New Corp Fin SLB on Legality and Tax Opinions

By Cydney Posner

The Corp Fin Staff has issued a new legal bulletin, SLB 19, regarding legality and tax opinions filed in connection with registered offerings of securities.  This legal bulletin discusses the requirements for these opinions, the staff's views regarding the required elements for these opinions and the staff's practices in reviewing them, and the filing of consents to include these opinions in registration statements The SLB discusses how the staff understands certain phrases used in opinions, such as "validly issued" and fully paid" for both corporate and non-corporate registrants, as well as for securities issued (including ADRs and ADSs) by foreign registrants. Below is some of the other guidance in the SLB.

Debt Securities. For debt securities, counsel must opine that they will be "binding obligations of the registrant" and that any guarantee will be the binding obligation of its guarantor. The staff does not object if the binding obligation opinion is subject to certain limited exceptions, such as bankruptcy and equitable principles limitations. Counsel need not expressly state in the opinion that 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, although the opinion may include such language. For debt issued under an indenture governed by U.S. law, a U.S. legal opinion will be required, even if the issuer is a foreign issuer. An opinion that a debt security or guarantee is a binding obligation of the registrant 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.

Options. In connection with the registration of options, warrants or rights to purchase securities, counsel must opine on the legality of the options, warrants or rights, that is , whether the option, warrant or right is a binding obligation of the registrant under the law of the jurisdiction governing the agreement. Of course, if the sale of the underlying securities is also being registered, the opinion must also opine on the legality of the underlying securities.

Poison Pills. When a company has a shareholder rights plan ( a "poison pill") and a registration statement is filed for the common stock to which the rights relate, a legality opinion is required regarding the rights. This opinion can be tricky because "the determination of whether the rights will be binding in any given situation will be subject to the fiduciary duties of the board of directors and will depend on the specific facts and circumstances, which cannot be predicted as a matter of law." The opinion can address these uncertainties and the possibility that the legality may be later questioned. For example, the staff does not object to any of the following:

• 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;
• board members are assumed to have acted in a manner consistent with their fiduciary duties as required under applicable law in adopting the rights agreement; and
• 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.

Units. Where units are registered, the opinion must address each component, as well as the unit itself. The staff has " traditionally asked for a binding obligation opinion with respect to the legality of the units. To the extent counsel believes the units should be treated in a similar fashion as shares of capital stock under applicable state law, the Division may permit an opinion of counsel that provides that the units are legally issued, fully paid and non-assessable."

Shelf Registration. For delayed offerings off the shelf, the legality opinion in the shelf registration statement at the time it becomes effective may include assumptions regarding the future issuance of securities that would generally not be acceptable in connection with a non-shelf offering. The following are examples of assumptions would be acceptable:

• 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 certificate or articles of incorporation;
• that the board will have taken all actions, passed all resolutions, etc., necessary to authorize the issuance and sale of the securities;
• that the specific terms of the securities will have been determined in accordance with all board resolutions or other authorization requirements; and <br>• that all required state approvals will have been received.

When a takedown occurs, the registrant must file an updated opinion without the assumptions included in the earlier opinion. The registrant can file this updated opinion either under Rule 462(d), which provides for the immediate effectiveness of a post-effective amendment filed solely to add exhibits to a registration statement, or on an incorporated Form 8-K.

Acquisition Shelf Transactions. Again, this legal opinion may, at effectiveness, be subject to assumptions regarding the future sale of the registered securities in an acquisition, such as an assumption that the number of shares to be sold will not exceed the number of shares authorized and that the board will adopt resolutions in appropriate form and content authorizing the issuance and sale of such shares. Where a post-effective amendment must be filed and declared effective before sales can be made, an appropriately unqualified opinion is required to be filed as an exhibit to that post-effective amendment. If no post-effective amendment is required, the opinion may be filed by post-effective amendment or on Form 8-K.

Exchange Offers. If shareholder approval is required and the registrant seeks that approval at or after the time of the mailing of the Form S-4, the opinion may assume that the required shareholder approval for the exchange offer will be obtained. An updated appropriately unqualified opinion must be filed no later than the closing date of the exchange offer. The prospectus should disclose that shareholder approval is a condition to the issuance of shares in the exchange offer.

Reincorporation Before Closing of Offering. The legality opinion should address the laws of the registrant's new jurisdiction of incorporation, but it may assume that any required shareholder approval for reincorporation will be obtained and the necessary filings will be made in accordance with state law so that the incorporation of the new corporation is effective. An appropriately unqualified opinion must be filed no later than the closing date of the offering. The prospectus should disclose that shareholder approval and subsequent effectiveness of the reincorporation are conditions to the issuance of shares in the offering.

Offerings Conditioned on Charter Amendments. Where a charter amendment is required to increase the number of, or to create a class of, authorized shares to be issued in a registered offering, the proxy solicitation of shareholder approval of the amendment may occur contemporaneously with the offering. The form of charter amendment may be filed as an exhibit to the registration statement. The legality opinion may assume that the required shareholder approval will be obtained and any necessary filings will be made in accordance with state law so that the charter amendment becomes effective. The staff expects the registrant to file an appropriately unqualified opinion no later than the closing date of the offering. The prospectus should disclose that shareholder approval and subsequent effectiveness of the charter amendment are conditions to the issuance of shares in the offering.

Securities Act Rule 462(b) Registration Statements. If the legality opinion in a registration statement contains a statement that any additional securities registered in reliance on Rule 462(b) are also covered by the opinion, the registrant may incorporate that opinion by reference into a Rule 462(b) registration statement. Otherwise, a new opinion is required.

Resale Registration Statements. For registration statements for the resale of outstanding shares, the opinion should recognize that these securities are already outstanding and fully paid. In these situations, the opinion should state that the shares "are" – and not "will be" – legally issued, fully paid and non-assessable.

Additional Considerations. Not surprisingly, overbroad assumptions are not favored, and unusual or overly broad assumptions may challenged and require supplemental support. However, the following non-comprehensive list includes examples generally considered appropriate:

• the 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;
• the representations of officers and employees are correct as to questions of fact;
• the persons identified as officers are actually serving as such and that any certificates representing the securities will be properly executed by one or more such persons;
• the persons executing the documents examined by counsel have the legal capacity to execute such documents;
• 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;
• a pricing committee of the board of directors will have taken action necessary to set the sale price of the securities; and
• the investors will actually pay in full all amounts that they have agreed to pay to purchase the securities.

Counsel's Expertise. Counsel may opine on the laws of the states in which they are admitted to practice, as well as Delaware law. If counsel is not admitted in a jurisdiction, the opinion will nevertheless be acceptable so long as it is not qualified with a "carve out" for the law of the relevant jurisdiction or indication that counsel is not qualified to opine on that law.

Qualifications Regarding the Scope of the Opinion. Reference to the "Delaware General Corporation Law" is "understood to include all applicable Delaware statutory provisions and reported judicial decisions interpreting these laws." As a result, counsel does not need to confirm that understanding in writing. However, an opinion that explicitly excludes consideration of such reported judicial decisions is unacceptable to the staff. This position applies to the corporation and other entity statutes of all jurisdictions. Counsel may exclude federal law, including the federal securities laws, and state blue sky laws, from the scope of the opinion as long as counsel clearly opines on the required state law matters.

Limitations on Reliance. The staff does not accept any limitation on reliance, such as that the opinion is "solely" for the company or its board of directors or another counsel. Purchasers of the securities in the offering are entitled to rely on the opinion.

Tax Opinions

Tax opinions are required in specified circumstances and in registered offerings where "the tax consequences are material to an investor and a representation as to tax consequences is set forth in the filing." The requirement can be satisfied by counsel or an independent public or certified accountant, or by an IRS revenue ruling. Information is "material" if there is a substantial likelihood that a reasonable investor would consider the information to be important in deciding how to vote or make an investment decision. Generally, these include tax-free mergers or exchange transactions and transactions offering significant tax benefits or where the tax consequences are so unusual or complex that, to make an informed decision, investors would need to have the benefit of an expert's opinion (e.g., debt offerings with unusual original issue discount issues, certain rights offerings, limited partnership offerings, certain offerings by foreign issuers). No opinion is required for taxable exchange offers or mergers, although the registrant must provide to investors accurate and complete non-expertized disclosure concerning the tax consequences. If counsel or accountants are named as the source of the tax discussion, a consent is required.

Short-form opinions. Item 601(b)(8) of Reg S-K expressly allows counsel or accountant to render its opinion in either long or short form. In a "short-form" opinion, the tax disclosure in the prospectus serves as the tax opinion, and the disclosure and the opinion filed as an exhibit both must state clearly that the tax consequences disclosure is the opinion of the named counsel .

Material Federal Tax Consequences. Only material federal tax consequences must be covered in the opinion. The heading may not refer to "certain" or "principal" tax consequences, which could convey that some material tax consequences are being omitted. The tax opinion should:

• identify the applicable IRC provision, regulation or revenue ruling;
• clearly identify each material tax consequence being opined upon;
• set forth the author's opinion as to each identified tax item; and
• set forth the basis for the opinion.

If the author is unable to opine on a material tax consequence, the opinion should state that fact, explain the reason why not (e.g., the facts are currently unknown or the law is unclear) and discuss the possible alternatives and risks to investors of that tax consequence.

It is not sufficient to just describe the law without applying it to the specific facts of the transaction. The SLB provides a number of specific formulations that the staff view as unacceptable. For example, a statement that, in the opinion of counsel, the following discussion is a fair and accurate summary of the material tax consequences fails "to identify the specific tax issue on which counsel or accountant is opining. The ‘fairness' or ‘accuracy' of the prospectus disclosure is not the appropriate subject of the opinion. Counsel or accountant must opine on the tax consequences of the offering, not the manner in which they are described in the prospectus."

Assumptions and Qualifications. These must be disclosed and must be consistent with the proposed transaction. Assumptions as to future facts or conduct, if limited and reasonable, are common and acceptable. However, the opinion cannot assume the tax consequence at issue or assume any legal conclusion underlying the opinion. For example, if tax treatment depends on the legal conclusion of whether the registrant is a partnership or whether the merger is a statutory merger, then the author of the opinion must opine on these matters as part of its tax opinion; they cannot be assumed. Finally, it is inappropriate for the tax opinion to assume facts relevant to the particular opinion that are known or readily ascertainable.

Opinions Subject to Uncertainty. If there is a lack of authority or conflicting authority or significant doubt, a "should hold " or "more likely than not" opinion may be issued. Appropriate explanation is required as to why a "will hold" opinion cannot be given, along with a description of the degree of uncertainty in the opinion. Risk factor disclosure regarding the uncertainty should be provided. The opinion may also state which position the registrant intends to take if challenged by the IRS.

Additional Considerations. The opinion cannot limit reliance to the board or the registrant; investors are entitled to rely on the opinion expressed. The opinion may recommend that investors consult their own tax advisors or counsel, particularly with respect to the personal tax consequences of the investment; however, it may not disclaim reliance for tax matters on which counsel has opined (e.g., "Investors should seek and rely upon their own tax advisors as to the consequences of this transaction").

Timing. While opinions are typically required to be filed before effectiveness of the registration statement, one exception is in the context of a tax-free reorganization, where the staff does not object if a tax opinion is not filed before effectiveness, provided:

• the merger agreement includes a non-waivable condition that the transaction will receive an opinion of counsel or accountant at closing that the merger be treated as a tax-free reorganization;
• the prospectus discusses the substance of the opinion that will be provided at closing; and
• the opinion is filed prior to closing.

If the condition for the receipt of closing tax opinions is a waivable condition, the registrant must file an executed opinion of counsel before effectiveness and undertake to recirculate and resolicit if the condition is waived and the change in tax consequences is material.

Consents. For legal and tax opinions, consents must be filed with respect to the prospectus discussion of the opinion, the reproduction of the opinion as an exhibit and being named in the registration statement. Denial of "expertise" in the consent is inappropriate.

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