All lawyers and clients have heard the stories. A commercial transaction is almost closed, and the lawyers spend the entire night and part of the morning before closing, drafting and revising the wording of the legal opinions they are to deliver – or worse yet – the clients are tapping their fingers on the closing table while the lawyers discuss whether a particular exception to the opinion is reasonable.
While every transaction is different, there is happy news for those who might question the value of the legal opinion being delivered on closing as a standard part of a commercial transaction. The most recent ABA Business Law Section study on Canadian private mergers and acquisitions* shows a marked decline in the delivery of legal opinions on such closings. The study, which reviewed 64 transactions ranging in size from $5 million to $100 million over the 2 year period of 2010 and 2011, showed that the percentage of deals having a requirement that the solicitors of the target deliver a legal opinion at closing has dropped from 72% in 2008 to 55%. The drop in the comparable study for transactions in the United States was even greater (from 58% in 2009 to 27% in 2011).
Considering the often glacial pace that trends in commercial transactions can move at, these drops are significant. So what’s behind them?
Aside from the general drag effect that negotiating a legal opinion can have on a closing, there are a few likely causes of the decline.
First, the ability of lawyers to craft numerous detailed exceptions to the opinions being given, has almost been elevated to a high art. While it is perhaps not surprising that lawyers want to minimize the liability associated with delivering an opinion on closing, the result is that there is often little actually being opined on.
Second, the items that are commonly opined on (such as the existence and status of the target at closing, the due authorization and delivery of the transaction documents, and the like) are matters that can often be satisfied through the diligence process in any event. As due diligence processes become more robust and electronic searching has increased diligence effectiveness, the need to rely on a legal opinion is decreased.
Finally, the same studies that have documented the decrease in use of legal opinions have shown an increase in the use of carve-outs for time limits and caps for representations and warranties in areas that are commonly in the purview of legal opinions, such as due authorization and execution of documents, ownership of shares, and the like. Whether the decline in legal opinions has resulted in this increase or vice versa is not clear, but the fact remains that many of the issues that a legal opinion is meant to cover are being dealt with in other ways.
While there will always be transactions which, because of their facts and circumstances, require the delivery of a legal opinion, it appears that the days of parties requiring its delivery as a closing condition as a matter of course, and then leaving the lawyers to negotiate its terms at a later time, may be coming to a close. Instead, lawyers and clients appear to be asking whether in fact they are needed in the first place.
*The 2012 Canadian Private Target Mergers & Acquisitions Deal Points Study, issued by the Mergers & Acquisitions Market Trends Subcommittee of the Mergers & Acquisitions Committee of the American Bar Association Business Law Section.