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Home > Publications > SEC's Division of Corporation Finance Releases Legal Bulletin Clarifying Expectations with Respect to Registered Offering Opinions

SEC's Division of Corporation Finance Releases Legal Bulletin Clarifying Expectations with Respect to Registered Offering Opinions

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Registration statements under the U.S. Securities Act of 1933, as amended, generally require a signed opinion of counsel regarding the legality of the securities being offered and sold.  These opinions must be filed as an exhibit to the registration statement, typically before it becomes effective, and are commonly referred to as "Exhibit 5" opinions.  

On October 14, 2011, the SEC's Division of Corporation Finance (the "Division") published Staff Legal Bulletin No. 19 clarifying its views with respect to legality and tax opinions filed in connection with registered securities offerings (the "Bulletin").[1]  Of particular relevance to both in-house and outside counsel who prepare and deliver legality opinions, the Bulletin:

  • in departing from current practice, permits qualified "forward-looking" MTN opinions at the time of effectiveness of a registration statement, followed by an unqualified opinion either filed at the time of each takedown or included in the text of each pricing supplement related to a specific issuance of notes;
  • confirms the staff's view that the legality opinion for debt securities, guarantees, options, warrants or rights necessarily encompasses the opinion that the registrant is validly existing, has the power to create the obligation, and has taken the required steps to authorize entering into the obligation, but permits the registrant to engage local counsel, if primary counsel is not admitted in the jurisdiction of incorporation of the registrant, to opine as to the valid existence of the registrant, its power to create the obligation and required steps to enter into the obligation. Generally, local counsel's opinion must be filed with the registration statement, proper consents must be obtained, and both counsels must be named in the registration statement;
  • permits counsel to make certain broad assumptions and acknowledge uncertainties involved when opining on rights under shareholder rights plans ("poison pills");
  • requires material differences in the way the terms "legally issued," "fully paid" and "non-assessable" are used or understood under foreign and U.S. law, if any, to be disclosed in the prospectus relating to shares publicly issued by a foreign registrant, in addition to requiring filing an opinion with respect to such matters;
  • in keeping with recent SEC guidance,[2] confirms that unqualified legality opinions are required to be filed by closing of each takedown off of a shelf registration statement, if not filed at the time of effectiveness, irrespective of how many or how frequently takedowns occur.  Such opinions must form part of the registration statement (i.e., on a filed, not furnished, Form 8-K or incorporated Form 6-K, or in a post-effective amendment to the registration statement);
  • permits certain assumptions regarding (a) future sale of the registered securities (in the case of an acquisition shelf transaction); or (b) required shareholder approvals and applicable state law filings (in an exchange offer, when a registrant seeks to reincorporate before closing an offering of securities or in an offering conditioned on charter amendments), each as long as an unqualified opinion is filed on Form 8-K or Form 6-K or in a post-effective amendment;
  • cautions practitioners against making assumptions that are overly broad, or that  "assume away" the relevant issue or that assume material or readily ascertainable facts underlying the opinion;
  • disapproves of opinions given by counsel in one jurisdiction with regards to laws of another jurisdiction that inappropriately carve-out such latter jurisdiction by virtue of not being admitted to practice there (except in the case of Delaware, where counsel not admitted to practice is generally deemed capable of opining on such state's law but may state expressly in such counsel's opinion that it is not so admitted);
  • sets forth the Division's view that opinions relating to capital stock issuances may be limited to the Delaware General Corporation Law, or the corporation and other entity statutes of an applicable jurisdiction if an entity is incorporated in such jurisdiction, and such reference is deemed to include all applicable statutory provisions of such laws and reported judicial decisions interpreting these laws; and
  • confirms that purchasers of securities in registered offerings are entitled to rely on filed opinions.

As discussed further below, the Bulletin both provides certain general guidance regarding filed opinions, and, as summarized in the tables below, sets forth the required elements of each opinion as they apply to specific types of securities and transactions.  Counsel is urged to review their opinion practice in light of this guidance and make appropriate modifications as soon as possible.

General Guidance Regarding Filed Opinions

Assumptions -- The Bulletin cautions lawyers against including assumptions in opinions that "are overly broad" or that "assume away" the relevant issue or any of the material or readily ascertainable facts underlying the opinion. For example, counsel should not assume that the registrant (1) is legally incorporated; (2) has sufficient authorized shares; (3) is not in bankruptcy; or (4) has taken all corporate actions necessary to authorize the issuance of the securities.  The Division may ask counsel to explain and support supplementally any assumption that is unusual, overly broad or otherwise inappropriate.

On the other hand, certain assumptions or qualifications may be necessary or appropriate, such as: (1) documents reviewed and relied upon in giving the opinion are true and correct copies of the original documents, and the signatures on such documents are genuine; (2) accuracy of representations of officers and employees as to questions of fact; (3) the persons identified as officers are actually serving as such and that the certificates representing the securities will be properly executed by one or more such persons; (4) the persons executing the documents examined by counsel have the legal capacity to execute such documents; (5) the registration statement has been declared effective pursuant to the Securities Act, or the trust indenture has been qualified pursuant to the Trust Indenture Act; (6) a pricing committee will have taken action necessary to set the sale price of the securities; and (7) the investors will pay in full all amounts that they have agreed to pay to purchase the securities.

Counsel's Expertise -- In addition to opining on the laws of the states in which they are admitted to practice, counsel may, in the Division's view, opine on Delaware law even if not admitted to practice in such state.  With the exception of Delaware, counsel may not, however, provide an appropriate opinion with respect to the law of a jurisdiction where it is not admitted to practice and then "carve out" such law, or indicate that he or she is not qualified to opine on that law. 

Qualifications Regarding the Scope of the Opinion -- A legality opinion with respect to capital stock may be limited to Delaware General Corporation Law (the "DGCL") or similar laws of other jurisdictions; however, it is the Division's view that such reference is understood to include all applicable statutory provisions and reported judicial decisions interpreting these laws.  It is therefore not necessary for counsel to confirm to the Division in writing that they concur with this understanding or to add the words "and reported judicial decisions" after citing the DGCL.  Counsel may not, however, explicitly exclude consideration of reported judicial interpretations of such law and limit their opinion to statutory provisions.  This requirement relates only to state law, however: counsel may exclude federal law, including the federal securities laws, from the scope of the opinion as long as counsel clearly opines on required state law matters. Counsel may also exclude state blue sky securities law matters.

Limitations on Reliance -- The Bulletin makes clear that the Division will not accept any limitation on reliance, for example only to the company, its board of directors or another counsel. Purchasers of securities are entitled to rely on the opinion.

Consents -- Subject to certain limited exceptions, all counsel providing opinions must consent to the prospectus discussion of such opinion, the reproduction of the opinion as an exhibit, and being named in the registration statement. Although counsel need not expressly admit in the consent that it is an expert within the meaning of Sections 7 and 11 of the Securities Act, it is inappropriate for counsel to deny that it is an expert within the meaning of Sections 7 and 11 of the Securities Act.

The tables below summarize further opinion practice guidance by type of security and by type of transaction.

Opinion Requirements by Security Offered in the Registered Offering

Type of Security

Required Opinion

Permissible Assumptions

Other Notes

Equity Securities of U.S. Registrants

 

 

 

Corporate Registrants

Whether securities will be, when sold, "legally (or validly) issued, fully paid and non-assessable."[3]

Counsel may assume that the registrant will receive the required consideration. 

If counsel does not opine that the securities will be legally issued, the Division will not accelerate the effectiveness of the registration statement.  If counsel opines that the securities are not fully paid or are assessable, however, the effectiveness may be accelerated so long as the disclosures about partial payment or assessability are adequate.

Non-Corporate Registrants

(limited liability company, limited partnership or statutory trust)

Whether (1) "the securities will be, when sold, legally (or validly) issued;" and (2) "purchasers of the securities will have any obligation to make payments to the registrant or its creditors (other than the purchase price for the securities) or contributions to the registrant or its creditors solely by reason of the purchasers' ownership of the securities." 

None explicitly identified.

If future payments or contributions to the registrant may be required, the opinion may specifically exclude such potential payments.  In such case, the registrant should describe the possibility of future payments or obligations in the registration statement.

Foreign Registrants

 

 

 

Capital Stock of Foreign Corporate Registrants

Whether shares publicly issued by a foreign registrant are "legally issued," "fully paid" and "non-assessable," as those terms are understood under U.S. law, even if the applicable foreign law does not use such terms.  

None explicitly identified.

If the legality opinion also addresses an opinion based on the meaning under the laws of the registrant's jurisdiction, then the opinion should explain the meaning of the term under applicable foreign law and how the term is being used in the opinion.

Differences in the way the terms "legally issued," "fully paid" and "non-assessable" are used or understood under foreign and U.S. law are to be explained and disclosed in the prospectus.  

American Depositary Shares ("ADS") evidenced by American depositary receipts ("ADR")

The ADSs will, when sold, be legally issued and will entitle their holders to the rights specified in the deposit agreement and the ADR. 

No assumptions are permitted regarding the legality of the issuance of the ADSs, but counsel may assume that the deposited securities of the foreign issuer have been legally issued.

The opinion is required to be filed by the registrant of the ADSs, which is represented by a depositary. 

Debt Securities and Guarantees 

Counsel must opine that the debt securities and guarantees, if any, will be "binding obligations" of the issuer or guarantor, as applicable.

Counsel must opine on the law of the jurisdiction governing the agreement or instrument pursuant to which the debt security or guarantee is issued.  However, the Division considers that a "binding obligation" opinion necessarily encompasses the opinion that the registrant "is validly existing, has the power to create the obligation, and has taken the required steps to authorize entering into the obligation" under the law of the jurisdiction under which the registrant is organized.

Certain limited exceptions, such as typical bankruptcy and equitable principles limitations, are acceptable. 

An opinion as to whether the agreement or instrument pursuant to which the debt security or guarantee is issued, such as an indenture, is enforceable in accordance with its terms, is not expressly required.

If necessary, the registrant may engage secondary local counsel to opine that the registrant "is validly existing, has the power to create the obligation and has taken the required steps to authorize entering into the obligation" under the law of the registrant's jurisdiction of organization. In such case, primary counsel may assume such matters, but primary counsel may not assume that the law of the jurisdiction governing the debt instrument is the same as the law of the jurisdiction in which counsel is admitted to practice. Both opinions must be filed as exhibits and comply with all applicable requirements, required consents must be obtained, and each counsel must be named in the registration statement.[4]

Other Registered Securities

 

 

 

Options, Warrants and Rights

Counsel must opine on the binding nature of registered options, warrants or rights under the law of the jurisdiction governing such instruments. If underlying securities are also registered, the opinion must also opine on their legality as well.

None explicitly identified.

See discussion above for "Debt Securities and Guarantees" regarding how the "binding obligation" opinion can be provided when the registrant is organized in a jurisdiction outside of primary counsel's area of expertise. 

Rights under Shareholder Rights Plans ("Poison Pills")

"Binding obligation" legality opinion is required with respect to rights issued under a shareholder rights plan. 

 

Counsel's opinion may acknowledge uncertainties involved and discuss the possibility of a determination that would question the legality of the rights at a later date.  Specifically, the Division will not object if counsel includes language in the opinion to the effect that: (1) "the opinion does not address the determination a court of competent jurisdiction may make regarding whether the board of directors would be required to redeem or terminate, or take other action with respect to, the rights at some future time based on the facts and circumstances existing at that time";  (2) "the opinion addresses the rights and the rights agreement in their entirety, and it is not settled whether the invalidity of any particular provision of a rights agreement or of rights issued thereunder would result in invalidating such rights in their entirety"; and (3) board members are assumed to have acted in accordance with applicable fiduciary duties in adopting the rights agreement.

 

Units (two or more underlying securities)

An opinion addressing the legality of the unit itself and each underlying component of the unit. 

None explicitly identified.

The Division has traditionally asked for a binding obligation opinion with respect to the legality of the units.  However, if counsel believes the units should be treated in a similar fashion as shares of capital stock under applicable state law, an opinion of counsel that provides that the units are legally issued, fully paid and non-assessable may be permissible.  The standard of review of such determination is not made clear in the Bulletin. 

 

Opinion Requirements by Specific Transaction

Type of Transaction

Permitted Assumptions

Filing Requirements

Shelf[5]

 

 

Effectiveness

Assumptions regarding the future issuance of securities that would generally not be acceptable in connection with a non-shelf offering (i.e., assumptions regarding future actions or events).

A signed opinion is required to be filed prior to effectiveness of the shelf registration statement.

 

Takedown

Assumptions applicable to type of security being offered and sold would apply.

When a takedown occurs, an unqualified opinion is required no later than the closing date of the offering of the securities, no matter how many or how frequently takedowns occur.  Such updated opinion can be filed either pursuant to Securities Act Rule 462(d), which provides for the immediate effectiveness of a post-effective amendment filed solely to add exhibits to a registration statement, or under cover of Form 8-K or Form 6-K, to the extent such filings are incorporated by reference into the relevant registration statement.

MTN Offering[6]

An issuer may file a "forward-looking" opinion with the MTN prospectus supplement that assumes that the MTN securities to be offered and sold will be legally issued.

See under "Shelf-Takedown" above.  

In the alternative, an issuer may file a qualified "forward-looking" opinion with the MTN prospectus supplement that assumes that the MTN securities to be offered and sold will be legally issued and subsequently provide an unqualified opinion as to a specific takedown in the text of the pricing supplement itself.  As a result, a separate opinion filing would be unnecessary. The forward-looking opinion filed with the MTN prospectus supplement must include counsel's consent to its opinion being issued in a future pricing supplement and to being named as providing that opinion.[7],[8]

Acquisition Shelf Transactions

Assumptions regarding the future sale of the registered securities in an acquisition, including that the number of shares to be offered and sold under the registration statement will not exceed the number of shares authorized in the registrant's organizational documents, and that the board will adopt appropriate resolutions authorizing the issuance and sale of such shares.

For those situations where a post-effective amendment to the registration statement must be filed and declared effective before sales can be made, an appropriately unqualified opinion must be filed. Where no post-effective amendment is otherwise required to be filed, the opinion may be filed by post-effective amendment or under cover of Form 8-K or Form 6-K, to the extent such filings are incorporated by reference into the relevant registration statement.

Exchange Offers

Required shareholder approval will be obtained, if the registrant determines to seek shareholder approval at or after the time of the mailing of the Form S-4.

The prospectus must disclose that shareholder approval is a condition to the issuance of the shares in the exchange offer, and the registrant must file an appropriately unqualified opinion by post-effective amendment or under cover of Form 8-K or Form 6-K, to the extent such filings are incorporated by reference into the relevant registration statement, no later than the closing date of the exchange offer.

Reincorporation Before Closing of Offering

Required shareholder approval will be obtained and the necessary filings will be made in accordance with state law.

See under "Exchange Offers" above.

Opinion should address the laws of the registrant's new jurisdiction. 

Offerings Conditioned on Charter Amendments

See under "Reincorporation Before Closing of Offering" above.

See under "Exchange Offers" above.

Securities Act Rule 462(b) Registration Statements registering additional securities

None explicitly identified.

Must include a new legality opinion, unless the legality opinion contained in the initial registration statement contains a statement that any additional securities registered in reliance on Securities Act Rule 462(b) are also covered by such legality opinion.


   [2]   Securities Act Rules CDI 212.05 (Aug. 14, 2009).

   [3]   In the Division's view, "legally issued" encompasses the opinion that the issuer is validly existing under applicable law, and that the securities are duly approved, authorized and issued under applicable law and the issuer's organizational documents and resolutions.  "Fully paid" means that the consideration received by the registrant satisfies the requirements of applicable state corporate law, the registrant's organizational documents, applicable resolutions and other agreements. For registration statements that register the resale of shares that are already outstanding (and not subject to conversion or exercise), the legality opinion should recognize that these securities are (and not "will be") already outstanding and fully paid. "Non-assessable" means that the security holder is not liable for additional assessments or calls by the registrant or its creditors.

   [4]   If primary counsel is expressly relying on the local counsel's opinion, however, the local counsel's opinion would be filed as an exhibit, but the local counsel's consent would not be needed and the local counsel would not be named in the registration statement. In this case, however, primary counsel's opinion must cover the law of the jurisdiction of organization and cannot assume valid existence, power to create the obligation, or due authorization.   Primary counsel may note, however, that its opinion as to these matters is subject to the same qualifications, assumptions and limitations as are set forth in the local counsel's opinion.

   [5]   Pursuant to Securities Act Rule 415(a)(1)(x).

   [6]   In MTN programs, the issuer will typically file a registration statement that permits sales of securities through a variety of methods, then a prospectus supplement for the MTN program followed by pricing supplements that set forth the terms of each particular issuance under the MTN program.

   [7]   The Division considers counsel to be responsible under Securities Act Section 11(a)(4) for specific opinions attributed to it in a pricing supplement, unless and until the registrant files a Form 8-K stating that such counsel's consent is withdrawn.

   [8]   The Bulletin notes that this practice is one example of an acceptable practice. Other alternatives that result in the provision of appropriately unqualified opinions may be appropriate.  The Bulletin states that counsel may contact the Division's Office of Chief Counsel with other proposed approaches. 

 

Gibson, Dunn & Crutcher LLP 

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you work, any member of the Capital Markets Practice Group, or any of the following:

Stewart L. McDowell - Co-Chair, San Francisco (415-393-8322, smcdowell@gibsondunn.com)
Andrew L. Fabens - New York (212-351-4034, afabens@gibsondunn.com)
Ronald O. Mueller - Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)
Douglas D. Smith - San Francisco (415-393-8390, dsmith@gibsondunn.com)
Michelle Hodges - Orange County (949-451-3954, mhodges@gibsondunn.com)

© 2011 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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