive
  • Other forms of entity
    • territorial authorities (States (and respective Departments of State), provinces, municipalities etc.)
    • private forms (partnerships, trusts, consortiums, foundations etc.)
    • key questions
      • will the entity be recognised in the chosen courts? (only interesting for newly-formed states and international organisations, since all states seem to recognise any form of private entity)
      • is the entity a legal or juridical person?
        • does it own assets separately from its shareholders?
        • can it sue and be sued in its own name?
      • is the entity entitled to immunity?
    • Trusts
      • not a legal entity but simply a bundle of assets held by a trustee for the benefit of beneficiaries
      • trustee is the contracting party (although liability is usually limited to the trust assets)
      • no protection to third parties if the trustee acts ultra vires, i.e. outside the actual powers and authorities of the trust instrument
      • therefore necessary to review the trust instrument
    • Partnerships
      • ordinary partnerships
        • partners are personally liable
        • private creditors of the partners first bite at the private assets
        • business creditors first bite at the partnerships assets
      • limited partnerships
        • limited partners are liable only to the extent of their agreed contribution
        • general partner has unlimited liability
        • purely academic, since general partner is usually a shell limited liability company (cf. GmbH & Co. KG)

II. Corporate powers

  • should state that the borrower has the corporate power to enter into and perform the agreement
  • ascertained by the law at the place of incorporation
  • does not mean that the transaction has been duly authorised, but that the agreement is not ultra vires under its corporate statute or by its constitutional rules (by-laws, certificate of incorporation, memorandum of association, statute, charter etc.)
  • Difficulties
    • Absence of express constitutional powers
    • objections to transactions which are not ancillary to an express corporate purpose
    • restrictions on the powers of a corporation to issue bonds e.g. until its capital stock has been fully paid in

III. Due authorisation

  • should state that the agreement has been duly authorised by appropriate corporate action
  • Corporations
    • authorisation of their managing body
      • meetings properly convened by appropriate notice
      • attended by a quorum of duly appointed directors
      • no qualification from voting by conflict of interest etc.
    • probably shareholder approval necessary
    • in most commercial jurisdiction, tendency goes towards protection of third parties where directors act in breach of constitutional authority Ù greater predictability, safety of transactions
  • Other entities
    • special official approvals may be required for municipalities or governmental borrowings
    • governmental borrowings often require furthermore specific sanction by legislature
    • Difficulties can arise where borrowing limits are expressed in domestic currencies (conversion date?, exchange rates? etc.)

IV. Legal validity

  • should state that the agreement would be treated by the local courts as a legally binding obligation by the borrower enforceable in accordance with its terms
  • heart of the opinion
  • generally a matter for the governing law of the agreement (subject to certain exceptions)
  • Legally binding
    • no real difference between legally valid and legally binding, therefore overlaps with other provisions
    • agreement is not void
      • ultra vires
      • unauthorised
      • illegal purpose
      • absence of exchange control consent
      • rescission on account of misrepresentation
  • Enforceable
    • agreement is actionable before a court
    • “enforceable” does not necessarily mean “specifically enforceable”
    • opinion is not a guarantee that the document will withstand all forms of attack, nor a warranty that it is enforceable according to its written terms (Trustees of the Central States v Golden Nuggett Inc.)
  • Bankruptcy qualification
    • common qualification that legal validity is subject to all insolvency, bankruptcy, moratorium, reorganisation etc.
    • major limitation since bankruptcy is the case when validity matters most
    • however, necessary qualification since short legal opinions cannot comprise the complex law on these matters and would not be a good advice as to the impact of bankruptcy law on the agreement
    • main bankruptcy doctrines
      • on bankruptcy creditors only receive a dividend
      • limitations on insolvency set-off in some countries (not England) thereby overriding a set-off clause
      • hierarchy of debts on insolvency, so that preferential and other debts may rank prior
      • non-provability of post-insolvency interest
      • powers of the insolvency representative to abandon contracts (subject to the payment of damages)
      • revocation of preferences (relevant for security for pre-existing debt)
      • conversion of foreign currency debts into local currency debts
    • qualification will usually apply expressly to the whole opinion so as to limit the other statements
  • Other qualifications
    • usually minor qualifications, which are included because they will only arise in exceptional circumstances and a reasonable lender could not expect otherwise
    • good practice to explain material qualifications by separate advice if required (usually not in the case of sophisticated lenders)
    • qualifications will usually apply expressly to the whole opinion
    • common qualifications include
      • potential invalidity of penalty interest
      • potential invalidity of agreements to pay in a specific currency
      • limitations on exculpation clauses
      • inefficacy of a clause that only waivers in writing are effective
      • compulsory grace periods or good faith duties on acceleration
      • inefficacy of severability clauses stipulating that void or illegal portions of the agreement do not affect the validity of the other clauses
  • “Good faith” qualifications
    • validity and enforcement may be made subject to doctrines of good faith, reasonableness and equitable conduct on the part of the lender
    • primarily intended to cover cancellation of a commitment to lend because of a technicality
    • relevant in the US where good faith principles can have an impact on the validity of such a cancellation

V. Miscellaneous statements

  • Official consent
    • should state that all consents and authorisations of official authorities have been obtained
    • lawyer should check that exchange control consent does not only cover scheduled payments under the loan agreement, but also accelerated payments and ancillary payments, such as management and commitment fees, increased costs, expenses etc.
  • Non-conflict with laws, constitution and contracts
    • should state that the agreement will not conflict with any present laws, the constitutional documents of the borrower or any contracts or other undertakings by the borrower
    • “non-conflict” statement goes further than “legally binding” in that it also covers violation of laws that would not render the agreement void but may nevertheless impose penalties on the offending borrower damaging its credit
    • “constitution” may contain a borrowing limit which may not prejudice the lenders who are not aware of the breach, but which might affect them in that breach of it may cause defaults on other agreements
    • “contracts” may contain a term that is violated by the borrower, resulting in a breach of that contract and a possible exposure of the borrower to liability under such contract, which might have serious consequences for the credit of the borrower
      • however, the investigation of all pending contracts of the borrower will be impracticable and disproportionately to the benefit
  • Litigation
    • should state that the lawyer knows of no pending or threatened litigation in which the borrower is involved
      • especially relevant in the patent and anti-trust field
      • coverage of this point crucial since litigation could seriously affect the company’s financial standing
      • “pending” means that proceedings have actually commenced
      • “threatened” does not cover unasserted possible claims, but only threats evidencing a present intention to sue
      • not usually good practice and even discouraged by some bar associations, since it is impracticable and adds unreasonable to the expenses of the opinion
  • Filings
    • should state that no filing, recording or registration is necessary
    • usually only required in relation to the granting of security
    • statement relates to the borrower, not the lenders
  • Legal form
    • should state that the agreement is in proper legal form for enforcement in the courts of that state
    • relates to requirements of language or compliance with formalities
    • such compliance should be assumed
  • Taxes
    • should state that the borrower is entitled to make payments without deduction for or on account of taxes, charges or restrictions imposed upon him
    • is desirable even if the borrower is bound by express clause in the loan agreement to bear withholding taxes by grossing-up
  • Pari passu ranking
    • should state that all obligations of the borrower rank and will rank pari passu with all other present or future unsecured debts
    • usually qualifications as to liquidation expenses, taxes and certain wages which are preferential payments
    • qualifications as to other special subordinations where applicable
  • Enforcement of foreign judgements
    • should state that foreign judgments in respect of the loan agreement would be enforced by the local courts without reexamination of the merits
    • usual qualifications
      • jurisdiction of the court of origin
      • fair trial without fraud
      • final and conclusive money judgment
      • no conflict with another judgment on the same cause of action
      • no conflict with public policy
  • Immunity
    • should state that the borrower is not entitled to immunity
    • could be buttressed by a statement that the borrower is subject to civil and commercial law with respect of its obligations under the loan agreement
  • No adverse consequences
    • should state that the lending bank will not become subject to local qualification rules, subject to the jurisdiction and subject to taxation in the borrower’s country by mere entering into the loan agreement
  • Application of governing law
    • should state that the choice of law would be upheld as a valid choice of law by the local courts
    • whether this statement can be given depends on the permission or restrictions on choices of law
    • does however not require a deep treatment of the private international law situation and would not confirm that no foreign law would be applied in priority to the chosen law since both statements would be impracticable and no good advice in such a short form