Legal Opinion

What is a legal opinion?

Legal opinion (in German Rechtsbestätigung, often also called Rechtsgutachten) is a formal written statement by a law firm in which it confirms to a specific recipient that certain legal prerequisites of a transaction are met. Typical statements concern the valid existence of a company, its authority to enter into a contract, proper representation and the validity and enforceability of the obligations undertaken. Unlike a detailed expert report, it does not weigh up considerations but records concise conclusions on which the recipient may rely. If a statement is wrong as a matter of law, the law firm may be liable to the recipient.

Legal opinions are customary mainly in loan and acquisition financings, in bonds and Schuldschein loans (German promissory note loans), in capital market transactions and in cross-border contracts. The contract usually names their delivery as a condition for disbursement or closing: without an opinion, there is neither disbursement nor completion. In German funding rounds with venture capital investors, by contrast, they are rare.

Capacity opinion and enforceability opinion

Existence and capacity

The capacity opinion (confirmation of capacity to act) confirms that the company has been validly formed and exists and may enter into and perform the contract. It also records that the necessary resolutions have been passed and that the signatories have validly represented the company. For a German GmbH (limited liability company), it relies on the commercial register, the articles of association, the list of shareholders and resolutions.

The managing directors' power of representation cannot be restricted vis-à-vis third parties (Section 37(2) of the German Limited Liability Companies Act, GmbHG). Internal reservations of consent, for example the duty to ask the shareholders' meeting before major transactions, are therefore as a rule irrelevant for validity towards third parties. This does not apply if the counterparty knows that management is disregarding such a restriction; the contract may then be open to challenge under the principles on abuse of the power of representation. The reservations nevertheless remain relevant for the usual statement that entering into the contract does not breach the articles of association.

Validity and enforceability

The enforceability opinion (confirmation of enforceability) confirms that the contractual obligations are valid, binding and enforceable under the agreed law. For cross-border contracts, statements on the validity of the choice of law (governing law) and the place of jurisdiction are added. In loan financings, the borrower's law firm sometimes gives the capacity opinion and the lenders' law firm the enforceability opinion. Often the lenders' law firm gives both.

Structure of a legal opinion: assumptions, statements and qualifications

Formally, the legal opinion is a letter from the law firm to the recipient (opinion letter), in international transactions usually in English. It names the recipient and the documents reviewed and is expressly limited to the law of one jurisdiction as of a reference date. In content it is divided into three parts:

• Assumptions: facts that the law firm does not verify itself, such as the authenticity of signatures, the conformity of copies with the originals and the accuracy of certificates from management.
• Opinion statements: the actual confirmations, each narrowly worded.
• Qualifications: general limitations, for example in favour of insolvency law, judicial discretion and the principle of good faith, as well as limitations on individual points that cannot be confirmed.

If limitations on individual points accumulate, the opinion loses value for the recipient, who demands that the underlying defects be remedied.

German practice in funding rounds and share purchases

In German funding rounds and in the purchase of GmbH shares, other instruments take over the function of the opinion. The notary checks the identity and power of representation of the parties at the notarisation and can certify the authority of representation on the basis of the commercial register (Section 21 of the German Federal Notaries' Code, BNotO). The existence of the company, ownership of the shares and authority to enter into the contract are secured by the parties through warranties in the participation agreement or purchase agreement. An opinion is therefore usually requested only if a foreign party needs it under its internal rules or a contract is governed by foreign law.

Documents and preparation

The law firm needs a current commercial register extract, the valid articles of association, the list of shareholders, the resolutions on the transaction and the powers of attorney of the signatories. Facts that do not follow from registers or deeds are confirmed by management in a certificate (officer's certificate).

If a resolution or consent is missing, it is made good and documented with the actual date. A contract that an agent has concluded without sufficient power of representation can be ratified by the company under Section 177 of the German Civil Code (BGB). Backdating documents is out of the question: it is impermissible and, depending on the document, can have criminal and liability consequences.

Practical example: legal opinion in a venture debt financing

A software company in the legal form of a GmbH with EUR 20 million of annual recurring revenue takes a venture debt loan of EUR 10 million from a foreign lender. Venture debt is a loan for a growing company that is not yet sustainably profitable. The loan agreement is governed by English law, the security agreements by German law. As a condition for disbursement, the lender requires three opinions. The company's law firm confirms the capacity of the GmbH (capacity opinion). The lender's English law firm confirms the enforceability of the loan agreement, its German law firm that of the security agreements.

In the preparation it emerges that the articles of association make loans of more than EUR 2 million subject to the consent of the shareholders' meeting and that the resolution is missing. Vis-à-vis third parties, the contract would in principle be valid even without a resolution because of Section 37(2) GmbHG. However, the lender knows of the restriction from the articles of association and knows that the resolution is missing; a residual risk to validity would therefore remain. The law firm also could not confirm that the conclusion of the contract complies with the articles of association.

The resolution is passed before disbursement, and the opinion is issued without limitation on individual points. The opinion has thus made a gap in the corporate documents visible before it could delay the disbursement of EUR 10 million or later call the validity of the loan into question.

Distinctions: legal opinion, due diligence, warranty and comfort letter

• Due diligence: review with the aim of identifying and assessing risks. The legal opinion confirms only individual, narrowly defined legal questions.
• Warranty: a promise by a contracting party to stand behind the accuracy of a statement. The opinion, by contrast, is given by a third party who stands behind its legal correctness, not behind the transaction.
• Bring-down certificate: confirmation by management that the warranties remain accurate at closing. It concerns facts, the opinion legal assessments.
• Comfort letter: confirmation by an auditor on financial information, mainly in securities prospectuses. A legal opinion does not confirm figures and financial statements.

Common mistakes

• Late instruction. The opinion is often the last document before disbursement or closing. If it is initiated only in the last days, resolutions or register extracts are missing and the date slips.
• Unclear scope. Which statements the opinion contains, which law it covers and who may rely on it belong in the draft contract and not in the week before the date.
• Economic statements expected. A legal opinion confirms neither figures nor the value of collateral nor the viability of the business.
• Foreign law from the wrong firm. A German law firm speaks only on German law. For a contract under another law, a firm admitted there is needed.

Frequently asked questions

Does a funding round of a German GmbH need a legal opinion?

As a rule not. Notarisation, commercial register and warranties cover the points that an opinion would confirm. Exceptions concern mainly foreign investors whose internal requirements call for an opinion on the company's capacity.

Who gives the legal opinion and who may rely on it?

A law firm, depending on the statement the firm of the party concerned or that of the counterparty. Only the recipients named in the opinion may rely on it.

What is a qualified legal opinion?

An opinion that does not make individual statements, or makes them only with a reservation, because of specific defects, for example because a resolution is missing. The general qualifications that every opinion contains do not yet make it a qualified one.

Who bears the costs?

In loan financings often the borrower, including for the opinions of the lender's law firms. The amount depends on how many jurisdictions and statements are involved.

The Roemer Capital view

Legal opinions are given by law firms, not by Roemer Capital, since Roemer Capital is not a law firm. They come up mainly when clients take on venture debt alongside an equity round or foreign investors bring their own requirements. In both cases Roemer Capital includes the opinion as a separate step in the timetable, because it depends on the state of the corporate documents.

In the data room, Roemer Capital keeps the commercial register extract, articles of association, list of shareholders and all resolutions complete and up to date. If a resolution is missing, the client's law firm initiates making it good. Roemer Capital coordinates the date with disbursement or closing so that the opinion can be issued without limitation on individual points.